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Amazon

Amazon Steps Up Fashion Challenge to Retailers by Charging Full Price

Phil Wahba
By
Phil Wahba
Phil Wahba
Senior Writer
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Phil Wahba
By
Phil Wahba
Phil Wahba
Senior Writer
Down Arrow Button Icon
April 7, 2016, 3:24 PM ET
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Amazon corporate office building in Sunnyvale, CaliforniaPhotograph by Lisa Werner — Moment Editorial via Getty Images
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It might seem counterintuitive that higher prices are the key to Amazon.com (AMZN) taking its fashion business to the next level.

But that’s exactly what the online store is doing to woo labels that for years thought Amazon was too down market and whose low prices would tarnish its brand.

The Wall Street Journal on Thursday reported that many top brands, including Nicole Miller, PVH’s (PVH) Calvin Klein, Kate Spade (KATE), Lacoste, and others, are now selling directly to Amazon.

In what is a tough time for chains like Macy’s (M), Dillard’s (DDS), and Kohl’s (KSS), many brands want to reduce their reliance on struggling department stores. What’s more, Amazon has been ramping up the selection offered by its own brands, using its size and scale to build up a robust fashion supply chain. Amazon recently launched seven of its own brands, including Franklin & Freeman men’s shoes and Society New York women’s dresses. And investment bank Cowen & Co. estimates that Amazon sells 343,000 different kinds of items (this includes different size and color combinations of a given item) in leading brands, compared to 85,000 apiece for Macy’s and Nordstrom.

Last year, Cowen estimated that Amazon, which is a relative latecomer to the world of fashion and apparel, would sell $27.8 billion worth of apparel in the U.S. in 2017, surpassing Macy’s as the No. 1 seller of clothes in the United States. (That’s up from an estimated $16.34 billion last year, according to Cowen.)

“The full-priced brands recognize that Amazon now is going all in with its own private brands and really trying to take over the apparel stage,” David Bassuk, managing director at AlixPartners and co-head of the firm’s retail practice, told Fortune.

Meanwhile, major clothing retailers are struggling. Macy’s sales fell 3.7% last year, while Kohl’s rose only modestly. What’s more, apparel is still an under-penetrated part of online shopping, meaning there is plenty of opportunity for Amazon to woo large fashion brands, despite their long held fear that selling to the online retail giant would undercut the chains that give those brands nice in-store presentation and look to cultivate those brands.

But many are starting to overcome such worries. As the Journal points out, long time Amazon holdout Ralph Lauren (RL) has started to sell some shoes directly on the site. (It’s easy to see why Ralph Lauren might want to branch out a bit: Macy’s accounts for about half of its North American wholesale business, and that retailer is contending with declining mall traffic.)

Department stores have been fighting back. As J.C. Penney CEO Marvin Ellison told Fortune in a recent cover story, the retailer is looking to make better use of its big private brands, which include St. John’s Bay and Arizona, to offer shoppers exclusive items. And Kohl’s last month relaunched its billion-dollar Sonoma apparel and home goods brand. (At both of those chains, private and exclusive merchandise generates about half of revenue.)

And higher end department stores like Nordstrom (JWN) and Neiman Marcus offer free returns, something that would squeeze Amazon. Fashion shoppers typically order an item in two or three sizes, meaning such retailers have learned to deal with a deluge of returns. Macy’s CEO Terry Lundgren last month predicted this would be create havoc for Amazon, telling analysts, “They’re going to have an interesting challenge when they start getting all those returns coming back online.”

All of these incumbent chains have touted their fleets of hundreds of stores equipped to handle online returns as a big edge over Amazon.

Still, many have predicted that Amazon would never cut it in the fashion world. Indeed, it has been one of the toughest retail nuts to crack for the online giant. But many chains have also learned the hard way not to underestimate Amazon.

“It’s not going anywhere,” AlixPartners’ Bassuk said of Amazon’s threat.

About the Author
Phil Wahba
By Phil WahbaSenior Writer
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Phil Wahba is a senior writer at Fortune primarily focused on leadership coverage, with a prior focus on retail.

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