Amidst a Profusion of Fashion E-Commerce Models, What’s Working?

NEW YORK, United States — "We're still at the tip of the iceberg." So goes the refrain sung by a chorus of fashion e-commerce entrepreneurs and investors. After all, apparel is the fastest growing e-commerce category in the US — estimated at $41 billion, according to GP Bullhound — and the second largest after consumer electronics. Meanwhile, "three-quarters of online sales in China are in apparel," said Althea Peng of A.T. Kearney in a report published earlier this month.

Considering these encouraging numbers, combined with fact that the majority of traditional fashion brands have been slow to embrace digital and a dominant ‘Amazon for fashion’ has yet to emerge, perhaps it’s not surprising that the number of sites vying for a piece of the online fashion market is now over two thousand, up 126 percent year-on-year, according to GP Bullhound, while venture money continues to pour into the space. Only a few days ago, Fab.com, which plans to increase its focus on fashion, raised a $150 million Series D round from investors including Andreessen Horowitz and Chinese tech giant Tencent at a $1 billion valuation.

Big-time exits have been few, however. In 2009, Yoox's IPO valued the company at €217 million (about $283 million, at current exchange rates) and resulted in a €21 million payout for founder and CEO Federico Marchetti, while, in 2010, Swiss luxury conglomerate Richemont, which already owned 29 percent of Net-a-Porter, acquired the remainder of the company from other shareholders, including founder Natalie Massenet, in a deal which valued the e-tailer at about £350 million pounds ($530 million). But amidst these success stories, companies are failing. The rise and fall of flash sales, daily deals and group deals sites has been well documented. Subscription commerce sites have also run into trouble, while the recent crop of online consignment, or "re-commerce," companies has met with mixed results.

So which models are showing the most promise? We spoke to a number of leading founders and investors to find out.

Social Curation

"I think the biggest online-only opportunity in fashion is related to and focused on discovery and connecting people to inspiration," said Kirsten Green, managing partner at Forerunner Ventures. And indeed, social curation sites, which offer consumers a way to discover inspiring content and product selections handpicked by others, have gained significant traction.

"To date, the majority of innovation in e-commerce has been around price efficiency for the consumer. Either people knew what they wanted and searched for the best price, or they sought out outlet models, like daily deals, group deals, flash sales" but the next round of e-commerce successes will have to deliver on "surprise and delight," said Joseph Einhorn, founder of The Fancy, a social commerce site which has attracted over 7 million users and has a run rate of approximately $36 million in annual sales, according to figures supplied by the company.

Lyst is another curation site showing signs of traction. But critically, the site allows users to follow products curated by brands and retailers, as well as other consumers. "We only share interests with certain facets of social groups. I go to gigs with only 10 percent of my friends, or take book recommendations from 5 percent of my friends. I have a lot of engineer friends — they're great, but I don't want fashion recommendations from them," said Lyst founder and CEO Chris Morton.

Lyst users are invited to follow the brands and retailers they like, generating in a personalised shopping feed that is specific to their tastes. “It’s a totally unique, bespoke experience that could never exist in the real world,” added Morton. The company has attracted 2 million active users, works with over 500 affiliates and drives over $1 million of sales each month.

Collaborative Consumption

Outside fashion, companies like Airbnb and Zipcar have proven that collaborative consumption — a model whereby people rent access to products, rather than owning them — is a compelling consumer proposition. With a total of $54.4 million in funding from the likes of Condé Nast, American Express and Kleiner Perkins Caufield & Byers, Rent the Runway has successfully brought the collaborative consumption model to fashion, enabling consumers to rent designer fashion and accessories for a few days at a time.

"Women come to Rent the Runway because they want permission to play dress up," said founder and CEO Jennifer Hyman. "It's a similar value proposition to Zara — that you can wear something once and not feel guilty." The company has attracted over 3 million members, who rent more than 10,000 dresses every week.

Vertically Integrated E-Commerce

Several of the most promising online fashion and accessories e-commerce players are vertically integrated businesses, who design, produce, market and distribute their own products, earning higher margins in the process. One of the most compelling examples is eyewear company Warby Parker, which has raised a total of $55 million since 2010 and seen sales grow by over 500 percent in its first two years of business, according to figures supplied by the company.

Warby Parker has also launched a fully owned and operated offline store in New York's Soho, followed by a second location in Boston. "More and more online brands will have a physical presence too," commented Robin Klein, a partner at Index Ventures. "I expect the winners of tomorrow to combine an element of physical and online retail presence," agreed Frederic Court, general partner at Advent Venture Partners.

Online Marketplaces

Online marketplaces, which connect buyers and sellers without taking on the risk of actually buying and holding inventory, have also met with success. Farfetch, which connects fashion consumers with carefully selected product from a large and diverse network of independent fashion boutiques, hit $129 million in sales in 2012, a 145 percent increase on 2011.

Building on this momentum, Farfetch, which has raised a total of $42.5 million from investors including Condé Nast, Index Ventures and Advent Venture Partners, plans to leverage its global network of over 250 boutiques, with a combined total of over 750 outlets, to connect the physical and digital shopping experiences and offer a layer of multi-channel services. But ultimately, it's the company's winning product assortment that is the biggest driver of its success. "What helps us win is our unique product," said founder José Neves.

Indeed, rather than a novel model, great product is perhaps the most important element of a successful fashion e-commerce business. “Many investors forgot this and overfunded businesses more focused on a specific model (subscription, flash sales, etcetera) than offering a great product,” said Court. “But product is the key to a successful e-commerce businesses, ahead of any parameter.”

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