Amazon Diversification: Changing eCommerce or Stretching Too Thin?

Amazon has announced a plan to sell high-end fashion on its website. It could be really cool, or really problematic for amazon for a couple of reasons. First, high-end fashion purchases are specific- they are unique, they fit perfectly, or have some intangible that gives people the moral permission to spend the money. Thus, when brought into an eCommerce space there tend to be a lot of returns because people buy 4 items knowing they are going to return 3 and keep the best 1. Returns are expensive. And likely more than the $79 flat shipping fee offered by Amazon Prime if this happens a few times throughout the year. Secondly, there are already some really great outlets for high-end retail. Sacks, Neiman Marcus, Nordstrom and Bloomingdales all have well-funtioning websites, established discount campaigns, audience research and ways to pique interest when shopping might not be top of mind. Third, high-end fashion is already a crowded ball game. Online competition, discount sites and hubs have been around for years. Plus, how do you really compete with the feeling of spending an afternoon trying on clothes, feeling amazing materials and finding jeans that really fit your thighs? Amazon is going all out, though, hiring models, creating photography, and negotiating contracts.

On the up side, if this endeavor works it could change designer fashion sales forever. Some companies are already worried that their brick and mortar stores will become just a showroom for Amazon orders. Their fears are not unfounded. A recent ComScore report determined that leading mobile retail activities look like this: find a store, compare prices, look for a deal. This idea is called showrooming, and it is very real. Go to the store, find the pieces you like, and order them online for a better deal. 

This is not the only endeavor for Amazon. They have recently developed Amazon Supply to challenge tool suppliers like Grainger, ACME and Fastenal. However, their lack of experience in the category may not do them justice in a category that is firmly based in first hand knowledge and shared trade advice. 

Who knows how it will all turn out but one thing is for sure: these diversification efforts from Amazon may change eCommerce forever, or run them dry. 

Ecommerce Rewrites Luxury and Beauty Market

Undoubtedly, e-commerce increases in importance for all industries - from power tools to books, medical supplies to toys, e-commerce is a source of sales like never before. With advancements in technology, proliferation of portable internet devices and increased functionality of social networks, it is safe to assume this retail channel will continue to grow with force.

But two of the most important spaces for online retail are beauty and luxury. Take Estee Lauder Companies for example. In 2012 web sales increased worldwide, reporting 20% growth in the US, 34% in the UK, 40% in China and a whopping 55% in Germany. They've cultivated about 340 marketing and e-commerce sites in 50 countries since 2001. Total sales climbing 10.2% to $9.7 billion earned them the No. 58 spot on Top 500 list of internet retailers. Where those numbers only make up 5% of their total sales for the year, there is no question that web presence is becoming continually important for the sector.

This focus on e-commerce, however, could mean something quite different for luxury clothing brands. Online retail funding for custom-made clothes doubled last year to $328.7 million. Why are venture capitalists investing so much in this market? Because its booming. Custom clothing startups like J.Hilburn Inc., American Giant and Bonobos Inc. are gaining share in the US e-commerce market- winning customers because cutting stores from the supply chain allows for lower price points than department stores who often marked up 3x from factory to store. Putting it in perspective: a men's dress shirt from J.Hilburn sells around $125, the same shirt from Zegna on Neiman Marcus website sells for $325-$435, even though the fabric is sourced from the same Italian mill.

Lesson: Zegna and other lux brands need to differentiate themselves from this market to give (particularly Millennials) consumers a reason to spend the extra money since they are providing extremely similar services at fractions of the price. I say this is important particularly for the Millennial audience because, where they may be in school debt, they are the largest group purchasing apparel, spending 8% more than those ages 35-44. Millennials are willing to spend, sure, but are also aware of their debt and happy to find a deal, which is why sites like Gilt and Rue la la are so popular with this demographic.

Additionally, online sales are not limited to a computer. 41% of Millennials have made a purchase using their smartphone. We are seeing an influx of purchasing from tablets and smartphones across all demographics, and if companies aren't optimizing they are losing sales. And this is not just in the US- growing mobile device usage in emerging markets like China, India and South Africa create excellent opportunities for cutting edge luxury and beauty brands to increase sales and develop prefernce from Millennials, a fiercely loyal group.

South Korean Beauty Boom

Cultural values of beauty, constantly improving domestic manufacturers and recession repercussions have made South Korea one of the most important beauty trendsetters and booming markets not only in Asia, but the world.

In 2011 the professional skin care products market grew by 5.3%, driven by strong showings in China, growing by 9.3%, and South Korea, growing. Amore Pacific data concludes that the cosmetics market in South Korea is steadily climbing from 7.9 trillion in 2009, to 8.9 trillion in 2010 and 9.7 trillion in 2011. The boom in South Korea is largely attributed to a regulatory change that drove investment in beauty industries as well as greater consumer spending on domestic products. Furthermore, internet and home shopping channels grew by nearly 18% as domestic brands developed e-commerce channels contributing to larger online shopping channels.

All and all the digital sector plays a major role in South Korean beauty, with blogs and social media creating extremely savvy customers and e-commerce not only allowing for more purchases in-country but also from outside as well. If Chinese travelers are driving luxury sales in Europe, they are doing the same for beauty in South Korea. Cosmetic companies in the country have benefitted from the steady increase of Chinese and Japanese visitors and internet customers purchasing beauty products produced in South Korea.

The main reason for the boom, though, is the cultural significane of skincare and beauty in South Korea. Their shoppers are extremely beauty savvy, are knowledgeable about products and take their skincare seriously. They are unique in that 64% of the beauty and cosmetics market is comprised solely of skincare and makeup. South Korean women cherish flawless skin, leading to skincare occupying about 49% of their market. Between the facial skincare, makeup and night routine it is estimated that South Korean women use around 17 products daily.

Foreign beauty brands are recognizing the importance of South Korea, yet their sales are struggling. Beauty giant Estee Lauder is extending their portfolio to include a new DayWear creme in Asian retail stores, as well as adding a trio of Optimizer Intensive Boosting Lotions on-counter this month. L'Oreal also develops unique formulas and patents for its Korean market, citing the climate and lifestyle differences that must be taken into account for skincare. Regardless of tailoring their products, Estee Lauder reported an 11% decrease in sales from the first half of 2012 as compared to 2011, and Lancome posted a 17% fall in sales over the same period.

Decisions to purchase domestic products are supported by a variety of factors.
1) South Korean manufacturers have produced at a much higher quality over the last decade.
2) Aggressive marketing of "one brand shops"over the past few years, and their opening locations in major shopping districts, hypermarkets, malls and even residential areas.
3) Foreign cosmetic companies primarily sell at department stores, which customers have been avoiding during the recession.
4) Domestic products are significantly cheaper than foreign brands.

Foreign beauty brands should continue making products especially formulated for South Korean skin and environment, but they also need to look at their marketing and product placement. Using a KIO program to partner with bloggers to promote their products would be beneficial in gaining the trust integral to recruiting new customers would be key. Focused sampling plays, trial events and discounts could assuage the fear to spend during the recession.

Perhaps more importantly, recognizing the cultural differences in approach to skincare: South Korean women treat their skincare as a medical necessity, not superficial fun. Placing products in pharmacies and promoting a message of scientific benefit would be more in line with South Korean perceptions of beauty. Finally, creating one brand shops of their own, or partnering with domestic companies to get shelf space out of the department store could be a crucial win for foreign competitors.