Jul 13, 2016 ยท 5 minutes

Yesterday was Amazon’s Prime Day, and according to several research reports way more of you than I would have expected bought…. Clothes.

One of the few debates that Kevin Kelleher and I have ever had was about a big Amazon Fashion push a few years ago.

The debate back then:

At the end of the day it boils down to what Amazon means by "fashion." When I was debating the strategy with Adam Penenberg and Kevin Kelleher last week they kept suggesting it would work because Prime customers would come to get a better deal on the dress they wanted. That's not fashion, that's fulfillment. And that's what Amazon -- and Zappos -- have always been great at. That's how women bargain-hunt, but that's not how women shop.

I'd agree that's a game Amazon can win with one hand tied behind its back. But Bezos is clearly trying to do something more that this.  In an interview with the New York Times about the move last year, he said he would have price points that designers could live with. In other words: No discounts. Indeed, most of the dresses range in price between $100-$500. That's wildly higher priced than more fashion-forward chains like H&M, Zara, and TopShop, and the price points aren't even in keeping with a chic, discount Target or TJ Maxx approach either. But nor is it high enough to include the best labels. It's not "luxe" as the New York Times profile suggests. It's solidly and boringly mid-market. Not a bargain, not inspiring and not particularly remarkable. 

And we both assumed I was mostly right that Amazon Fashion hadn’t exactly set the world on fire. From Kevin’s more recent story on Amazon’s push into CPG:

For Amazon, this isn't just another hole in which to plunge a tentacle, it offers a higher-margin opportunity in older, yet still huge markets where retail margins have thinned. It's an insurance policy on AWS just in case that lucrative annuity starts to pay fewer dividends. But like AWS, and unlike its fashion business, it may accrue margins over time, provided it catches on. 

And that’s why so many companies like Bonobos and NastyGal and Tea Collection have believed vertically integrated, branded multi-channel fashion was the lone ecommerce opportunity left to exploit. Not an easy one. But one Amazon couldn’t do.

Well the eye of Amazon is scanning the landscape for where it can grow next. And according to Morgan Stanley it needs a trillion dollar market opportunity to sufficiently move the needle. That leaves two big markets: Groceries and clothing, which is together a $1 trillion spend in the US. Morgan sees this driving 26% of Amazon’s growth in North America going forward.

But lumping these two categories together in a bullish stock report seems strange as a consumer. Unless you are a devotee of Wal-Mart (no judgement) most people shop for groceries and clothing differently, right?

Groceries we know about. Some 17 years after WebVan was founded, consumers broadly want groceries and bulk dry goods delivered, and billions in built out logistics are chasing this. Between Google, Jet, Wal-Mart and Amazon, the mega-funded Instacart looks like a boutique effort. In my opinion, there’s no reason to ever lug a massive shopping cart to Costco again.

According to the report, less than 20% of consumers buy groceries online, but it’s growing rapidly. And 17% of online grocery shoppers expect to increase their spend over the next 12 months, up from 13% in the fourth quarter. Wal-Mart has 40% of the market and Amazon has 38%.  

Jet is a rare bold bet that enough capital can bring down Amazon at what it does best: Convenience and low cost. And I gotta say, despite being a Prime member for years, I’ve started using Jet. It has a way better UI for hunting down favorite brands. But looking at the market share numbers, I’m clearly in the minority here.

Groceries plays into what Amazon does best, and is a natural expansion at the time the customer is ready for it. The rumored and no-brainer next step is Amazon’s own private label packaged goods just to fuck with the establishment even more.

But…. clothing?

Buying clothes is the opposite of buying toothpaste. And yet, look at the numbers. From Morgan:

Online clothing penetration is the highest of any category (52% of US shoppers have purchased clothes online in last 12 months). But here again, share of wallet appears heading upward, with 29% of online clothing shoppers expecting to increase their spend over the next 12 months (up from 25% in 1Q:15). AMZN is driving and benefiting from this shift as 45% of US consumers bought clothes on AMZN in the past 12 months...up 600bp from 39% in 1Q:15. This is the largest y/y increase of the 10 retailers we monitor...as AMZN now has a 2X+ clothing shopper reach advantage

Cowen Group’s research has shown that Amazon’s apparel sales are up 48% year over year to some $16 billion, expanding its total online apparel market share to 21%. Amazon’s apparel sales equalled those of Macy’s, Nordstrom, Kohl’s, Gap and L Brands.

Now, this doesn’t mean I was completely wrong about the particular foray into high end fashion a few years ago. A report from Internet Retailer points out that most of the growth is coming from the marketplace, not Amazon’s own deals with designers.

Much of the growth of the online apparel market share is attributable to the massive expansion of Amazon’s marketplace, through which Amazon markets and processes purchases of apparel for hundreds of mostly small and midsized apparel retailers and manufacturers, taking a cut of each transaction. Created in 2002, apparel and accessories SKUs and sales on Amazon’s marketplace have soared in recent years, and last year alone grew 48% to $16.3 billion, according to research from Cowen Group.

It’s telling that Morgan notes that eBay is the only retailer where US clothing shopping declined year-over-year, considering it too is a market place. It speaks volumes of the execution gap between the two OG Internet giants.

When there’s a $1 trillion market opportunity, Amazon will find a way.