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Private Label, Amazon’s Secret Fashion Weapon

Franklin & Freeman, James & Erin and Society New York. These may not be household names yet, but given time, these private-label collections from Amazon—along with its latest launch, Find—could pose a real threat to apparel retailers.

The e-commece giant got serious about fashion last year with the launch of several labels, including men’s wear, athleisure and intimates. And consumers are catching on. Slice Intelligence reports sales for Amazon’s house brands increased 67 percent in Q4 of 2016, compared to Q3. The biggest drivers were dresses, which comprised 40 percent of Amazon’s private-label apparel sales.

Even with this success though, the company’s owned apparel offering is tiny compared to established house collections from competitors like Macy’s and Nordstrom. For instance, Slice found that Halogen pulled in 11 times the revenue of Amazon’s Lark & Ro and Alfani generated nine times the revenue in 2016.

But even so, it’s too soon to discount Amazon’s potential. Consider its dominance in other product categories like batteries, for which its AmazonBasics brand accounts for a third of all units sold online in the U.S.

“Amazon’s new private label brands will need time to develop that familiarity. Still, competitive apparel brands—both private label and national brands—should keep a close eye on Amazon,” said Ken Cassar, principal analyst, Slice Intelligence, in the company’s research report. “It has a ton of data about what consumers like, what consumers are willing to pay, and has control over a wide array of levers to create awareness of its brands.”

Apparel and e-commerce

The New York Times recently published a story investigating Amazon’s fashion prospects that found the apparel sector is prime for a sea change. It referenced research firm L2’s market intelligence that shows tipping points in retail occur when online shopping makes up 20 percent of retail spending in a category. And according to research firm Cowen and Company, apparel hit 21 percent last year.

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That would explain why every fashion retailer has been bemoaning a “shift in consumer behavior” when explaining abysmal same-store performance. But it could also mean we haven’t seen the full impact yet.

“I do think this year is the year apparel e-commerce takes off,” Cooper Smith, an analyst at L2, told the Times.

And Amazon is poised to take advantage of this acceleration. Slice Intelligence estimates that Amazon captured 43 cents of every dollar spent online in the U.S. in 2016.

Currently Cowen estimates Amazon’s apparel sales—including direct and through third-party vendors—at a total of $22 billion or 6.6% of the market. By 2021, the research firm estimates that number will hit 16 percent, which is a huge chunk for a fractured market.

“We look at it as winner take most,” John Blackledge, an analyst at Cowen, told the Times. “That’s their game.”

And it’s a game they could win in men’s shoes, women’s cocktail dresses, and women’s sweaters. L2 found that Amazon is the biggest threat to these vulnerable categories.

The Amazon advantage

And while its brands don’t have the name recognition of established house labels at department stores, the company does have built-in consumers thanks to Amazon Prime. The membership that offers free shipping for a yearly fee plus additional perks across the e-tailer’s platform, creates loyalty that other retailers are sorely missing. And it makes shopping the site easy—even addictive.

If the numbers are to be believed, Prime members have doubled since March 2015. Consumer Intelligence Research Partners estimates there are 80 million members in the U.S., up from their estimate of 40 million two years ago. And Prime members spend an average of $1,300 a year compared to the $700 non-members spend on the site.

In addition to a captive consumer base, Amazon is looking for other ways to beat fashion retailers at their own game. The company recently received a patent for on-demand apparel production, which sources close to the matter tell the Times would create garments in five days. It would also stem the tide of returns, which are the black hole swallowing retailers’ e-commerce profits.

But to make the custom garment business work, the company will need to figure out how to get consumers’ measurements. For other made-to-measure businesses, that’s where physical locations come in. While Amazon is ramping up its brick-and-mortar stores, it seems to have a more high-tech solution in mind. The source from the Times article says the company—which recently launched the Echo Look, a virtual assistant with a camera—is developing a similar device to capture the measurements it needs for on-demand apparel.