Firstly, its margins are significantly higher than other categories. If you are an online store selling apparel and accessories, your gross margins are somewhere around 35-40%. As a reference, retailers have gross margins of around 6-10% for smartphones, or around 20% for large appliances. Plus, fashion e-commerce isn’t that expensive to ship, unlike, say, washing machines. This ridiculously high gross margin makes fashion e-commerce considerably more attractive, and why many people believed (and still do) that these companies would almost inevitably become profitable. They would have the space to subsume other costs. (View Highlight)
Fashion ecommerce has the highest returns of all categories in e-commerce . People don’t return phones once they buy them. Or books. Or washing machines. But they return clothes and accessories all the time. Sometimes it’s because they don’t fit very well. Or because they didn’t like the material. Or… for no reason at all. On an average, other categories have a return rate of maybe 20-25%. Fashion and apparel return rates are much higher, usually at around 35-40%. (View Highlight)
For a long time, most companies believed that the only way to make the economics work would be to sell clothes offline, in physical stores, in prominent real-estate. Customers could try and look at what they wanted to buy—which would bring down returns. Sure, this would lead to rent and operations as an expense, but the gross margins would help pay for that, leading to profits. (View Highlight)
Online e-commerce believed the opposite. They believed that returns could be solved using technology, but rent could not. And so they chose to take on the costs of returns, again, hoping to pay for it using their massive gross margins. (View Highlight)
Here’s a story from 2015 that captures the state of the market.
While Myntra has lost out after going app-only in May, Jabong has seen growth slowing after the exodus of several senior managers.
The beneficiaries have been the fashion businesses of online marketplaces (also called horizontal marketplaces) such as Flipkart, Snapdeal, and Amazon, which have quickly expanded their product offerings and added new features to build a large fashion businesses (View Highlight)
This discount war went on and on, until the market quickly consolidated. Flipkart bought Myntra, which bought Jabong, and the combined entity had a commanding market share. Myntra declared that it would reduce its discounts. It seemed like, finally, companies could go back to focus on profitability. Until, well, Meesho came along, and everyone went to war again, particularly Flipkart—which saw some erosion of its market share at the lower end in fashion e-commerce. (View Highlight)
The first is private labels.
This is simple. Why get stuff from someone else if you can make it yourself? If done well, this pushes the gross margin up to nearly 50-60%, and helps get you to profitability faster. And that’s exactly what Flipkart and Myntra have been doing for years. For Myntra, a significant share of their sales are through private labels. By 2017, the business was contributing nearly 25% of Myntra’s revenues, and the company claimed that it was profitable . (View Highlight)
Typically there are two ways e-commerce companies buy from vendors. They either buy it outright and stock it in their warehouse. Or they do what’s called an SOR (Sale or return)—essentially this gives e-commerce companies like Myntra the option to return products back to the vendors in case they do not sell. SOR typically has lower gross margins, but also diminishes risk and ensures that companies aren’t stuck with stuff they can’t sell.
Over the years, most fashion e-commerce has been moving to this model. Today, over 90% of all products at Flipkart Fashion are via SOR. (View Highlight)
Primarily, there are two types of returns. The first is RTO (Return to Origin), where a product is returned because the product could not be delivered to the customer. Perhaps it’s because the address was wrong, or maybe the customer didn’t want to pay for it, or just flat out refused to accept the order. The second is called RVP (Reverse Pickup), i.e., a return that has been initiated by the customer.
Combined, both of these account for the high returns percentage, which, like I mentioned earlier, is somewhere around 35-40% for a company like Flipkart Fashion or Myntra. (View Highlight)
Most people believe that products once returned go back to the warehouse—a process called inventorisation, but that’s not how it works. Sometimes the returned products are in a bad condition, or worn, or broken. But if you can reinventorise a big chunk of your returns, you can bring down costs. Again, this is what Myntra and Flipkart Fashion have been doing for a while, and I’ve been told that they’ve maxed out on all the progress that they can possibly make. (View Highlight)
There’s bad news for fashion retailers hoping to cut real estate expenses by venturing into ecommerce — running an apparel business online is almost just as expensive as running a brick-and-mortar store in any mall. In fact, with ecommerce in the country pushing fashion brands to give more than 15-20% discounts, it could also eat into profit.
Some fashion brands that entered the online space in the past five years claim to be paying 30-40% commission to ecommerce platforms such as Jabong, Flipkart, Amazon, Myntra and Koovs for sales and product delivery. Last year, Myntra is said to have increased the margin it sought from brands to 36-40% from 28-32% — higher than the 30-35% margins that several apparel, footwear, fashion and lifestyle vendors were giving to brick-and-mortar franchises then.
This is almost as much as they would pay to run a physical retail store, which includes costs like rental (15%), staffing and utilities (8-10%) and maintenance and discounts (5-6%), according to Arvind Singhal, chairman of retail consultancy firm Technopak Advisors. (View Highlight)
