A Blog by Jonathan Low


Dec 14, 2014

How to Compete with Amazon - and Survive

Differentiation is necessary for survival in digital commerce, but increasingly difficult.

How to do it? Everyone has access to the same hardware and software. Tax advantages, where they aren't disappearing, are similarly available to any enterprise with the right connections and the wherewithal to engage them. Sustainable competitive advantage is a fond memory and even first mover advantage is a will o' the wisp.

But it turns out that there are enterprises finding their way. And they are not all in California or New York. Some, in fact, are in supposedly hidebound old Europe, as the following article explains. And their strategy lies in figuring out how to market exclusivity through a mass-market medium.

Aggregating talent people and systems in order to make them available to web-savvy clients is part of the answer. As is picking skilled partners. Additional intangibles like brand and access contribute value. But the managerial magic of putting it all together, effectively, remains the secret that few have and fewer can teach. JL

Nicola Clark report in the New York Times:

Adapting in response to expectations of web-savvy brands by offering consulting services that now include digital marketing, social media strategy and advanced customer analytics.
In an unmarked warehouse at a vast industrial park on the outskirts of Bologna, a three-story-tall robot is mining for a gem: a $980 sleeveless cocktail dress from Armani, in French size 42.
This is how things work, behind the scenes, in the global electronic-commerce market for luxury goods — one of the last retail industries to drop the merchant’s veil of mystery and bow to digital efficiency.
From this warehouse, the Yoox Group, an Italian company that has emerged as a global leader in online luxury, fulfills three million orders a year. Many of those will ship in the next few weeks, during gift buying’s high season, to customers in Europe, the United States, the Middle East and Asia. Helping fulfill those orders will be Yoox distribution centers in the New Jersey city of Clifton, Tokyo and Shanghai.
As the giant machine here speeds on rails at 20 feet per second, its mechanical arm swoops and jerks as its radio-frequency tag reader scans one of 46 shelves packed floor to ceiling with around five million items — including Ralph Lauren jackets, Jimmy Choo shoes and Lanvin purses — from some of the world’s most prestigious designers.
A Yoox Group warehouse in Bologna, Italy. Credit Alessandro Grassani for The New York Times
When it locates the dress — a V-necked silk, with a ribbon of pink chiffon cascading off each shoulder — the machine plucks the packaged garment from its shelf and deposits it onto a conveyor belt. The belt snakes nearly three miles before reaching a packing station, where products are boxed by hand in eco-friendly packaging and dispatched for delivery.
In the past, the inventory inside these drab walls could only be found on the racks of glittering boutiques of Fifth Avenue in New York, the Ginza district in Tokyo, Avenue Montaigne in Paris or Bond Street in London. But Yoox, through years of persistence, persuaded the luxury designers that there could be an online market for their last-season lines and overstocked items, without cannibalizing their in-store retail businesses.
“Basically, we are bridging two worlds,” Federico Marchetti, 45, the chief executive of Yoox, said in an interview at its headquarters in Milan. “E-commerce is a very analytical and process-driven business, while luxury is very visual — it’s all about creativity, the content and image.”
Compared with book publishers, music labels and toy makers, luxury goods were slow to go digital. The markers feared — besides a loss of cachet — that customers might doubt the authenticity of designer wares sold online. Even now, the websites of many top brands, like Louis Vuitton and Hermès, remain little more than digital billboards.
But the fashion world’s digital wariness is fading fast.
Although online sales still generate less than 5 percent of the $270 billion in annual luxury revenues today, global e-commerce in luxury is growing at a 30 percent rate a year, according to Altagamma, a Milan-based trade association for the luxury industry. By the end of the decade, Altagamma predicts, e-commerce could represent as much as one-fifth of luxury revenue — on par with retailers of consumer electronics, gardening supplies and home appliances.
“We are at an inflection point,” said Luca Solca, a luxury analyst at Exane BNP Paribas in London. “Luxury goods companies still have quite a way to go in terms of reach and customer experience and integrating their online and physical offer. But in the next few years, you are probably going to see a very significant surge in digital engagement by luxury brands.”
And that presents both an opportunity and a challenge to Yoox, as well as its competitors that include Net-a-Porter, a British fashion vendor owned by the Swiss luxury group Richement, or members-only flash-sale sites like Vente Privée of France or Gilt.com, which is based in New York.
The e-luxury sites have grown by serving as online merchants for the designer brands. But Yoox also makes about one-third of its revenue — which totaled 456 million euros, or about $563 million last year — by providing the back-end technology for the designers’ own websites, including Valentino, Alexander Wang, Dolce & Gabbana and Jil Sander. The pickup in luxury e-tailing could enable Yoox to grow and prosper. The risk, though, is that as more luxury brands recognize the possibilities of online commerce, they will elect to take that business in-house, rather than farm it out to Yoox.
“Yoox was a shortcut for luxury brands to go online at a time when online was seen as something exotic and separate,” Mr. Solca said. “The more that the large brands realize that this is strategic, the risk is that they become less willing to accept the powered-by-Yoox offer.”
Founded in 1999 by Mr. Marchetti, Yoox was one of the earliest entrants to the online luxury market. At the time, Mr. Marchetti — the son of a Fiat warehouse manager and a telephone operator — was a recent graduate of Columbia Business School in New York with a previous background in investment banking and a passion for technology and beautiful things.
He was also very busy.
“The definition of luxury is so different to many people,” Mr. Marchetti said. ‘'For me it’s time, I was buying luxury, but I didn’t have time to go around to the shops. I wanted this kind of a store, to be able to find everything I wanted in one place.”
The result was Yoox — the name refers to the Y and X chromosomes, with the “OO” meant to evoke binary digital code — which made its debut with just over $1.5 million in venture capital funding. Ten years later, in 2009, the company listed on the Milan Stock Exchange.
Yoox has a stock market value of just over €1 billion. But the share price is down more than 40 percent this year, slumping along with many European retailing stocks, in light of the region’s flagging economy. Still, Yoox remains one of the few online luxury players to turn a consistent profit throughout the downturn. Its net earnings rose 24 percent in 2013, to 12.6 million euros, and the company expects both sales and operating profit to increase by 20 percent for full-year 2014.
One key to that profitability is maintaining a tight lid on costs, Mr. Marchetti said, which Yoox seeks to do through its highly automated Bologna operation. Next door to its robot-driven warehouse is a mechanized studio, where employees continually dress and photograph a parade of plexi-glass mannequins as they glide along rails. Two-thirds of the images for Yoox.com’s catalogue are produced this way — up to 200 images per hour. By 2016, nearly all of Yoox.com’s catalogue photos will come from this assembly line.
From its Bologna warehouse, Yoox fulfills three million orders for luxury goods each year. It persuaded luxury brands to embrace online sales, but now it has rivals. Credit Alessandro Grassani for The New York Times
Given the breadth of its inventory and distribution network — the company has sent more than 30 million items to more than 100 countries — Yoox is sometimes referred to as the Amazon of high fashion. And with 14 million fashionistas trawling through its stores each month, Yoox also sits on a global gold mine of information about its customers, who spend an average of $250 per order.
Those databanks might reveal, say, which colors or skirt lengths are most popular in Shanghai or São Paulo, or track a fading taste in Germany for low-rise skinny jeans. During the recent Black Friday and CyberMonday sales pegged to the Thanksgiving holiday weekend in the United States, Yoox said shoes were by far the most popular item in North America, with high-heeled ankle boots and stiletto sandals at the top of women’s most wanted lists.
“The sheer amount of data they have really puts them in a superior position,” said Philip Guarino, a Paris-based luxury consultant. “It’s a huge asset for them.”
Some Yoox executives say they are flattered by any comparisons to Amazon — up to a point.
“We are one-one thousandth of their size,” said Alberto Grignolo, Yoox’s general manager, who helped write the roughly 500,000 lines of software code that drive the company’s stores. “We are similar in that we keep in mind that the customer is the key person on the other side of the screen. And we exploit the same kinds of numbers and processes to the benefit of the customer.”
But in terms of the shopping experience, Mr. Grignolo said, the companies could not be more different.
“If you go and search ‘Bottega Veneta’ on Amazon, it might come up with a book, an off-brand handbag or maybe some razor blades,” Mr. Grignolo said. “There is very little way to bridge Amazon with fashion without drastically changing both.”
(A recent search of ‘'Bottega Veneta'’ on Amazon.com returned more than 600 hits — mainly lower-value items like branded perfumes and sunglasses — as well as dozens of purses that claimed to be “inspired” by the Italian brand’s signature woven leather bags.)
Yoox also tries to distinguish itself from the fashion e-tail pack by acting as a behind-the-scene contractor. Since 2006, it has quietly run the websites, order fulfillment, logistics and customer service operations of more than three-dozen different designers. Yoox provides these services in exchange for a commission of about one-third of the retail sales value of each online purchase.
“Yoox already had critical mass, rich expertise and rich teams,'’ said Stefano Sassi, chief executive of Valentino, which enlisted Yoox to run its online store in 2008.
Valentino — whose products are also sold on the websites of high-end department stores like Neiman Marcus and Saks Fifth Avenue — has seen its e-commerce transactions grow to as much as 8 percent of its sales, up from less than 1 percent five years ago, Mr. Sassi said.
Two years ago, Yoox landed its most prominent e-commerce partnership to date: a seven-year deal with the French luxury conglomerate Kering to manage the online stores of seven of its most popular labels, including Balenciaga, Alexander McQueen and Stella McCartney. The arrangement is structured as a joint venture, and Kering has said it is open to letting Yoox drive the online stores of its other brands, which include Gucci, Christopher Kane and Boucheron jewellery. Kering hopes the venture with Yoox can bolster its online sales to as much as €1 billion by 2018 — equivalent to around 10 percent of its revenue last year.
Yet despite this recent momentum, some analysts worry that Yoox risks losing its early advantages. Generalist e-tailers like Amazon and T-Mall in China are eager to grab a slice of the lucrative luxury pie. That shift could force companies like Yoox to adjust their strategy to confront a more crowded digital marketplace.
It might also mean that Yoox, which has spent so many years courting luxury companies, may one day wind up being pursued by one itself.
“I could foresee interest from one of the big groups, maybe even Kering itself — much in the same way that Richemont bought Net-a-Porter,” in 2010, said Mr. Guarino, the Paris analyst. He noted that even Amazon itself has hinted that it may consider entering higher-margin sectors like fashion.
Mr. Marchetti would not comment on such speculation, saying he remained focused on expanding Yoox into new markets and new product categories, including accessories like sunglasses and jewelery, and even perfume. This year, the company began operating the online stores of the Italian interior design brand Kartell.
But Mr. Marchetti said he had no illusions about the rapidly changing dynamics of luxury retail. To try to keep a step ahead, he said Yoox was already adapting in response to expectations of web-savvy brands by offering consulting services that now include digital marketing, social media strategy and advanced customer analytics.
“We are someone to leverage on,” Mr. Marchetti said. “We provide the car, but for us the best thing is if we have a great driver. And the driver is the brand.”


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