E-commerce out, v-commerce in — how the fashion industry has reimagined vertical commerce for the 21st century.
Amazon may have made e-commerce the name of the retail game, but there’s a new crop of e-tailers with something different in mind. Thanks to emerging brands giving vertical integration a fresh twist, v-commerce is here, and it’s shaking up retail all over again.
Vertical integration — a business model in which a company owns and operates multiple steps of the production, marketing, and sales process — isn’t a new idea. In fact, it’s been the standard model for most of human history. So while the concept should sound familiar to family farmers, it’s become something of an endangered species in our era of hyper-specialization. How, exactly, did specialization edge out vertical integration? Decades of broad market growth have led companies to stake out niches. Most focus on a particular segment of production, selling their intermediate product or service to the next company in the chain until the final product eventually reaches consumers. Think of it as an assembly line in which multiple actors cooperate to their mutual benefit. The aluminum industry is a great example. Hundreds of companies currently compete in the space, forcing each to own a small niche. But before the 1970s, just six vertically integrated companies dominated production. At the time, demand for aluminum’s intermediaries — bauxite and alumina — was just too slim to support nonintegrated players.
Today, the fashion industry is undergoing this shift in reverse. Changing market conditions have made hyper-specialization less profitable, leading entrepreneurs to give vertical integration a second look.
DNVBs: Fashion’s Foray Into Vertical Integration
Andy Dunn, founder of the men’s clothing company Bonobos, was the first to get brands thinking about how vertical integration could work in the digital age. When he started Bonobos in 2012, he paired vertical integration with a digital-first strategy, birthing the industry’s first digitally native vertical brand (DNVB).
On the surface, Dunn’s model looks a lot like e-commerce. But while Bonobos sells its products online, it’s also its own label and its own brand. Whereas e-commerce companies sell a variety of brands — take Amazon, for example — DNVBs produce, market, and sell only their own products. As Dunn puts it, a DNVB’s brand name is on both the physical product and the website it’s sold on. Think Warby Parker, JustFab, Dollar Shave Club, and Tuft & Needle. These companies were born and raised on the internet. Each produces and sells branded products directly to consumers, slashing costs and boosting margins by chopping middlemen out of the equation.
Why Fashion Became a Hotspot for Vertical Commerce
To be clear, fashion companies aren’t the only ones experimenting with vertical integration, but they’re certainly the majority. Allbirds, AdoreMe, JustFab, American Giant, AYR, Chubbies, and Everlane are just a few examples.
These and other fashion retailers view v-commerce as a fresh opportunity for three reasons:
1. Suddenly, there’s a way to stand out.
Search “iPhone case” on Amazon, and you’re presented with more than 14.4 million results. In an ever-growing sea of indistinguishable options, how can a fashion brand possibly stand out?
Mobovida, a fashion-forward mobile accessory brand, saw opportunity in v-commerce. Instead of selling rebadged iPhone cases on page 300 of Amazon, it chose to produce, sell, and support its own products. As a result, it retains control over the customer experience, product quality, and branding, enabling it to sell high-quality products for less. Its Acacia case, for instance, has a unique look and can’t be found for sale anywhere but on the brand’s own website.
2. At last, companies can compete with Amazon.
In saturated markets (such as iPhone cases), competition creates a race to the bottom and unsustainably thin margins for most retailers. As tech investor Chris Dixon quoted on his blog — and as many startups have come to learn the hard way — “If it has a UPC code, Amazon will beat it.”
A vertically integrated strategy, however, gives the small guys a chance to counter Amazon’s massive scale advantage by reducing production costs. Although every market is unique, research proves profit margins generally improve as the degree of vertical integration grows.
3. Finally, monopolies aren’t standing in the way.
In certain fashion spaces, monopolies by vertically integrated businesses have made it nearly impossible for non-vertically-integrated brands to successfully enter the market. For instance, Luxottica — a vertically integrated company which rules 80 percent of the eyeglasses industry and manufactures most major brands’ glasses like Oakley, Gucci, and Ralph Lauren — has long hogged profits and erected costly barriers to entry for nonintegrated brands. But by going digital-first and owning all stages of production, eyewear startups like Warby Parker can go toe-to-toe with industry heavyweights.
Fashion is hardly the first sector to use vertical integration to improve margins, introduce new products, and counter monopolistic players. But given the successes of v-commerce fashion brands in our hyper-specialized world, it almost certainly won’t be the last.