The European online fashion business is brutal. Just ask the backers of one-time highflyers like boo.com, the urban sportswear retailer that tanked earlier this year, and Dressmart.com, the struggling menswear specialist. Those once stellar online brands expanded too fast, spent way more than they earned, got their fingers burned and then lost the protection of their investors after the Internet bubble burst in April. The markets sent online fashion stores a tough message: Come up with business models that generate revenues.
But amid the wreckage, a few firms have shown that not all online fashion shops are information superhighway roadkill. Copenhagen-based Haburi.com, the online designer-label discount store, Sweden's sportswear vendor Sportus and the custom-made Italian shirts store Marco Bracci have all figured out ways to survive and even thrive in a very tough environment.
Haburi's distinctive business model is an Internet version of the factory outlet where brand manufacturers sell directly to consumers at lower prices from huge out-of-town shopping malls. The concept is far less prevalent in Europe than in the U.S., and Haburi wants to fill the gap. Michael Vad, Haburi's ceo, says that Europe's apparel factory outlet sector could yield $10 billion in sales annually.
According to Vad, national regulations that limit malls outside city centers have hampered the development of this sector. "For the consumer, there's the two-hour drive to the mall, and when you get there you don't know whether you'll get the size or color you want," says Vad. By going online, Haburi aims to cut the retailer's costs and to save consumers the long drive. Orders are delivered within two to five days, depending on where the customer lives. Haburi splits net revenue 50-50 with the brand manufacturers.
Haburi has already nabbed about 30,000 online customers and is close to hitting its target of 40,000 total transactions by the end of 2000. The additional $12 million invested in Haburi in June — on top of the $5.24 million the firm got in its first round of financing between April and May — indicates investors will still back business-to-consumer Internet companies, but only if they have a solid strategic vision and not just a fashionable whim spurred by Internet hype.
So where did Dressmart and boo.com go wrong? "They were supposed to run out of money. They were among the companies that only got venture capital if they promised very rapid expansion," observes Ola Ahlvarsson, Stockholm-based CEO of Result Venture Knowledge International, a venture capital firm that controls Sportus. But the rules have changed since Internet stocks dived in April.
In Europe, online clothes sales account for less than 1% of the total retail sector. Apparel is difficult to sell in the virtual world because people like to feel and touch the clothes they buy. For the online retailer, acquiring the items, inspecting them, cleaning and storing them before shipping out orders, plus handling returns, can be complex and expensive. "The cost of customer service is much higher than selling books or even furniture," says Matthew Nordan, a retail analyst at Forrester Research's Amsterdam office.
Unless linked to a major bricks-and-mortar operation, an online retailer needs a competitive edge. For example, Italian shirtmaker Marco Bracci sells expensive goods for high profits and has cornered a niche market. Dressmart, on the other hand, tried to do too much too soon. Originally it planned to sell only shirts and to make the original Swedish operation profitable before branching out. But within months it tried to go pan-European and sell everything including ties, shoes and sportswear, and to rent physical outlets at airports. Dressmart has now scaled back and operates only in Sweden. It's on the verge of bankruptcy and searching for a backer.
Ahlvarsson says one-year-old Sportus, currently trading in the Netherlands, Finland, Sweden and Norway, succeeds by keeping costs to a minimum, unlike boo.com which burned around $125 million in its brief existence. "Boo.com also bought its technology for about $10 million. That's unrealistic. We spent $300,000 on ours and it works like clockwork," Ahlvarsson claims. "In the Internet world, they think the guy with the most marketing money will win. It is, in fact, the guy with the best management team and supporting organization."
Despite its apparent success, CEO Vad admits that the recent shakeout in online clothes retailers has affected Haburi. "We're going to postpone our Asian launch by eight to nine months. We need to build our brands and get the right [sales] volume and be a lot smarter," he says. In other words, the successful online fashion retailers are the ones that stick to their knitting.