Venture firms such as New Enterprise
Associates and Accel Partners are stepping up investment in e-
commerce as shoppers increasingly turn to niche websites for
custom-made clothes at prices that undercut department stores.
The two firms, along with Lightspeed Venture Partners and
Battery Ventures, helped online retail funding more than double
last year to $328.7 million, according to the National Venture
Capital Association.
Custom clothing startups J. Hilburn Inc., American Giant
and Bonobos Inc. are racing to gain share in a U.S. e-commerce
market that Forrester Research Inc. estimates will reach $327
billion in 2016, up from $202 billion last year. They’ve won
customers and venture backers by cutting stores from the supply
chain to ship straight to consumers from the factory, charging
lower prices than department stores and eking out higher margins
than Amazon.com Inc. (AMZN), the biggest Web retailer.
“J. Hilburn will sell shirts that are made out of the same
fabric mill in Italy that a Zegna would sell at Neiman Marcus
for $300,” said Brian O’Malley, a partner at Battery Ventures,
an investor in the startup, which has raised a total of about
$12 million. “They can sell that same shirt totally custom-made
for the customer for less, and do that still with healthy
margins because there are a lot less middlemen along the way who
need to get paid.”
Part of the appeal is offering an experience that consumers
can’t get from a traditional online retailer, said Harry Weller,
a partner at New Enterprise Associates, which invests in other
e-commerce startups.
Addressing Inefficiency
“They’re tackling a behavior,” Weller said. “If you can
address an inefficiency in consumer behavior as opposed to just
pricing, you can make more. Take the fact that men don’t like
buying clothes -- if you can make it easy for them, they’ll pay
a decent price.”
J. Hilburn keeps expenses in check by making items to
order, eliminating costs associated with running warehouses and
stores and avoiding the need to discount obsolete merchandise,
said Hil Davis, co-founder and chief executive officer. A
typical garment from most retailers is marked up three times as
it works its way through the supply chain from the factory to
the store, he said.
A men’s dress shirt costs J. Hilburn about $35 for fabric
and another $22 for manufacturing. That $57 shirt sells for
around $125 -- about $200 less than a shirt by Ermenegildo Zegna
Group sourced from the same Italian mill, Davis said. Zegna
shirts cost $325 to $435 on Neiman Marcus Group Inc.’s website.
Its prices give J. Hilburn a 54 percent gross margin.
Amazon’s gross margin (AMZN) was 22 percent in 2011, while Macy’s Inc. (M),
operator of its namesake and Bloomingdale’s stores, logged a 40
percent margin in its most recent fiscal year.
“It was obvious that you could slice a ton of fat out of
the retail supply chain,” Davis said.
Stacey Keller, an Amazon spokeswoman, declined to comment.
Zegna didn’t respond to requests for comment.
The business model is luring investment from some
traditional department stores. Nordstrom Inc. (JWN) in April helped
lead a $16.4 million investment round in Bonobos, an online
menswear company, in an effort to improve Internet sales.
“Online is the fastest-growing part of our business,”
Colin Johnson, a spokesman for Seattle-based Nordstrom, said in
an interview. “Bonobos is a company that’s rapidly growing and
really in step with how men want to shop. We’re really excited
to learn from them.”
Student Project
Bonobos began in 2007 as a research project for Brian Spaly
and Andy Dunn, then students at the Stanford Graduate School of
Business. After getting hand-tailored pants during a trip to
Colombia for a friend’s wedding, the roommates saw an unmet
market niche: pants nipped in at the waist to give a slim fit to
men with an athletic build.
After selling some samples to Stanford classmates, they
debuted the Bonobos website. The startup raised more than $38
million from investors, including Accel and Lightspeed, to help
expand its wares beyond pants to shirts and custom suiting.
Bonobos is the largest U.S. clothing brand started online.
Designers at J. Hilburn, the largest U.S. custom-shirt maker,
and American Giant, which sells casual menswear online, work
directly with manufacturers on the fit, fabric and sewing
quality of their garments. They win factory contracts for small
batches because, by placing orders throughout the year, they
offer manufacturers a cushion against seasonal revenue swings
from larger fashion clients that usually order in bulk four
times annually.
Honeymoon Idea
Davis, a former retail analyst for hedge fund Citadel LLC,
hatched a plan for the company during his honeymoon in the
Virgin Islands. He teamed up with Veeral Rathod, a former
investment banker at Credit Suisse First Boston, to start the
Dallas-based online retailer in 2007. The pair shared a love of
luxury shirts and an aversion to shopping.
“Who’s going to justify going to buy a shirt for $250
ready-to-wear when they can buy a custom-made shirt with the
same fabric for $109?” Davis said. “That’s the big bet we’re
making.”
While J. Hilburn expects sales to more than double this
year from $17 million in 2011, its success depends on a small
group of devoted customers, compared with Amazon, which boasts
more than 100 million users who generated sales of $48.1 billion
last year.
Amazon and Macy’s have broad appeal with customers seeking
one-stop shopping for a wide variety of items and loyalty
rewards programs such as Amazon Prime that help build repeat
business.
Boutique Websites
New Enterprise Associates, a venture firm with offices in
Menlo Park, California, and Chevy Chase, Maryland, has invested
$18.7 million in boutique e-commerce websites, according to
NVCA. Its investments include accessory vendor BeachMint and
flash-sale operator Gilt Groupe Inc., which plans to hold an
initial public offering in 2013, according to Jennifer Miller, a
Gilt spokeswoman.
American Giant in February began selling sweatshirts
online, shipping directly to shoppers from the factory. Like
Bonobos, the San Francisco-based startup promises men a tailored
fit --in this instance by offering a refined spin on the hoodie.
Selling online helped American Giant trim enough costs from
its supply chain to afford something many other retailers can’t:
manufacturing in the U.S. All its garments are cut and sewn in
Brisbane, California.
Small-batch clothiers have drawn venture backing “because
consumers are excited about shopping and finding things in new
ways,” said Josh Goldman, a partner at Norwest Venture
Partners, which has invested in the vintage-style clothing
website ModCloth Inc. “It used to be about search -- that was
Amazon,” he said. “Now it’s about curation.”
American Giant raised $5 million from angel investors in an
investment round led by Donald Kendall, former CEO of PepsiCo
Inc. The company expects sales to triple next year, though it
declines to give specific numbers.
“Everyone’s focused on these businesses that have sticky
products that people like and come back to buy,” said O’Malley
of Battery Ventures. “There’s a lot of momentum in this
market.”
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