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The ‘digital land grab’ in fashion

Source: MacKinsey & Company

As e-commerce and platforms evolve, fashion companies could use them to realize higher margins and build scale.

As the race to become the platform of choice for both customers and fashion companies intensifies, e-commerce players will continue to innovate by adding profitable value-added services and focusing on new technologies. Whether through acquisitions, investments, or internal R&D, companies that diversify their ecosystems will strengthen their lead over the remaining pure players relying solely on retail margins and existing offerings.

In the 2018 State of Fashion report, we emphasized the importance of platforms as entry points of choice for consumers in their shopping journeys. The growing dominance of these platforms, through superior convenience, growing segment coverage, and the launch of private labels, continues to be a theme this year for both fashion pure players and multicategory platforms. Our latest State of Fashion report, written in partnership with the Business of Fashion (BoF), therefore highlights what we call the “digital land grab” as one of our ten trends for the fashion industry to watch in 2019.

For example, Amazon, with an estimated total share of more than 8 percent, is on course to become the leading apparel retailer in the United States. Flipkart has a 40 percent share of online fashion sales in India. However, the potential for profitable growth fueled by user acquisition is starting to saturate due to market maturity and increased competition. The next horizon in platform evolution is business model diversification through proprietary technology and knowledge to enrich the offering to consumers and brands. The race is under way.

This evolution presents platforms with an opportunity to generate higher margins while growing scale, as opposed to the recent experience of fast growth without significant profitability. E-commerce players, with average EBITDA1 margins of some 4 percent in 2017, consistently post lower profits than traditional retailers, with EBITDA margins of about 8 percent, according to an analysis from McKinsey’s Global Fashion Index. Three of 16 publicly listed e-commerce players with revenues of more than $100 million made a loss. A number of private e-commerce players also operate unprofitably: Farfetch (pre-IPO), for example, reported an EBITDA margin of approximately –14 percent in 2017, despite significant revenue growth of 74 percent. While investors in leading players have often shown patience for profitability, weak performance has been reflected in the valuations of some small to midsize private players—, once valued at $900 million, was reportedly sold to PCH in 2015 for $15 million to $30 million. In 2018, Rue La La reportedly acquired Gilt Groupe for less than $100 million, far below its former valuation of $1 billion.

In the context of such cautionary tales, large e-commerce players are strategically adding new services. They are venturing in areas where they have a competitive advantage (as Farfetch and Zalando, for example, have done with white labeling) or where they spot a structural opportunity (such as Alibaba’s XPressBees logistics company). They are also investing heavily in technology across the value chain, aiming to boost efficiency and streamline the customer experience.

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