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DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

1) TheUKhasoneof themostdevelopede-commerceapparelmarkets in theWesternworld, and 23%ofUK apparel salesarecurrentlymadeonline.Weestimatethattheproportionofapparelsalesmadeonlinecouldreach30%infiveyears.

2) Internet-onlyretailersaregainingshareoftheonlinechannel.We estimate that online pure plays’ share of the onlineapparel and footwear retailingmarket increased from17.2%in2011to28.6%in2015.

3) Despite theoverall softness in theUKapparelmarket,manyfashion pure plays have been consistently growing quarterlysalesatratesof20%orhigherinthelastyear.Pureplayshavebeen vastly outperforming multi-channel retailers, eventhoughthemulti-channeloperatorscontinuetoinvestintheironlinebusinesses.

4) Pure plays are growing through new shopper additions, andincreasesinbothpurchasefrequencyandaveragebasketsize.Theseretailersalsotendtohavenimbleandcustomer-centricbusiness models, which allow them to quickly adapt tochanging customer demandsand fashion trends. In addition,they keep expanding their customer delivery and returnoptions, and they have excelled at customer service andrelationshipmanagementbyofferingpersonalizedcontent.

5) We believe apparel pure plays such as Zalando, ASOS,Boohoo.com, Amazon and Missguided will continue to gainsales in the UK market at the expense of discounters,departmentstoresandspecialtyapparelretailers.

D E B O R A H W E I N S W I G M a n a g i n g D i r e c t o r ,

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C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

DEEP DIVE: UK Apparel

E-Commerce: Pure Plays Boom

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TABLEOFCONTENTSEXECUTIVESUMMARY.......................................................................................................................................3

INTRODUCTION.................................................................................................................................................4

E-COMMERCENOWCAPTURES23%OFUKAPPARELSPENDING........................................................................4

PurePlaysRobustlyOutperformingDespiteDownturninUKApparelMarket…WhileMulti-ChannelRetailersStruggle..........................................................................................................................................................5

WHYAREPUREPLAYSGROWINGAGGRESSIVELYANDCAPTURINGSHARE?.....................................................10

BusinessModel.............................................................................................................................................10

FashionSeasonalityandNimbleOperations..................................................................................................10

VarietyandMassiveFashionRange..............................................................................................................11

EffectiveMarketingandCustomerRelationshipManagement......................................................................12

Pure-PlayFashionRetailersHaveOvercomeChallengesofDeliveryandReturns..........................................12

MAJORAPPARELPUREPLAYS...........................................................................................................................13

Zalando.........................................................................................................................................................13

ASOS.............................................................................................................................................................13

Boohoo.com..................................................................................................................................................14

Amazon.........................................................................................................................................................14

Missguided....................................................................................................................................................15

KEYTAKEAWAYS...............................................................................................................................................16

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EXECUTIVESUMMARYTheUKhasoneofthemostdevelopede-commerceapparelmarketsintheWesternworld.AccordingtomarketmeasurementfirmKantarWorldpanel,the UK fashion market was worth £36 billion in 2015 and e-commerceaccountedfor£8billionofthattotal.Currently,23%ofUKapparelsalesaremade online, up from 21% in 2015.We estimate that the proportion ofapparelsalesmadeonlinecouldreach30%infiveyears.

The share of the online apparel and footwear retailing market held byonlinepure-play retailers increased from17.2% in2011 to28.6% in2015,weestimate.

Bycontrast,numerousUKapparelretailersacrossotherchannelsegmentshave been posting disappointing sales in the last few months. Given theshrinking size of the overall UK apparel market, it appears that omni-channelretailers’onlinesalesareactuallycannibalizingtheirstoresales inmost formats. Pure plays have been vastly outperforming multi-channelretailers, even though the multi-channel operators continue to invest intheir online businesses. Despite the overall softness in the UK apparelmarket, many pure-play fashion retailers have been consistently growingquarterlysalesatratesof20%orhigherinthelastyear.

Pure plays are growing through new shopper additions, and increases inboth purchase frequency and average basket size. Compared to mostfashionretailers,pureplaysofferunmatchedproductchoiceandconstantstyle evolution. They are gaining traction because their product offeringsfocusoncurrentweather trends, insteadofonseasonal items formonthsahead. This is especially relevant nowadays, as weather patterns haveprovenvolatileinthepastfewmonths.

Pure plays also tend to havemore nimble and customer-centric businessmodels,whichallowthemtoquicklyadapttochangingcustomerdemandsand fashion trends. In addition, these retailers keep expanding theircustomerdeliveryandreturnoptions,andtheyhaveexcelledatcustomerserviceandrelationshipmanagementbyofferingpersonalizedcontent.

Amazon Fashion has strong ambitions to turn itself into a global primefashion destination. The company considers itself only a few years into averylong-terminvestmentinthefashionmarket.

Webelievepure-playapparelretailerssuchasZalando,ASOS,Boohoo.com,AmazonandMissguidedwillcontinuetogainsalesintheUKmarketattheexpenseofdiscounters,departmentstoresandspecialtyapparelretailers.

DespitetheoverallsoftnessintheUKapparelmarket,manypure-playfashionretailershavebeenconsistentlygrowingquarterlysalesatratesof20%orhigherinthelastyear.

Currently,23%ofUKapparelsalesaremadeonline.Weestimatethattheproportionofapparelsalesmadeonlinecouldreach30%infiveyears.

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INTRODUCTIONIn this report,weexploreonline apparel retailing in theUK, including thesize of the market, forecast growth rates and the proportion of apparelsales generated online compared with total sector sales. Our analysisfocuses on leading pure-play apparel and footwear retailers that have ameaningful presence in the UK market: Zalando, ASOS, Boohoo.com,AmazonandMissguided.

We discuss the recent softness in the overall UK apparelmarket and thereasons behind the pure plays’ outperformance versus competing omni-channel retailers. We also outline why we think Amazon Fashion willcontinue to grow its UK apparel sales and take share from discounters,departmentstoresandspecialtyretailers.Finally,weoffersummaryprofilesoftheUK’smajorapparelpureplays.

E-COMMERCENOWCAPTURES23%OFUKAPPARELSPENDINGTheUKhasoneofthemostdevelopede-commerceapparelmarketsintheWesternworld.AccordingtoKantarWorldpanel,theUKfashionmarketwasworth£36billion in2015,andonlinesalesaccountedfor£8billionofthattotal.E-commercecurrentlyaccountsfor23%ofUKapparelsales,upfrom21% in 2015.Online apparel sales grewby 7.5% year over year in the 52weeksended July31,2016,whileapparel sales inphysical storesdeclinedby3.0%overthesameperiod,accordingtoKantar.

Source:Shutterstock

The CEO of British fashion pure play ASOS stated during the company’sanalystdayinJunethattheUKapparele-commercemarketisgrowingfourtimes faster than the total apparelmarket. ASOS expects online apparelpenetrationtoreachapproximately40%ofthetotalUKapparelmarketovertime.

Theshareoftheonlineapparelandfootwearretailingmarketheldbypureplaysincreasedfrom17.2%in2011to28.6%in2015.

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Weestimatethattheproportionofapparelsalesmadeonlinecouldreach30% in five years. Our estimate is based on Kantar’s statement that e-commerceaccountsfor23%ofUKapparelsalescurrentlyandassumesthattheannual increase inthepenetrationratewillslowtoanaverageof1.5%peryear.WebelievepureplayssuchasZalando,ASOSandBoohoo.comwillcontinuetogainsalesintheUKmarketattheexpenseofdepartmentstoresandspecialtyapparelretailersinparticular.

Asshowninthegraphbelow,theshareoftheonlineapparelandfootwearretailingmarketheldbypureplaysincreasedfrom17.2%in2011to28.6%in2015,accordingtoouranalysisofEuromonitormarket-sharedata.

Figure1.ApparelPurePlays’ShareoftheTotalOnlineApparelandFootwearMarket(%)

Source:EuromonitorInternational/FungGlobalRetail&Technology

Pure Plays Robustly Outperforming Despite Downturn in UK ApparelMarket…WhileMulti-ChannelRetailersStruggle

Fashionretailershavestruggledwithsoftsales intheUKmarket inthe lastfewmonths.According to the Office for National Statistics (ONS), overallmonthly UK retail sales increased by almost 4% year over year in August(latest availabledata),butapparel and footwear retail salesdeclinedbyalittlemore than 4% in the same period.We believe the slowdown in UKapparelsalescanbeattributedtothefollowing:

• Consumersbelievetheweatherisbecominglesspredictableandaretherefore adjusting their purchasing decisions toweather patterns,waiting topurchase summerorwinter apparel itemsuntil theyaresuretheyreallyneedthem.

• Accustomed to deep discounting activity, shoppers areoverwhelmingly waiting for discounts and promotions before theypurchaseapparel.

• Thereisalackofmajorinnovative,newfashiondesignsandstylestoinciteshopperstopurchasemoreclothing.

OnlineapparelpureplayersarerobustlyoutperformingdespitethedownturninUKapparelmarket,whilemulti-channelretailerscontinuetostruggle.

17.2%18.7%

20.3% 21.5%

28.6%

2011 2012 2013 2014 2015

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• The athleisure trend is benefiting athletic apparel and footwearretailerssuchasAdidasandNikeattheexpenseofspecialtyretailersanddepartmentstores.

• Consumers, especially millennials (those born between 1980 and2000), are prioritizing spending on experiences such as holidays,restaurantsandleisureoverspendingonfashion.

Numerousnon–pureplayapparelretailersacrossvariouschannelsegmentshavebeenpostingdisappointingsalesinthelastfewmonths:

• For the 53 weeks ended September 17, Primark reported its firstcomparablestoresalesdeclinein16years;thecompany’scompsfellby2.0%over theperiod.Someanalystsdrawadirect linkbetweenthe revenue slide and Primark’s lack of an online sales platform. AlargeproportionofPrimark’scustomersareintheirteensand20s,agenerationthattendstoenthusiasticallyshoponline.

• Initslatestquarterlyresults,forthe16weeksendedSeptember24,Sainsbury’salsoreporteditsfirst-everdeclineinclothingsales.

Given the shrinking size of the overall UK apparelmarket, it appears thatomni-channel retailers’ online sales are actually cannibalizing their storesalesinmostformats:

Source:Shutterstock

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• For the first half of 2016 (the 26 weeks ended July 30), Next’srevenues showed a softening trend,with store sales nearly flat, at0.1%,andNextDirectorysalesgaining“only”7.1%yearoveryear.

• Marks&Spencer’shomeandclothingdivisionsalesdeclinedby8.9%in its most recent reported quarter (the 13 weeks ended July 2),marking themostpronouncedquarterly clothing sales compressionineightyears. In itsfiscalyear2015,thecompanysawclothingandhome sales decline by 2.9% year over year, despite online salesincreasingby23.4%overtheperiod.

• Likewise,Debenhamspostedcomparablestoresalesof(0.2)%foritsmostrecenttradingquarter,endedJune11.

DespitethesoftnessintheUKapparelmarket,fashionpureplayshavebeenconsistently growing quarterly sales, at rates of 20% or higher in the lastyear:

• Boohoo.com reported thatUK revenues in itsmost recent quarter,whichendedAugust31,increasedby35%yearoveryear.

• ASOS reported UK retail sales growth of 28% year over year in itsmostrecentquarter,whichendedJune30.

• Zalando stated on its last earnings call that growth in the UKfollowingtheBrexitvotewasdevelopingpositively.

Source:BoohooThe apparel pure plays have been vastly outperforming multi-channelretailers, even though the multi-channel operators continue to invest intheir online businesses. Internet-only retailers are growing through newshopper additions and increases in both purchase frequency and averagebasket size. For example, the number of active ASOS UK customersincreasedby 21.1% year over year, to 4.6million, as of June2016 (activecustomersaredefinedas those shoppingwith thecompany in the last12

GiventheshrinkingsizeoftheoverallUKapparelmarket,itappearsthatomni-channelretailers’onlinesalesareactuallycannibalizingtheirstoresales.

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months).ASOSstatedthatitsactivecustomerbaserepresentsaround25%oftheUKmillennialtargetmarket.

Online pure plays have also posted strong order growth. Boohoo.com’sorderfrequencyinitslastreportedquarter(endedAugust31)increasedby7.7%yearoveryear,toanaverageof2.11customerpurchasesperyear.

Figure2.ASOSandBoohoo.com:TotalOrders(Mil.)

Figuresaregroupdata,notjustfortheUK.Source:CompanyreportsPure plays have also managed to expand customers’ average basketpurchasesizes.

Figure3.ASOSandBoohoo.com:AverageBasketSize(£,IncludingVAT)

Figuresaregroupdata,notjustfortheUK.Source:Companyreports

Internet-onlyretailersaregrowingthroughnewshopperadditionsandincreasesinbothpurchasefrequencyandaveragebasketsize.

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ASOS Boohoo.comFY14 FY15 1H16

£62.82

£35.28

£68.74

£33.59

£68.86

£37.16

ASOS Boohoo.comFY14 FY15 1H16

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For the last fiveyears,ASOShasgrown revenuesata24%CAGR,and thecompanyexpectsfull-year2016salesgrowthattheupperendofthe20%–25% range.Boohoo.comhas raised its guidance three times this year andanticipatesfull-yearsalesgrowthof30%–35%.Zalando(notchartedbelow)expectsfull-yearrevenuestogrowby20%–25%.Figure4.ASOSandBoohoo.com:UKRevenue(YoY%Change)

Source:CompanyreportsASOSexecutivesstatedduringthecompany’sCapitalMarketsdayonJune29thattheyenvisionUKsalesgrowingto£1billioninthenextfourtofiveyears,upfromthecurrent£474million.Zalandointendstogrowitssalesbyfivetimes inthecomingyears,whichwouldamounttoapproximately£13billion. The company says that,with revenues at that level, itwould holdapproximatelya5%shareoftheEuropeanfashionmarket.Figure5.ASOSandBoohoo.com:TotalUKRevenues(£Mil.)

Source:Companyreports

Zalandointendstogrowitssalesbyfivetimesinthecomingyears,toholdapproximatelya5%shareoftheEuropeanfashionmarket.

35%33%

27%

38%

28%

35%

ASOS Boohoo.com

FY14 FY15 LastQuarter

372

474

203

94130

44

FY14 FY15 LastQuarter

ASOS Boohoo.com

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WHYAREPUREPLAYSGROWINGAGGRESSIVELYANDCAPTURINGSHARE?BusinessModel

Brick-and-mortarretailersareseeinganaturalcapongrowth,asthemarketfor physical stores is saturated in the UK. Multi-channel retailers’ onlinebusinesses are almost certainly cannibalizing their own store sales, whilethesalesmadebypureplaysareallpuregains.

FashionSeasonalityandNimbleOperations

Online-only retailers are gaining traction in part because their productrangesfocusoncurrentweathertrends insteadofonseasonalapparelformonths ahead. This is especially relevant nowadays, as weather patternshaveproven volatile in thepast fewmonths.Omni-channel retailers havefoundthemselvesforcedintoheavydiscountingactivityafterbeingsaddledwithunsoldinventory.

BritishonlineretailersASOSandBoohoo.comhavebeengainingtractionbyfocusing their offering and tailoring theirmessages to current trends. Forexample, they have highlighted bomber jackets instead of seasonalproducts, and have focused on events such as back to school and theCoachellamusicfestival.

Source:ASOS

Pure plays tend to have more nimble and customer-centric businessmodels. ASOS designs product based on mining and analyzing customerdata,soitisveryquicktoadapttochangingcustomerdemandsandfashiontrends. The company’s buyers purchase product on a running basisthroughout the season, and product is designed for a six-week sellingperiod—itisnotavailableallseasonlong.Boohoo.comoperatesatest-and-repeatmerchandisemodel,whichreducesexcessinventoryanddiscountingriskandalsoenablesrapidreorderingoffast-sellingitems.

Meanwhile, department stores and specialty apparel retailerspurchaseordesign merchandise months in advance, and the same merchandise is

Pureplaystendtohavemorenimbleandcustomer-centricbusinessmodels.ASOSdesignsproductbasedonminingandanalyzingcustomerdata,soitisveryquicktoadapttochangingcustomerdemandsandfashiontrends.

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offeredthroughoutanentireseason.Onlyfast-fashionretailersInditexandH&M can rival the online pure plays in terms of supply chain speed andflexibility.

VarietyandMassiveFashionRange

Compared tomost fashion retailers, pure plays offer unmatched productchoice and constant style evolution. ASOS launches between 3,000 and5,000 new products every week, and ensures there is newness on itswebsite every single day. Zalando offers over 1,500 brands and over150,000 products. The company plans to increase its offering to 1millionproducts. Boohoo.com offers 20,000 different styles and introduces 100newstylesaday.Thenewdailyandweeklyproductinflowatpureplaysisequivalent to theSKUsthatomni-channel retailershave in their stores foranentireseasonoryear.

Pureplaysalsooffer specialtyniche linesandproducts, including items intall,petiteandplussizes.ASOSoffersmaternity,bridalwear (withmostofits wedding dresses priced at less than US$200), bridesmaid dresses,eveningwear andwide-fitting footwear. The company has also broadeneditsproductrangestoincludemen’sgrooming.Boohoo.comandASOShavebothstatedthattheirspecialtyrangesaregrowingverystrongly.

Internet-only retailers often sell exclusive-collaborative collections withpopularbrandsthatcannotbefoundanywhereelseexcepttheirwebsites.For example, Zalando offers Tommy Hilfiger’s Tommy x Gigi collection,Beyoncé’s IvyPark collectionandexclusive footweardesignedwith luxurybrand Marni. Zalando has developed 17 private-label brands. KeyBancCapital Markets estimates that Amazon sells 1,800 different private-labelitems.

Source:Zalando

Pureplaysofferunmatchedproductchoiceandconstantstyleevolution.ASOSlaunchesbetween3,000and5,000newproductseveryweek.

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EffectiveMarketingandCustomerRelationshipManagement

Online-only apparel retailers have excelled at customer service andrelationship management. They have also managed to win customerengagement throughspecially targetedand innovative initiatives.Zalando,forexample,hostedapublicconsumertrendshowcalledBreadandButterthat featured indoorandoutdoorexhibitionbooths, runwayshows,musicactsandactivitiesby the31brands that sellproductsonZalando’sonlineplatform. The exhibition also featured Zalando’s private-label lines.ASOSlaunched a rewards loyalty scheme in February 2016, initially for UKcustomers, that allows customers to build up points on purchases; thepoints can be converted into vouchers, birthday discounts, free next-daydelivery and exclusive content. And Boohoo.com introduced customerservicewebchatintheUK.

Manyapparelpureplaysalsoworktobuildandmaintaincustomer loyaltybyofferingpersonalizedexperiences, such as individualizedproduct edits,searchresultsandsizepredictionsbasedonpreviouspurchaseandreturnhistory.

Pure-Play Fashion Retailers Have Overcome Challenges of Delivery andReturns

Apparel pure plays keep expanding customer delivery and return options.ASOSoffersfreereturnsandhasamidnightcutofffornext-daydelivery inthe UK. The company also launched returns in the UK through Doddlestores, Hermes ParcelShops, home-collection returns and InPost ParcelLockers,and introducedone-hour,next-day returncollectionslots in largecities. ASOS is also developing a Pick-Up-Drop-Off network, which allowscustomers to collect and return orders from a variety of convenientlocations.IntheUK,customershaveover5,500deliver-to-storelocationstochoosefrom,andASOSalsohasclick-and-collectpointsatBootsstores.

IntheUK,Boohoo.comalsooffersnext-daydeliverywithamidnightcutoff,as well as Sunday delivery, returns collection and the Boohoo Premierprogram,whichoffersunlimitednext-daydeliveryforanannualfee.

Source:Shutterstock

Online-onlyapparelretailershaveexcelledatcustomerserviceandrelationshipmanagement.

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MAJORAPPARELPUREPLAYSBelow,wehighlightthemainapparelpureplayswithapresenceintheUKmarket:Zalando,ASOS,Boohoo.com,AmazonandMissguided.

Zalando

Zalando is Europe’s biggest online fashion pure play by revenue. TheGerman retailerwas founded in 2008 andwas initially a dedicatedonlinefootwear retailer. The company distributes in 15 European countries andsaysitholdsa5%marketshareinfootwearinGermany.Overtime,Zalandobranchedout into distributing other product categories, including apparelandaccessories.Thecompanyfocusesonabroadcustomeragerange.

ZalandohasfocusedmorethanASOShasonprovidingasalesplatformforbig global brands such as Gap, Adidas, Topshop, Abercrombie & Fitch,Hollister, Levi’s, G-Star RAW, Nike, Puma and Hugo Boss. Zalando alsocollaboratesonexclusivelineswithwidelydistributedbrands.

The company has developed 17 private-label brands and is operating itsown-label unit, called zLabels, as a stand-alone business. Zalando statedthatlessthanone-fifthofitssalesarederivedfromitsprivate-labelbrands.Thecompanyisplanningtogrowthebusinessbyenteringnewmarketsandsellingitsproductsonothermerchants’websites.Zalandowillsoonsell itsprivate-labelshoebrand,Zign,onASOS,andAnnaFielddressesonAmazonintheUS.SeveralofitsbrandsarealreadydistributedinChinaonAlibaba’sTmall platform. Zalando is not aiming to reach the same penetration ofown-labelsalesasASOS(50%),butisforecastingthatitsprivate-labelsaleswill growat the samepace as its overall sales, or by approximately 20%–25%annually.

ZalandoismakingabigpushintheUKmarketcurrently,asevidencedbyitsaggressivemarketingthroughprint,busandoutdooradvertising.France isone of Zalando’s strongest markets and one of its most important withregardtoitsgrowthstrategyforthenextfewyears.

ASOS

UK-basedASOSisthesecond-largestEuropeanfashionpureplayintermsofrevenue.Thecompanysellsover850brandsandover85,000brandedandown-labelproducts.Popularbrands includeAbercrombie&Fitch,Boohoo,Hollister,Missguided,AdidasandReebok,aswell asnewand little-knownbrands. ASOS also collaborates on exclusive lines with widely distributedbrands.Thecompanyisfocusedonyoungfashionandtargetsyoungadultsintheir20sthrougheightlocal-languagewebsitesintheUK,theUS,France,Germany, Spain, Italy, Australia and Russia. ASOS also ships globally toalmosteverycountryintheworldanddistributesinChinathroughTmall.

Attheendofthefirsthalfof2016,ASOSwasgeneratingabout44%of itsrevenuesfromitsownprivatelabels.UnlikeZalando,ASOSdoesnotsellitsownlabelsonothermerchants’websites.

ZalandoismakingabigpushintheUKmarketcurrently,asevidencedbyitsaggressivemarketingthroughprint,busandoutdooradvertising.

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AccordingtomarketingagencyMediaVision,ASOShadthehighestrankingsacross 2,000 popular Google search terms, ahead of major high-streetdepartmentstoressuchasHouseofFraser,JohnLewisandDebenhams.

Boohoo.com

Foundedin2006,Boohoo.comisaUK-basedfashionpureplaythattargetsthe 16–24-year-old demographic. The company sells 100% private-label,value-orientedproductsintheUK,IrelandandAustralia,andshipsproductsto over 100 countries. Boohoo products are also sold on competing e-commercesitessuchasLipsy,ASOSandAmazon.

Boohoo.com holds an option to acquire smaller online fashion retailerPrettyLittleThing before March 2017. According to press articles,Boohoo.com is contemplating exercising the option and purchasing itssmallerrivalfor£5million.PrettyLittleThingisrunbyUmarKamani,thesonof Boohoo.com founder andCEOMahmudKamani. PrettyLittleThing salesareexpected to reach£30millionby theendof2016,up from£5millionlastyear.

Amazon

Amazon Fashion has strong ambitions to turn itself into a global fashiondestination.Thecompanyconsidersitselfonlyahandfulofyearsintoaverylong-terminvestment inthefashionmarket.Amazonhasstatedthat,withregardtofashion,itiskeenlyfocusedoneconomics.Theretailer’sshippingandhandlingcostsarethesamefora$10bookanda$1,000skirt,soprofitperunitishigherforfashionitems.

AmazonFashionalreadysellsglobalbrandssuchasKateSpade,CalvinKlein,DKNY, Michael Kors, French Connection, 7 for All Mankind and Vince.Amazon has also launched seven of its own private labels this year, eachofferingitemspricedunder$100.AsAmazonFashionimprovesthelookofitswebsite, itsproductpresentationand its content curation,moremajorbrandsarelikelytodistributethroughtheplatform.Withdepartmentstoresales declining around the world, Amazon now has more leverage toconvinceglobalbrandstodistributetheirproductsthroughitswebsites.

Amazon has launched various initiatives to be perceived as a crediblefashionplayerandtoencouragepopularbrandstoselltheirgoodsthroughAmazonFashion.ThepromotionaleffortsincludeopeningaphotostudioinLondon and sponsoring New York’s Men’s Fashion Week, India FashionWeekandTokyoFashionWeek.Amazonalsohasa live fashionwebshowand sponsors a web series on the Council of Fashion Designers ofAmerica/Vogue Fashion Fund. In addition, it has launched its first TV adcampaigninEurope.

AmazonFashionhasnumerousadvantagesoveromni-channelretailersthatwillenableittocontinuetotakesharefromweakerplayersandemergeasa major fashion destination. Besides unmatched scale and resources, thecompany has vast amounts of customer data that could be leveraged tocater tocustomertastesandoffer themostrelevantanddesiredproduct.Furthermore,Amazonhasbuilt itsbusinessonanalyzingpriceelasticityat

AmazonFashionhasstrongambitionstoturnitselfintoaglobalfashiondestination.

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scale,andthecompanychangesproductpricesonaverage9.2timesdailytomatchproductdemand,accordingtoBoomerangCommerce.

In the US, Amazon appears to be taking massive apparel share fromdepartmentstoresandspecialtystores.Thecompanyincreasedthenumberof apparel and accessory items on its website by 87% in 2015 and hadapparel sales ofUS$16.3 billion, according to Internet Retailer. Amazon iscurrentlythesecond-biggestUSapparelretailerafterWalmart.Itgeneratesonlineapparelrevenuesthatarehigherthanthecombinedonlinerevenuesof the five largest US online apparel retailers:Macy’s, Nordstrom, Kohl’s,GapandLBrands.Inthesecondquarterof2016,aggregatesalesatthesixlargest US department stores declined by US$660million year over year,while Amazon’s apparel sales increased by US$1.1 billion, according toMorganStanley.

Furthermore, approximately 20% of US consumers and 35% of Primemembers now frequently purchase clothing on Amazon, according to aMorganStanleysurvey.Nearly60%ofsurveyrespondentsstatedthattheywould buy more clothing on Amazon if it offered a wider selection ofpopular,fashionableclothingbrands.

It is highly plausible that a scenario similar to the one in the US apparelmarket is rapidly evolving in the UK.We believe Amazon will most likelyexpandUK apparel sales at a robust pace, aggressively taking share fromstore-basedincumbents.

Missguided

UK-based,online fast-fashion retailerMissguidedwasestablished in2009,and currently ships to 160 countries worldwide. Missguided targetsfashionablecustomersintheirteensandearly20s.

The company launches 1,000 new products each month and carriesspecialty ranges such as maternity, bridal, petite, tall and activewear.MissguidedalsosellsbeautyproductsonlineandatBootsstores.

Thecompanywillopenitsfirstbrick-and-mortarstoreinNovember2016inLondon’sWestfieldStratfordCityandisplanningtoopenthreemorestoresin 2017. Missguided also has partnerships with ASOS, Zalando and USdepartmentstorechainNordstrom.Thecompanyoperatesshops inshopsin Selfridges department stores in the UK and in department stores inTurkey and Spain.Missguided will also be sold in Hudson’s Bay stores inCanada.

Missguided’sCEOhasstatedthatthecompany’ssalesperformanceremainsverystrong.Revenuesin2015increasedby70%,to£87million,andtheUKmarket contributed£66millionof that total. The company’sCEOalsohasstated that Missguided seeks to grow revenues to £125–£135 million in2016andthathewouldturnthecompanyintoa£1billionbusinessinfiveyears.

IntheUS,Amazonappearstobetakingmassiveapparelsharefromdepartmentstoresandspecialtystores.

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KEYTAKEAWAYS

TheUKhasoneofthemostdevelopede-commerceapparelmarketsintheWesternworld.E-commercecurrentlyaccountsfor23%ofUKapparelsales,upfrom21%in2015,andweestimatethattheproportionofapparelsalesmadeonlinecouldreach30%infiveyears.

DespitethesoftnessintheUKapparelmarket,fashionpureplayshavebeenvastly outperforming multi-channel retailers and consistently growingquarterlysalesatratesof20%orhigherinthelastyear.

Amazon Fashion has strong ambitions to turn itself into a global primefashiondestination.Inourview,apparelpureplayssuchasZalando,ASOS,Boohoo.com,AmazonandMissguidedwillcontinuetotakeshareintheUKfromdiscountretailers,departmentstoresandspecialtyapparelretailers.

Inourview,apparelpureplayssuchasZalando,ASOS,Boohoo.com,AmazonandMissguidedwillcontinuetotakeshareintheUKfromdiscountretailers,departmentstoresandspecialtyapparelretailers.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

EvaKubickaSeniorResearchAssociate

HONGKONG:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406LONDON:242–246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

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