One of the biggest disruptors in retail over the past several years has been the shift from brick and mortar to e-commerce. Empowered by smartphones, and driven by a need for convenience, choice and price transparency, consumers are flocking online to buy everything from light bulbs to laptops. Between 2010 and 2015, e-commerce sales grew at a compound annual rate of about 15 percent, more than six times that of retail, says the U.S. Department of Commerce.

As recently as 2014 most of those sales were in electronics, hardware, office supplies and other non-style related commodities. Apparel and footwear remained relatively unaffected, the industry thought, because consumers wanted to feel and try on items before buying.

It looks like that tide is finally turning. At its dotCommerce conference this past spring, Goldman Sachs revealed that the apparel market is seeing a dramatic shift to online that has caught many traditional retailers off guard. Mall-based specialty chains and department stores have begun to give up large chunks of their clothing and accessories business to Amazon and other pure play merchants.

In a post-conference recap called “Apparel’s Radical Shift Online,” authors Lindsay Drucker-Mann, Heath P. Jerry, Matthew Fassler, Taposh Bari and Stephen Grambling report that in 2015, after growing at almost 20 percent in each of the past three years, or 10 times that of the total apparel and accessories category, online apparel became the largest e-retail category. It grew to about 14 percent of the $300 billion U.S. apparel and accessories market. That’s more than $40 billion in sales.

Goldman says it expects another $9 billion in sales of apparel and accessories —the equivalent of J.C. Penney’s entire apparel and accessories business—to shift online in 2016. At its current rate, the online penetration of apparel will grow to 25 percent by 2020, double the level at the close of 2015. The accelerating trend will add another $50 billion in online apparel sales by 2020 —equal to the total category sales of Macy’s, Nordstrom and Kohl’s combined.

Given that the total apparel and accessories market in the U.S. is growing at about 2 percent—that is, barely keeping up with inflation—this shift online, and the doubling of online apparel sales, will have enormous implications for the retail landscape.

Demographic and Technology Drivers

Why is this shift happening? Driving this acceleration are the influence of millennials on consumer behavior and lifestyle and the rapidly evolving technology that make online shopping easier.
The first consumer groups to gravitate to online shopping were millennials, people aged 19 to 35 who are comfortable working and transacting online, and high-income consumers who tend to be more time starved and less price sensitive. A recent Goldman Sachs consumer survey found that more than a third of millennials, or approximately 33 million consumers (a staggering 10 percent of the population), reports spending most of its apparel dollars online.

While the shift among the two early adopter groups accelerates, the rest of the population has begun to follow and will soon start buying much of its apparel online.

Although mobile shopping technology still remains rudimentary, with promotional emails and coupon aggregators the weapon of choice for most e-retailers, an unprecedented amount of development is underway in the retail tech space. The creation and implementation of more sophisticated online platforms such as product aggregators, pricing tools, geo-fencing, augmented reality, body scanning and other capabilities will further accelerate the shift, making it easier for consumers to shop smart online.

Traditional Retailers Left in the Dust

The main losers in this scenario, according to Goldman, will be the mall-based specialty apparel and mid-tier department stores suffering from declining mall traffic and the persistent overhang of inventory, which adds pressure to lower prices. Add to that the increased operating budgets needed to build omnichannel capabilities, and you have a pretty dismal financial outlook.
Although Kohl’s, Macy’s, Victoria’s Secret and JC Penney remain the most-visited apparel-specific e-commerce sites today, heightened discounting online among traditional brick-and-mortar retailers is driving prices down without a resulting uptick in units sold. Traditional retailers are losing steam online, slowing growth over the past few years, placing them behind the online apparel market. Nordstrom’s recent rollout of price matching, if followed by others, could have a further devastating impact on profitability.

Amazon

Amazon.com currently sells an estimated $10 billion per year of apparel and accessories, a figure that is expected to grow significantly in the next few years. It has begun to drastically improve its execution of apparel, leading to rapid growth in some key areas of the category. Over the past several months the company has created and displayed more content in its Amazon Fashion sections and organized products by themes.

The biggest incentive for apparel brands to join the Amazon platform remains the need to be where consumer traffic is. But several large brands, like Vince, Calvin Klein and Under Armour, take part because it’s a great way to tell their brand story in a thoughtful way. Hanesbrands reports that its sales to Amazon grew by 70 percent in 2015. Many wholesale brands find that the economics of selling to Amazon are comparable to selling to traditional retailers. Goldman’s research found a lower incidence of markdowns at Amazon that at department store websites for similar products.

The Long Tail: Proliferation of Niche Pure Plays

Many leading industry-watchers say that over the next decade or so, the big winners in apparel will be small online niche players that appeal to a specific consumer group with a strong point of differentiation. These brands, several of which were featured at the Goldman conference, are expected to gain share from the large power brands that dominate apparel today.

Asos

With a strong brand presence in Europe where it generates more than $1 billion in sales, Asos is still building scale and momentum in the U.S. with a combination of private label and third-party branded merchandise. Target customers are 20-somethings with keen fashion sense. Although still relatively unknown stateside, the company scores high in brand affinity among its growing consumer base.

Revolve

This multibrand e-tailer focuses on the California aspirational lifestyle with premium product. Its assortment consists of emerging and micro-label designers, as well as a strong suite of in-house-designed private label offerings.

Poshmark

This unique shopping platform is anchored in social media. Pre-owned product is posted, Instagram-style, by members who want to sell what they no longer wear and find gently-used fashions at a great value. The company claims that 1 in 50 U.S. women use the platform. A key growth initiative is a new partnership with established brands that gives users the opportunity to buy fresh inventory for their own boutiques.

Everlane

This San Francisco-based brand founded by a former venture capitalist focuses on supply chain transparency. It shares profiles, photos and other information about its factories to ensure compliance and gives customers visibility into the economics of production for each style, sharing detail about the cost of materials, labor, trim, freight and duty, as well as the likely cost of a similar garment at a traditional brick-and-mortar retail store.

Fabletics

This celebrity-like brand whose spokesperson is Kate Hudson is actually a membership subscription-based service that offers fashion active wear at value prices. It’s a division of JustFab.com, which has sales estimated at about $1 billion.

Most of these brands originated in the digital space and have managed to gain traction using social media, word of mouth, and a unique value proposition. They are not encumbered with physical real estate, a plus. According to the Goldman report, “Apparel’s old guard is grappling with a groundswell of e-commerce-based apparel brands and retailers that have successfully scaled using social media, search, traditional and grass roots marketing. With a heritage anchored in digital as opposed to brick and mortar, this new breed can more nimbly meet the consumer where she is going, without the overhang of legacy processes and store fleets.”

The smartest among the traditional retailers will be those who figure out a way to join forces with these newer brands by leveraging their financial, retail, supply chain, and merchandise experience while tapping into the consumer knowledge and marketing expertise of the Next Gen players.