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Amazon makes life hard for e-commerce start-ups, but Stitch Fix has found a path

  • Stitch Fix is part of a new breed of e-commerce start-ups that have created a shopping experience completely different from Amazon's.
  • The revenue numbers for Stitch Fix show that its model is working.
  • Investors see an opportunity for start-ups to deliver a different and better shopping experience than Amazon.
Katrina Lake, founder and CEO of Stitch Fix
Source: Stitch Fix
Katrina Lake, founder and CEO of Stitch Fix

As Amazon takes over a bigger chunk of online retail, e-commerce start-ups are searching for niche areas where they can provide a better, more targeted experience.

Stitch Fix, a personal styling service, will be the first of this new breed of start-ups to test the public market. The six-year-old start-up, which sends a customized box of apparel based on a person's measurements and preferences, filed its IPO prospectus on Thursday.

Rather than trying to take on Amazon's vast marketplace and next-day delivery, Stitch Fix is all about clothing, shoes and accessories.

Customers receive a shipment of five items, selected by algorithms and stylists, and only pay for what they keep. Other start-ups are focused on home decor, vitamins for women and different types of personalized and curated services that Amazon lacks.

"Amazon is all about efficiency," said Rick Yang, an investor at venture capital firm NEA, which is not a Stitch Fix shareholder. "But as Amazon gets bigger, it becomes a bit more impersonal."

Yang referenced Goop, an NEA-backed start-up founded by actress Gwyneth Paltrow, as another company creating a new shopping model by combining content and personal curation. Casper, Houzz, and Brandless are also carving out a winning formula by being creative, he said.

In its most recent fiscal year, Stitch Fix generated revenue of $977.1 million, up 34 from the prior year, and operating income of $31.6 million.

"Stitch Fix packages an experience, which is the difference," Yang said. "This is where I think they are well shielded from Amazon."

Amazon's dominance has led some investors to flee e-commerce investments altogether. According to CB Insights, online retail funding fell last year to a four-year low in number of deals and a three-year low in dollars invested.

That's not surprising considering the number of recent flameouts. Former highfliers like Gilt Groupe, Fab and One Kings Lane burned through hundreds of millions of dollars in cash before being acquired for prices far below what investors paid.

But Kirsten Green, founder of venture capital firm Forerunner Ventures, has found success in the sector. Some of her biggest investments include Jet.com, which was bought by Wal-Mart for $3.3 billion, and Dollar Shave Club, acquired by Unilever for $1 billion last year.

'Different, better experience'

Green said she makes investments only if the company has a unique experience and takes the consumer beyond Amazon's world of choice and convenience. While Green admires Amazon, she said that in some ways it's a "very old shopping site with a big catalog and a drop-down menu."

Forerunner's portfolio also includes Bonobos, the clothing company bought by Wal-Mart, and designer eyewear brand Warby Parker.

"The way I shop and the way I engage with my wardrobe, those experiences don't come to life on Amazon's platform," Green said. "There's just a lot of room for delivering a different, better experience."

Stitch Fix faces plenty of challenges. The apparel market is fiercely competitive and Amazon recently launched a rival service called Prime Wardrobe. Rising marketing costs are also cutting into profit margins, and revenue growth is slowing.

Still, the company sees plenty of room to maneuver around Amazon. In its IPO filing, the company said the first wave of online shopping was focused on low prices and fast delivery, but today's shoppers demand better and more personal ways to search.

Stitch Fix employs 3,400 human stylists (out of 5,800 total employees) who pick and choose the right match for its customers.

"We are reinventing the shopping experience by delivering one-to-one personalization to our clients through the combination of data science and human judgment," the company's filing said. "This combination drives a better client experience and a more powerful business model than either element could deliver independently."