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Business Bytes

Efficiency is glamorous

The Bloomberg article, “E-Tailor Startups Challenge Amazon in $200 Billion Market,” identifies a new market while failing to understand the competition.  However, we can forgive Bloomberg the mistake: since Amazon is an online retailer, any new online business would seem to be a challenge.  The e-tailor entrants make an exciting headline not by undermining Amazon but finding a new way to practice business school basics: understanding their consumer and correcting a market inefficiency.

There is a class of consumers who shop for quality, unique clothes and accessories within a price range that seems unreasonable to those who frequent Gap or Guess.  And so this consumer goes to an upscale department store or boutique, purchasing a few items: frugal behavior compared to some other patrons.  These are the customers who make purchases, rather than go on sprees, who would rather a cashmere “Jackie” cardigan than three cloth-blend ones; the upper part of the 99% who have money to spend but not to burn.  Josh Goldman of Norwest Venture Partners said it best when he described this type of shopping as “curating.”

While Amazon does carry some high-end brands, such as 7 for all Mankind and Calvin Klein, the majority of the brands are mid-range, like Levi’s and Guess.  The supply profile complements Amazon’s overall service: providing the same, and similar, products at a variety of prices so that the consumer can make the tradeoff between price and quality.  This model clearly works well for Amazon’s 17 million users.  It does not work for the consumer who wants a wide selection of quality, and a purchase seems much less special when “Automotive and Industrial” goods are just a click away.  And it will certainly not work for the sartorial sirs who consider briefly visiting Italy to recapture the perfectly-fit polo shirt.

Fortunately, some with a taste for fashion also have a sense for business, particularly in menswear.  Both Vastrm and Bonobos tailor to men and provide the quality with a sense of specialness.  Vastrm provides polo shirts designed to customer specifications, made out of high-quality cotton, manufactured by companies that comply with The Sustainable Fashion Business Consortium.  Bonobos began with a better fitting pant for men and then expanded to include tops, suits, outwear, and more, all made from premium fabrics.  The site also offers a selection of products from outside brands to complement their existing product.

Under the new model, these companies offer lower prices than the brick and mortar competitors the same way Wal-Mart can.  Both e-tailors and Wal-Mart negotiate with suppliers and deliver directly to the consumers, which eliminates several links in the supply chain and brings the product closer to its marginal cost. Only, unlike Wal-Mart, the companies understand that their consumer will willingly pay for the high quality.  J. Crew provides a less familiar but perhaps a better example.  The company uses the same fabrics as the leading fashion houses to sell for much less than Neiman Marcus, but more than Macy’s.

While Amazon may see a fall in their revenue with this trend, stores like Neiman Marcus, Nordstrom’s, and Bloomingdales, which sell the same product but at a greater cost, will likely see the most loss.  To compete, the stores will need to work their competitive advantage: the physical presence of products and salespeople and the potential to make shopping an experience. Though Nordstrom’s has invested in Bonobos to improve its online reach, the startups true value comes from correcting a supply chain inefficiency to better meet high-end consumer demand.

In the prudent pursuit of fabulous, e-tailors make supply chain efficiency glamorous and shows that a special products can come at the marginal cost.

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