This is the second post in the series. In the first part, I talked about how the dominance of one player on the eyewear market led to unjustifiably high prices for the consumers, thus creating an opportunity for a massive disruption.
This time, I wanted to focus on an entirely different kind of market: much more diversified, often characterized by cutthroat competition and therefore low margins. This space, however, still offers room for a significant innovation in terms of product, customer service and operations.
Clothing Industry: Huge But Competitive
Apparel market in the U.S. alone reached $208 billion in 2014, according to NPD Group estimates. Footwear and accessories accounted for another $62 and $52.7 billion, respectively. Online apparel sales reached $52 billion. What’s even more interesting is that the space remained quite fragmented: top-9 retailers accounted only for 35% of the market, with Macy’s, Wal-Mart and Target being the largest ones with 9%, 7% and 5.4% shares.
Putting all those numbers aside, the main question is whether there still is a significant opportunity for innovation in this market. Granted, the market is huge, which creates strong incentives to look for untapped opportunities. However, unlike the eyewear market discussed in the first part of this post, this is also a very efficient market (in terms of competition), with a huge amount of players operating in the space: for example, apparel retailers’ net profit margins are usually lower than all-industry retail averages of around 8%. E-commerce apparrel retailers lack high margins as well because, while having significant advantages in terms of operations, they are usually forced to accept lower gross margins due to intense competition, lack of differentiation and a number of other issues (e.g. high percentage of returns), and also often have to engage in expensive marketing activities in order to acquire and retain customers.
However, that doesn’t mean that there is no room for innovation in this space. On the contrary, companies have been proving again and again that there are still plenty of opportunities. Years ago, Zara revolutionized the market, introducing the concept of fast fashion, and then went on to build extremely efficient operation to support its growth. E-commerce retailers then brought operations efficiency to a new level, getting rid of the majority of costs of a typical brick and mortar chain, and centralizing warehouses and logistics. A number of companies found creative ways to collaborate with leading players in other industries (Nike being probably the most famous example, with its partnership with Apple), which in some cases benefited both the retailer and their partners a lot.
Now we are witnessing the emergence of yet another trend: e-commerce retailers that have been previously exclusively focused on growing their online sales, are turning their attention to brick and mortar, recognizing the benefits that come with the omni-channel approach.
“Zappos for Pants”
In 2006, Brian Spaly and Andy Dunn, then students at Stanford School of Business, being frustrated by their inability to find pants that fit well (most pants on the market lacked contoured waistline and the tailoring in the thigh, and had a rise that was either too big or too small for most customers), decided to start a company that would finally be able to meet the customers’ need for well-fitting pants. Bonobos (named after Bonobo ape, sometimes also called the only peaceful ape on earth), which started as an independent study project, since then turned into a company that went on to raise more than $127 million in funding, and built its presence in all major cities in the U.S. (more on that later).
Brian Spaly, one of the two founders of Bonobos, left the company in 2009 over the disagreements with Andy Dunn regarding the strategy the company should have pursued (he did well for himself, founding Trunk Club, which was subsequently acquired by Nordstrom in 2014 for $350 million). Meanwhile, Bonobos continued to grow, expanding its offerings to include shirts, suits, and blazers in 2011, signing a deal with Nordstrom to sell its pants in 2012 (Bonobos also secured funding from Nordstrom as part of that deal), and launching experimential women’s line under AYR brand in 2014 (in 2016, AYR was spinned off and went to raise the funding on its own). In the meanwhile, Bonobos worked to change its image to make it more appealing for working professionals, and continued to expand the lines of clothing it offered (with a limited number of sports clothes being the most recent addition). By 2015, Bonobos was approaching $100 million in annual gross revenue this year and reached profitability, according to Bonobos board member Joel Peterson.
From its earliest days, the ultimate goal of Bonobos founders was to build “Zappos for pants”, as Dunn himself has put it. Part of the Zappos appeal was that it offered its customers an unprecedented level of service most of their competitors couldn’t match. That became an essential part of Bonobos strategy, with the company offering free shipping and returns on any item, incentivizing its customer service employees (dubbed “ninjas”) to spend with the customer as much time as necessary and so on. There was, however, one other element of Bonobos strategy, perhaps the most crucial one to providing the customers with the best shopping experience.
Going Brick and Mortar
As mentioned earlier, in 2012 Bonobos struck a deal with Nordstrom for it to sell Bonobos pants in 20 of its stores (as well as through Nordstrom website). This move was a part of the overall strategy pursued by Bonobos, which ultimate goal was to turn the company into a full-fledged omni-channel retailer. The center piece of this strategy was a concept called “guideshop”.
The core idea behind guideshops was to create a place where customers could try on any clothes that were being sold by Bonobos and find the right fit for them. The idea was to bring the customer a personal touch usually only found in high-end retailers, making the shopping process as convenient and personalized as possible: while one could always drop by at one of the company’s guideshops, Bonobos encouraged its customers to set up a half-hour or hour long appointments to eliminate waiting times and ensure the best in-store experience possible.
One important point is that Bonobos guideshops don’t actually sell clothes, which means that the customers can’t buy the items they like at the guideshops. All the orders still have to go through Bonobos website and are then shipped to the customer. Bonobos guideshops essentially operate as showrooms, which allows Bonobos to keep them small and inventory-light. While this approach might seem controversial at the first glance, as one might assume that the customers would want to get the items they liked immediately, provided they already came to the store, it works well for Bonobos. The logic behind it is that men generally dislike shopping, spending on average less than one-sixth of the time women typically spend on shopping, and would actually appreciate the opportunity to have their order delivered to them instead of having to carry it around with them. This might not be true for all customers, but the group who feel this way is large enough to allow Bonobos to focus exclusively on servicing them. Also, Bonobos clothes of the same size have little to no variation in terms of fit, which means that after the initial visit to the guideshop to get measured, one can safely order everything online.
For Bonobos, having offline presence wasn’t about necessarily making additional sales, but rather about building brand awareness and securing new customers who would later shop online. Both the guideshops and the partnership with Nordstrom played a huge role in that.
Bonobos started experimenting with guideshops in 2012, opening the first one in their Manhattan office’s lobby. After it turned out to be a success, the company decided to proceed with the concept. By 2014, Bonobos had 10 guideshops; its products were also sold in all 118 Nordstrom locations. Further expansion of offline presence was named as one of the main objectives for the last $55mm round of financing raised in 2014. Today, Bonobos has 27 guideshops in 18 different cities across the U.S., and continues expanding its presence (e.g. it just opened new guideshops in Austin, Miami and New York City).
Offline Presence as a Holy Grail
Why the guideshops were such a big deal for Bonobos? Well, most importantly, they offered Bonobos a way to build its brand in offline, without taking on the risks usually associated with running brick-and-mortar operations (specifically, avoiding risks that come with inventory management).
In apparel market, online can only bring you so far. While a lot of people shop for clothes online today, for the majority of them, it is still extremely important to be able to try those offline before making the purchase. Besides that, for a clothing retailer, having offline presence goes a long way in terms of building brand awareness and establishing deeper relationships with customers.
Pure e-commerce apparel retailers usually have huge advantages in inventory management area as they aggregate their inventory in a single warehouse instead of spreading it out amongst hundreds of retail stores. However, the one area where they often struggle is fit. Granted, one can provide an option for free returns, but that can actually backfire against the company, as the logistics often becomes prohibitively expensive if the majority of the customers have problems with fit and have to keep returning the items they’ve ordered on the constant basis.
In contrast, Bonobos guideshops are cheap to operate compared to traditional brick and mortar because their footprint is so small. A truly genius part of the concept, however, is that it completely eliminates inventory management risks, as the guideshops aren’t actually selling clothes, and therefore don’t need to maintain significant inventory, while still allowing Bonobos to reap benefits from having offline presence.
Bonobos is not the only (or the first) company that has chosen to implement offline strategy to support its growth. By now, most retailers (from tiny startups to Amazon) understand the benefits omni-channel strategy offers, and are experimenting with it. As discussed in the first part of this post, for Warby Parker, for example, having offline presence turned out to be a crucial part of its value proposition, allowing it to differentiate from pure e-commerce play in terms of customer experience it were able to provide.
The Innovation Effort
Obviously, Bonobos isn’t the only interesting company in the apparel market. A number of different companies have always been innovating in space in one way or another. Customized clothing at relatively modest prices is one of the emerging trends of the last few years, with companies like Indochinoor Proper Cloth leading the way. There is also a number of companies building their businesses around very specific niches (much like Bonobos did in its early days), such as American Giant, The Tie Bar and so on. In many ways, those companies are different, but there are several key characteristics they all share, with omni-channel strategy being one of those.
Incumbents are recognizing the benefits of going omni-channel, too. One example is online jeweler Blue Nile that has recently opened a number of showrooms in malls to allow its customers to experience its offerings firsthand before going online to actually purchase those. It’s worth noting that for the majority of both incumbents and startups the focus is still on making most sales online, but having an opportunity to interact with a retailer in offline world adds a new dimension to the overall experience and therefore is usually highly valued by the customers.
Shared Ingredients of Success
So, what other traits do Bonobos, Warby Parker and the likes of them have in common that make them successful? It’s hard to list all of those, but the key ones are:
- Focus on eliminating intermediaries in the supply chain and distribution network, allowing for a better control of costs
- Focus on a single product category, which helps to build a brand resonating with target customers
- Strong emphasis on providing superior customer experience competitors often can’t match
- Omni-channel strategy with online and offline complementing each other
This is by no means a comprehensive list; besides, different companies can act upon those in different ways. For example, while both Bonobos and Warby Parker eliminated most of the intermediaries from their supply chains, the objectives for doing so for those companies were vastly different. For Warby Parker, it was critical to be able to offer its customers cheaper prices, therefore the benefits of eliminating intermediaries were largely passed to the customers. Bonobos, on the other hand, positioned itself as a premium clothing retailer, therefore it didn’t necessarily need to pass the benefits stemming from the lack of intermediaries to the customer, but rather could use its higher margins to reach profitability quicker and then to support its growth while still remaining profitable.
Still, while the strategies of innovative companies in retail space might differ, they all usually have those four elements at its core: tight control of their supply chains and distribution networks, strong emphasis on one product category, superior customer experience and omni-channel strategy in place to support its growth. Would every retailer that has those in mind turn out to be a success? Probably not, though it certainly doesn’t harm to have them in mind. But can one build a successful retailer today without focusing on those four elements? I believe that the answer today is a resounding “no”.