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L2: Fashion on Amazon is Still Nascent

Every apparel seller with a pulse should be worried about Amazon’s foray into private-label fashion, not least because Cowen and Company analysts recently repeated their prediction that the online goliath will unseat Macy’s as the number one clothing retailer by next year.

Let’s face it: The market share is ripe for the picking. People aren’t spending money at Macy’s, Nordstrom and Neiman Marcus like they used to. And according to a report from research group L2, Amazon, a site that many brands have been slow to sell their wares on, may finally succeed in an arena where others have failed.

“Winning in fashion would mean huge financial gains for Amazon, given the high profit margins compared to typical household items,” L2 said, pointing out that the company’s seven in-house brands—dispatched without a marketing push earlier this year—currently have more than 1,800 products listed on the platform, spanning men’s, women’s and children’s apparel and accessories.

Basics are a boon

Brands eager to board the Amazon bandwagon should be aware of the site’s top players, which L2 said are fashion basics, rather than the latest trends.

“Bestsellers are often core, replenishment items such as T-shirts, underwear and socks,” the report said, noting that these items drive more than 75 percent of sales on Amazon for most brands. “Similarly, the market favors products with lower price points. Sixty-five percent of the top-100 bestselling shoes most visible in search results [in June 2016] were less than $100 and 24 percent were less than $50.”

By comparison, prices were higher on Nordstrom where 51 percent of bestsellers were less than $100 and only 6 percent were less than $50.

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Third-party merchants make for a confusing landscape

As L2 pointed out, third-party merchant listings represent more than 75 percent of fashion brand SKUs tracked on Amazon.

“This widespread presence is rooted in brand supply chains as many distributors use the Amazon channel to clear inventory,” the report said. “Kate Spade products, for example, are sold by a variety of third-party merchants including retailers, outlets and Amazon-specific vendors.”

Thus, whether or not brands officially distribute on the site, they need to monitor the ecosystem and track “equity-damaging listings,” such as outdated products and off-brand imagery, because Amazon has limited incentive to regulate its open marketplace.

Poor inventory management means lost sales

Many brands struggle to keep priority SKUs, like core items, in stock on Amazon, thanks to the company’s “notoriously poor” inventory management system. L2 data from January 2016 showed that less than half (41 percent) of merchant SKUs were in full stock, while Germany had 21 percent and the U.K. and France each had 18 percent.

“The negative repercussions of inventory shortages are magnified due to Amazon’s marketplace for independent sellers,” the research firm said. “When official brand inventory is sold out, third-party merchants with the product in stock win the buy box, resulting in a loss of potential sales for the brand.”

Dynamic pricing doesn’t work for everyone

“Amazon’s dynamic pricing algorithm will drop prices on wholesale inventory in order to sell through product, and it will adjust pricing based on third-party merchant offerings, which routinely offer discount,” L2 said, highlighting how merchant listings offered 35 percent discounts in the second quarter, on average, while third-party merchants cut prices by 34 percent.

Not only does discounting affect sales and margins on Amazon, L2 said it can sometimes knock the entire pricing ecosystem off-kilter, because brands miss out on margins as the cost of deep discounts is passed back to them.

Poor product pages lead to less visibility

It pays to put time and money into product detail pages (PDP), and bare-bones listings only hurt brands. Levi’s, however, goes all out on Amazon, including three or more thumbnail images, size guides and custom product videos to model fit. L2 explained, “Listings with these sophisticated PDPs consistently have good Amazon search visibility and a greater number of reviews than those without them.”