When I read that Amazon was in talks to partner with big fashion retailers like J. Crew, Abercrombie & Fitch and Neiman Marcus, it got my attention. Despite Amazon’s leadership position in online retail, you typically don’t associate these higher-end clothing retailers with a mainstream site that targets essentially everyone.
If we were talking about a partnership between Amazon and Wal-Mart (WMT) or even Costco, that would be far less surprising because of their parallels in broad customer bases and emphasis on low prices. But rather than partnering, Wal-Mart is making its own investments to level the playing field with Amazon. So why are fancier retailers like Neiman Marcus considering such a partnership? What are the risks? And do these risks outweigh the possible benefits? I think they do.
For starters, look at the recent Amazon-Hachette dispute that followed failed contract negotiations. According to recent reports, Amazon (AMZN) raised prices for Hachette books and prolonged delivery times in what the New York Times calls “scorched-earth tactics.” Fashion retailers aren’t likely to fare any better in their negotiations over the long-term.
Also, consider that Amazon has nothing to lose in these partnerships. They are a completely win-win proposition. The company needs to satisfy different stakeholders yet remain true to its customer-centric model. It needs to deliver that symbolic smile on its boxes to customers.
To this end, we see Amazon’s $6-billion research and devlopment budget being spent on a diversity of areas, such as Dash, Fire TV, and the Last Mile to Drones. Amazon simply has to keep growing. With less than a 1% margin and an extraordinary price-to-earnings ratio, investors have been paying attention to Amazon’s price-to-sales ratio. (Otto, the world’s second largest retailer, had a 6% margin in 2013.) The key for Amazon is to generate revenue. So it’s continuously seeking to innovate through initiatives like Amazon Prime, third-party reseller partnerships, Amazon Fresh and cloud-based services. We’ll likely soon see it enter the nascent area of fog computing. These are great expansion opportunities not only for increasing sales, but also for making customers happy with increased offerings.
Partnerships with fashion retail are particularly appealing for Amazon because of the massive upside potential. U.S. Census data from 2012 shows ecommerce in the clothing category severely lagging behind. It comprised a mere 1.17% of total sales in contrast to 5% for ecommerce across retail categories. Moreover, these partnerships give Amazon additional access to sales data from a highly desirable demographic, complement its recent Derek Lam monobrand entry, and help usher the Amazon brand into the upper echelons.
This is exactly why big fashion retailers should think twice about partnering with Amazon. The online behemoth is well on its way to becoming a competitor. By placing their products on Amazon’s site, they are helping to legitimize Amazon as a shopping channel in this upscale market. Further, despite the product link ultimately going to the retailer’s site (rather than Amazon selling it directly), they still lose a tremendous amount of control over their brand. The initial image, look of the displays and product placement would be controlled by Amazon.
Instead of partnerships, large fashion retailers are better off entering ecommerce on their own terms. If they have any doubt as to how important this is, just look at the numbers: A Google 2012 study shows that 90% of consumers use multiple screens sequentially, with 98% moving between devices on the same day. A Deloitte study shows that 36% of in-store sales are influenced by digital devices.
The only retailers such partnerships may work for are the smaller ones that don’t have the resources to effectively and efficiently pursue ecommerce. For them, Amazon provides access to a huge market and they can benefit from the company’s innovations.
However, the bigger retailers aren’t as resource constrained. They should be initiating rather than imitating those innovations. For example, while Amazon offers box delivery, fashion retailers could offer personal concierge delivery. Fittings and clothing could be delivered to consumers’ doors to maintain that touch and sensory stimulation (not to mention immediate gratification) that is so important in fashion retail.
Large fashion retailers should take a page from Amazon’s book to make investments in the digital space in the short-term rather than giving up the long-term. They could also be creative and partner with new players like Iterate Studio, which gives access to proof of concept labs and connects retailers with carefully vetted tech startups for field tests. Ironically, we’re already seeing some of the smaller players partnering with Iterate Studio.
The bottom line is that unless those larger, high-end retailers can clearly protect their brand and retain control throughout the Amazon experiment, they are better off going it alone and partnering with new players, investing in digital media and ecommerce, and perfecting omni-retailing to create a seamless experience for customers. If they do attempt to partner with Amazon, they may find themselves in the same boat as Hachette in the not too distant future.
Sharmila C. Chatterjee is a senior lecturer of marketing and academic head of the Enterprise Management Track at MIT Sloan School of Management.