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...

In 2015, e-commerce sales in the U.S. accounted for $341.7 billion, with 14.6% growth rate over the previous year, and there are no signs of this growth slowing down in the future. Still, while the revenues of online retailers are soaring, very few of those are actually profitable or have a decent chance of turning profitable in the near future.

The reason why it is so difficult to build a sustainable business in the e-commerce space is simple: the vast majority of online retailers look too much alike. Sure, there are some differences, but most of those are still selling the same products to the same customers, thus creating a fertile ground for perfect competition. As a result, the gross margins become depressed, the marketing and operating costs soar, and ultimately the profits are competed away. Even Amazon, famously known for its brutal efficiency, was never really been profitable until a couple years ago (and those profits now come from AWS services, not its online retail business).

But while e-commerce in general might be a tough space to succeed, it doesn’t mean that the opportunities to build successful companies making huge impact on the customers aren’t there. One just needs to know to look hard enough to uncover those.

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Imagine going to the mall to buy some clothes. You look around and see all the usual brands: Gap, J.Crew, Banana Republic, H&M, Levi’s and many others, all of them there. But as you enter the first store and start checking the items, you notice a strange pattern. Everything costs $200. You check a few pairs of jeans, a jacket, several tees — everything costs the same. Bewildered, you move to the next store, but there...