Rise of online fashion boutiques
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Created 232 days ago, Updated 129 days ago
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Cartoons and movies are easy to be digitized and to be distributed cheaply over the Internet. And they do not require many different raw materials to produce. But what about physical products? Even though we all talk about importance of culture and contents, deep inside we talk to ourselves “OK, let’s accept that mass niche could become mainstream in those funny little things. What about physical products that we eat, wear, and live in?” Apart from (probably meaningless) debate whether physical products are more “important” than digital products, I think it is a good question. And we were curious about that, too.
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As you can easily guess, we believe mass niche can happen in brick-and-mortar industries or areas where products and services may not be digitized. Do we have examples? Yes. Where? Electronics? Bioscience? No. We found the evidence in clothing industry, probably the oldest manufacturing industry in human history that seems like farthest from innovation if not hopeless.
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Clothing, one of three basic elements for human life along with food and shelter, plays various but vital role in our lives; protecting us from whether and environment, helping maintain social orders, allowing us to express ourselves. When we think of innovation and change, IT or Bio pops up in our heads. However, the history of clothing is truly the history of innovation breathing in our lives; from primitives’ pelts to Armani and Ferragamo.
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The beginning of Industrial Revolution was in the textile industry. Even in the 20th century clothing and textile industry brought tremendous changes including invention of Nylon, Polyester and Spandex and introduction of designer’s brands. Although we don’t see much about clothing and textile businesses in cover stories any more, they still matter a lot. The textile and clothing business was the key driver in the early stage of Samsung. The US, often associated with high technology, still leads the world in cotton production through farms in Texas. One of the most talked about topics in Free Trade negotiations is clothing and textile (largely about how much to allow Chinese imports).
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After such a long history of change and innovation, is clothing industry still evolving in 21st century? Definitely yes. With the entrance of players in the tail, our heroes, the clothing industry in Korea is rapidly transforming into a flagship of mass niche.
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To understand the change in clothing industry, let’s look into the retail environment. The combined market size of department stores, discount stores and online shops grew by 11.5% annually to 51 trillion in 2005 from 33 trillion in 2001. Department stores’ growth was flat while discount stores rose by 14.5% during the period. However, online shops showed a spectacular 38% annual growth, soaring to 10.2 trillion in 2005 from a mere 3 trillion in 2001. Even more impressive is that the growth trajectory is not showing any downward sign. Online shops grew by 34% year over year in 2005. The sales volume of online shops reached over 60% of that of departments, which was a mere 10% in 2001. And in 2-3 years, online retail is expected to surpass department stores in size.
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Just a few years ago, however, many people were concerned about its sustainability; price was the only advantage and the whole market was becoming a battle field of fierce price war. At one point, skepticism looked like becoming reality seeing slowdown of growth from 19% in 2003 and 9% in 2004. However, online shopping industry has succeeded in rebounding. How?
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When we started researching on this, we navered (usually better than Googling for Korean research) to find some news articles about general online shopping industry trend. And the articles we found were discouraging. They were saying that the online shopping industry is getting concentrated to a few leading general shopping malls. And worse, one of my ex-colleagues, who I had worked with in the management consulting industry, was skeptical about my hypothesis that online clothing should show evidence of mass niche. But is the online shopping becoming another giants’ playground just like automobile or telecom industries?
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The first e-commerce business model that cultivated substantial success was price-centric. The main advantage of the business model was that it does not require many things that an offline store would require such as intermediary distributors, rental costs, and floor staff. Starting at online bookstores, ‘lower price than offline’ has become the predominant value proposition among e-tailers. Computer and electronics manufacturers and retailers opened up discount online stores as well. Online banking, brokerage and insurance also followed the same track, moving offline transactions to online with lower price.
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This kind of online stores sell products that they purchase or make themselves to consumers. While keeping this basic business model of an offline retailer, online stores reduced the intermediaries involved and/or their margins. And purchased items were delivered through door-to-door services without consumers’ having to visit the stores. Recently, they are called general online shopping malls.
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Just a few years ago, many people were concerned about its sustainability; price was the only advantage and the whole market was becoming a battle field of fierce price war. And the growth was slowing down. At one point, skepticism looked like becoming reality seeing slowdown of growth from 19% in 2003 and 9% in 2004. However, online shopping industry has found a new growth engine, which is called marketplace (or more often ‘open market’ in Korea).
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Unlike a general shopping mall, a marketplace does not carry its own inventory but just connect buyers and sellers. The business model is literally providing the marketplace and tools like payment and shipping for easy transaction. The marketplace business model had been talked about a lot, but it didn’t draw attention until eBay’s success. Auction, acquired by eBay, had the initial success with auction-based consumer to consumer commerce model. Gmarket, current #1, started a whole new growth of marketplace from 2003 by introducing more innovation (giving more control and freedom to sellers including price setting). The transaction volume of marketplaces is expected to be 62% of online shopping in 2006 which was 14% in 2003. The growth driver of online shopping? The simplest answer is “the online marketplace.”
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If that is the case, are Gmarket and eBay replacing the older e-tailers? Yes and no. It depends on how you compare. If you ask at which websites (or domain names) consumers are buying, marketplace sites are winning over merchant shops. But if you ask from whom buyers are buying, people are buying from the sellers residing in marketplaces. And these sellers are typically small businesses. It is equally (or even more) accurate to say that the small sellers at marketplaces are replacing the large non-marketplace etailers.
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Now let’s turn our perspective from channel to product category. Which product category do you think has the largest share in online shopping? Computer? Home appliances? Books? No, it is clothing. In 2006, electronics & telecoms, computers & peripherals and books accounted for 15%, 9% and 5% respectively. Travel and reservation was 15%, larger than computer. Clothing & fashion accessories topped with 18%. In addition, they were the fastest growing category with about 50% growth in 2006 which was about double growth rate of the overall online shopping.
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This was the most surprising finding from the research. How could clothing become the leading category in online shopping? I remember a lot of consultants’ forecasts during the early dotcom boom, and no one, including myself, predicted that clothing would lead e-commerce. Korea did not even have meaningful catalogue shopping culture of the US. The obvious candidates were content products like book, music and video and financial products. As for physical products, electronics and computers had the most votes. Initially, the trend supported the forecasts. In 2002, electronics & telecoms topped with 18%, and computers & peripherals came in second with 15%. Clothing and fashion accessories took up just 9%.
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And clothing has been the bread and butter for open markets. In 2007, clothing occupied 33% of gross merchandise value, which was larger than computer and electronics combined. In the earlier years, it was reported that clothing’s share was over 50%. Other marketplaces also depend heavily on clothing now. Online shopping growth was driven by marketplaces, and marketplace growth was driven by clothing. And typical clothing sellers are SOHO businesses who source their selections from Dongdaemoon (a large wholesale market area) and small sewing factories.
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Online boutiques did not just stop at the marketplace. According to Dongdaemoon Association of Fashion, the number of online retailers who does business (mostly sourcing, presumably) with Dongdaemoon has increased rapidly. Only 500 in 2001 became 40,000 in 2006. Interestingly, 50% of these vertical malls already have previous experience in selling at Auction or Gmarket. This implies that those entrepreneurs train themselves at marketplaces before opening their own shop. It is too early to say confidently, but it is possible that the online fashion entrepreneurs are beginning to move out of marketplaces to find more freedom and identity.
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It seems that this gold rush in online clothing shopping will not slow down in the short run. According to Makeshop, who seems enjoying its heyday, among all newly launched vertical sites, almost 50% was in clothing category in the first half of 2006. Later in this chapter, let’s think about why this is happening in clothing not something else.
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To understand the whole picture more easily, here is the list of our findings from macro to micro.
- Online shopping malls are growing a lot faster than offline stores like departments and discount stores.
- The marketplace sites, which provide e-commerce platform for small online shops, has become the leading online shopping business model, outgrowing general online shopping malls (merchant shops).
- The fastest growing category is clothing which accounts for the largest share among online shopping categories.
- # of online clothing boutiques are increasing very fast.
- Many independent online shops experience marketplace before opening up their own shop.
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These emerging changes contradict the conventional belief of business strategy, ‘the big wins’. The smalls are becoming the mainstream of clothing industry. Why is this happening? Why clothing? The key is ‘variety’(diversity?).
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Let’s assume that you run an online computer shop. Are you happy with your business now? Are you making a lot of money? Probably not (at least in Korea). Why? Because you only compete with price. When people want to buy a PC, many first go to Naver or Daum or one of independent price comparison sites to see who is offering the lowest price. You have very little room to have non-price advantage. Your Samsung or HP notebook computer is the same everywhere. You have better customer service? It probably helps but not much, when most manufacturers offer their own service and all your competitors are guaranteeing best service.
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One of the main reasons for the online clothing gold rush is because there is gold. Even after so many people jumped in, they say the better ones are making over 20% operating margin. Of course, a lot of shops go bankrupt. But that is just how the free market system works. Good (and lucky) ones survive, others die. So, how can clothing make profits when there are quite a few competitors?
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The difference is that people don’t buy clothes only based on price. Unless price is outrageous for their budget, they buy style. People who view clothes as disposable do not care about quality that much, either. They will throw it away anyway after this season, or even wearing just a few times. As a result, they don’t care much about the ‘quality’ represented by established brands. So, what’s left is style + low price + OK quality. As the online boutiques have more stylish and trendy clothes, you will buy from them. And among them, it is hard to compare prices as they don’t have the same items. (Even if they did, you cannot figure out. They have all different brands, and they don’t have any standardized specs like in cars or PCs.)
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The female shopper, quoted earlier, said “At first, I bought clothes at general online shopping malls like Hmall and CJmall. But now I buy more clothes at specialized sites because there are more items that suit my taste. I first learned about those specialized sites in the advertisements of magazines. Sometimes I get to know them at Gmarket. If I am satisfied once, I tend to re-visit because I know I can trust them.” It is clear that she is pursuing a certain style, and she shops at an online boutique because it has what she wants.
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As an entrepreneur who understood this, what would you do? You create your own niche. As long as you can differentiate with a collection with unique style, you will do all right. And as a result, they seem to provide vast choices. If you look at Gmarket’s women’s clothing category, there are 14 different sub-categories which in turn have 10~20 sub-sub-categories each. If you go into T-shirt sub-category, there are 21 different sub-sub-categories underneath them. If you go into the first sub-sub-category, Basic/Plain, there are 1,271 items. We can rouglhy estimate that there could be around 200,000 different items. Even considering some duplication (i.e. different sellers selling the same items), it really seems quite a variety.
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The large companies do not seem to fit in this “variety + low price + OK quality” segment. They use economy of scale to drive costs down and some quality control process to ensure high quality. First of all, quality is almost irrelevant in this segment. Economy of scale does not seem to be much help, either. There was not much economy of scale to begin with. And the variety factor makes it even worse for a mass producer.
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Most of clothes are made by a sewing factory with fairly simple facility and manual labor. Clothing industry may be very proud of being the oldest, but it probably has been embarassing to be one of the least automated. Many sewing factories are moving to China because labor is the main cost item. And the reason why there are much more online boutiques in women’s clothing market is that to make men’s suit some costly equipment is required.
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Variety makes it more difficult to take advantage of economy of scale. When Henry Ford said “No color other than black’, it was not because he liked the black color so much or that he hated seeing colorful cars. To drive costs down as much as possible, you need large orders and variation should be removed. You want the line keep rolling making 10 thousands of cars, rather than 10 cars of thousand different colors. Sewing factories, once seen as a problem child for mass production, on the other hand became the perfect model for small orders of 100 pieces or even 10 pieces.
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Some people thought that variety and economy of scale could go together and experimented mass customization. But we have not heard any true success story of mass customization model, let alone the consensus that it will be the successor of mass production as ‘the’ model for the market economy. Giving no cost or quality advantage to the big players, this growing variety segment is creating an empty space for small boutiques. They don’t supply variety individually, but as a group they do.
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An interesting side story is, the decreasing size of orders seems to help sewing factories in Korea that were being replaced by Chinese counterparts. For orders that are small and need delicate sewing and fast response, Korean sewing factories were preferred by online boutiques.
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In addition to variety, lowered start-up costs are making a friendly environment for online boutiques. Before the current Dongdaimoon clothing market complex formed the entry barrier to clothing distribution was high. To get a textile store space at Pyongwha market, you had to pay the upfront premium as high as $3 million and over $200,000 to get a clothes store. Now, premiums on clothing stores nearly disappeared and small security deposit of $20,000 would be sufficient to get a store space in those offline markets. With the lowered entrance barrier, young entrepreneurs fluxed into Dongdaimoon. Dongdaimoon became the offline foundation and wholesaler of online fashion entrepreneurs who go there almost every day.
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This expanded supplier base made good environments for online boutiques. Many wholesalers now accept unsold inventory returns. From the shop owners’ point of view, they can be more aggressive without having to worry about the inventory burden.
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Development of e-commerce tools was probably the most direct factor for online fashion boutiques to emerge. Online marketplaces like Gmarket and eBay, e-commerce solution providers like MakeShop and Whois, and providers of various services like shipping, payment and photo taking made the online boutiques viable.
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All these supply factors were met with demand. People wanted to look different from others. The desire to show off individual sense of fashion was getting stronger. These days, it is very hard to find uniformed fashion trend. In 80s (and probably before), everyone looked similar with similar clothes and similar hair style. Of course we still have (and will have) trends, but they tend to be micro trends compared to what used to sweep all young people.
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Together, these needs make up a demand for variety. Customers seem to polarize their consumption pattern to wisely spend their money. For clothes that they want to wear a few times and never again, they view price more important than quality. They choose one $15 jean every month rather than a $180 jean a year. (By the way, variety must be the central concept for the new economy. More on this in the appendix.)
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In addition, people want to look different from themselves day by day. As a result of this desire and increase of income, purchasing cycle is shortening. Before the financial crisis in the late 90s, clothing companies divided seasons by 6 months: spring/summer and fall/winter. But after the crisis, they divide the season by one month. Now at online shops, clothes change almost every week.
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Just like any other innovation, after the fact it all seems obvious. But it wasn’t at all just a few years ago. It is fascinating to see how many factors played to make this possible. Just like it was the first industry of mankind and just like it led industrial revolution, the clothing industry seems to be leading in the mass niche model. And it is giving us rich content to learn about mass niche.
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