Equity Research

Industry Update — March 17, 2021

 
Retailing, Specialty Softlines, and E-commerce

Amazon & The Retail Rainforest: 4Q20 Edition

 
Our Call Equity Analyst(s)

In the 14th edition of our “Amazon & The Retail Rainforest” series, we once again take Ike Boruchow
a deeper look at the performance of Amazon (and ecommerce in general) during last Senior Equity Analyst | Wells Fargo Securities, LLC
ike.boruchow@wellsfargo.com | 212-214-8024
quarter (retail’s 4Q20) and how it reads through to the rest of the retail industry. Notably,
traditional retailers struggled mightily in 2020 amid the pandemic, but the channel shift Tom Nikic, CFA
to e-commerce was dramatically accelerated (to AMZN's benet). Additional details we Senior Equity Analyst | Wells Fargo Securities, LLC
tom.nikic@wellsfargo.com | 212-214-8030
comb through in this ~25 page report include:
Will Gaertner, CFA
Associate Equity Analyst | Wells Fargo Securities, LLC
1) AMZN is the #1 seller of apparel in the U.S. We estimate that U.S. sales of apparel/ will.gaertner@wellsfargo.com | 212-214-4837
footwear on Amazon’s platforms (including 3rd party sales) grew +15% in 2020 - Lauren Frasch
exceeding $41B (20-25% above #2 player WMT). This represents highly impressive Associate Equity Analyst | Wells Fargo Securities, LLC
11-12% share of all apparel sold in the U.S. and 34-35% share of all apparel sold online. We lauren.frasch@wellsfargo.com | 212-214-5024
now estimate AMZN will surpass $45B in apparel/footwear sales in 2021.
2) AMZN accounts for half of TAM growth in 2020. Amazon’s U.S. GMV (across all
categories, excluding Whole Foods) was about $290B in 2020 - a $9 billion (or +22%)
increase YoY. Given that Amazon’s addressable market (as we dene it) grew by $180B,
this means that AMZN accounted for ~50% of the market’s sales growth in 2020. Notably,
the trend was most pronounced in 2Q20 (when brick-and-mortar competitors were
largely closed), but even when we isolate it to 4Q, we nd that AMZN accounted for
35-40% of TAM growth. Importantly, we also nd that ecommerce broadly is taking a
greater piece of the pie. Specically, ecommerce penetration of addressable categories
rose more than 500bps in 2020 (to ~27%), which was far-and-away the biggest growth
we ever seen (historically 100-200bps annually). Thus, we see that e-commerce
experienced 3-4 years of channel shift trends in 2020 alone.
3) Aggressive Category Expansion Remains A Hot Topic. Though Amazon has been able
to rapidly disrupt other retail sectors (e.g. electronics, books, grocery) based on their sheer
volume and scale capabilities, that strategy does not necessarily work when it comes to
the nicky fashion customer or discerning luxury shoppers. In this section, we detail their
various initiatives to capture the fashion customer. Most recently in September 2020,
Amazon launched “Luxury Stores” - a dedicated portion of the platform to sell 1P luxury
goods. While luxury brands have been reluctant to sell to Amazon, Amazon adapted their
oering in such a way to overcome these obstacles, attracting Oscar de la Renta as the
rst brand on the new platform.
4) Survey Work Suggests A Signicant Portion of Share Shift Will Persist Post-
Pandemic. We conducted a survey of 1,000 U.S. Amazon shoppers to gauge how
consumer engagement has shifted during the pandemic. Notable ndings include: (1)
Not surprisingly, we found that consumers increased their engagement with Amazon
in 2020, in both general and apparel/footwear spending - Amazon overall wallet share
increased 600bps (to 35%) during the pandemic, while increasing apparel/footwear wallet
share by 200bps (to 18%). (2) Once the pandemic is in the rear-view, the largest portion
of respondents expect that their spending will not change vs. their pandemic spending
(46%) - suggesting that a signicant portion of the acquired market share will prove to
be "sticky." (3) However, a larger portion expect to return to their pre-pandemic habits
in their apparel/footwear spending (30%) than whom do for general Amazon spending
(22%) – suggesting that apparel/footwear channel shift will see greater "normalization"
trends.

All estimates/forecasts are as of 3/17/2021 unless otherwise stated. 3/17/2021 5:00:00 EDT. Please see page 20 for rating denitions, important disclosures and required analyst certications.
Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the rm may have a conict of interest that could
aect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

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Industry Update Equity Research

AMZN Is the U.S. Apparel Leader

While AMZN obviously carries a very wide range of products, over time they’ve become a meaningful
player in the softlines market. To that point, according to data from eMArketer, the gross merchandise
value (GMV) of apparel and footwear that was sold on AMZN’s platforms approached $36B in 2019
(incl. sales by 3rd party sellers), and we estimate that their softlines GMV rose to $41B in 2020. While
this was only a modest increase of +15%, we believe that overall demand for apparel was stied by the
pandemic, and AMZN's customers were more focused on "essential" items and/or items that catered
to the newfound work-from-home environment. By comparison, AMZN had grown their apparel/
footwear GMV by a +20-30% CAGR the prior 3 years - but even though the growth rate might have
slowed in 2020, we'd note that 1) AMZN drastically outperformed the softlines industry overall (which
declined 10-15% per personal consumption data from the U.S. government) and 2) AMZN's 15%
growth actually represents an increase of more than $5B (a sizeable number).
Looking ahead, we estimate that AMZN will grow their softlines business at a fairly-modest +10%
rate in 2021 to more than $45B. We believe this slowdown vs prior years will be driven by a partial
reversal of the channel shift that occurred during the pandemic (in other words, as customers return
to shopping in stores), as well as the "law of large numbers". Specically, we have AMZN's softlines
GMV increasing by over $4B in 2021, which is still a very large amount of incremental GMV (even if it
represents slower growth on the increasingly-large GMV base).
Exhibit 1 - AMZN's Softlines GMV By Year
50,000
45,262
45,000 41,147
40,000
35,780
35,000 29,510
30,000
23,700
25,000
20,000 18,380

15,000 13,185
9,018
10,000 6,313
5,000
0
2013 2014 2015 2016 2017 2018 2019 2020 2021E

AMZN Apparel/Footwear GMV ($MMs)

Source: Euromonitor, eMarketer and Wells Fargo Securities, LLC

What’s even more impressive, in our view, is that LY’s $41B+ GMV gure means that AMZN is actually
the biggest seller of apparel/footwear in the U.S. (by a healthy margin). To put AMZN’s GMV into
perspective, WMT sells roughly $33-34B of softlines annually (meaning AMZN is already 20-25%
larger than the #2 player), while there are only 6 other companies that even sell $10B or more in the
U.S. annually (TJX, M, TGT, KSS, GPS and ROST). Thus, AMZN has established itself as the dominant
player in the retail softlines industry.

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 2 - AMZN Is the #1 Seller of Apparel In the U.S. By a Wide Margin

45,000
41,147

40,000
AMZN leads the #2 apparel
seller in the U.S. (WMT) by a
35,000 healthy margin 33,432

30,000

25,000

20,000
16,598
15,958
14,876
15,000
11,677 12,175
10,706
9,215
10,000

4,876 5,018 5,113 5,350 5,412

4,151
5,000 2,997 3,302
2,127 2,177 2,312 2,337

0
ANF

Adidas NA DTC

PLCE

URBN

LULU

AEO

EBAY

BURL

LB

NKE N.A. DTC

FL

DKS

JWN

ROST

GPS

KSS

TGT

TJX

WMT

AMZN Softlines GMV

2020 Total U.S. Apparel and Footwear Sales ($MMs)
41,147
Source: Company reports, eMarketer and Wells Fargo Securities, LLC

Because of AMZN’s rapid ascent in the apparel/footwear industry, they now have meaningful market
share. Specically, as they’ve grown their sales in the category at a +20-30% CAGR over the past
3-4 years, the overall category was only growing at a +LSD CAGR prior to COVID, and declined
meaningfully in 2020 (down 10-15% according to data from the U.S. Bureau of Economic Analysis).
As a result, while < 2.0% of apparel and footwear sales were done on AMZN’s platforms in 2013,
this gure grew to 9.0% pre-COVID (2019) and then moved meaningfully higher in 2020 to almost
12.0%. Furthermore, AMZN has taken substantially more share within the ecommerce channel for the
category. Whereas AMZN accounted for less than 17.0% of the online apparel/footwear market in
2013, they accounted for almost 35.0% of all online purchases of apparel in the U.S. in 2019 (in GMV
terms). Interestingly, their market share in online apparel/footwear actually decreased in 2020 - we
believe this was a function of traditional brick-and-mortar retailers experiencing an outsized channel
shift online, coupled with AMZN's shoppers increasingly focused on "essentials" for the home amid
lockdowns. In 2021, we would expect AMZN's share of online apparel/footwear to bounce back to the
34-35% range, with their total market share (both online and oine) remaining relatively stable (due
to a recovery in the brick-and-mortar channel).
Exhibit 3 - AMZN's Market Share In Softlines Has Risen Steadily
14.0% 34.9% 34.1% 35.0%
32.4%
30.9% 31.0%
12.0%
28.9% 30.0%

10.0%
24.8%
25.0%
8.0%

20.2%
6.0% 11.6% 11.6% 20.0%
16.8% 8.9%
4.0%
7.5%
6.2% 15.0%
4.9%
2.0% 3.6%
2.5%
1.8%
0.0% 10.0%
2013 2014 2015 2016 2017 2018 2019 2020 2021E

AMZN Market Share of Total U.S. Apparel/Footwear AMZN Market share of Online Apparel/Footwear (right axis)

Source: Company reports, Euromonitor and Wells Fargo Securities, LLC

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Industry Update Equity Research

As mentioned above, AMZN's market share in online apparel/footwear is in the 30-35% range,
according to eMarketer data. To put this into perspective, AMZN sold almost 7x as much apparel/
footwear as the 2nd largest player online (Macy’s). In fact, according to the Euromonitor data, every
other retailer of online apparel is below $6B in online revenues (vs. over $41B for AMZN).
Exhibit 4 - AMZN Sells Almost 7x More Apparel/Footwear Than the #2 Online Player
45,000
41,147

40,000

35,000

30,000 AMZN is almost 7x larger than the

2nd largest online apparel business
in the US (Macy's)
25,000

20,000

15,000

10,000
5,944
4,337 4,892
5,000 3,361 3,677
2,690
1,600 1,814 1,952 2,010
1,005 1,036 1,087 1,180 1,239 1,326 1,338 1,465 1,467 1,558

0
ANF

J. Crew

LULU

Hudson's Bay

Wish

JCP

AEO

Qurate Retail

URBN

LB

SFIX

DKS

EBAY

FL

TGT

JWN

GPS

WMT

KSS

AMZN GMV

2020 U.S. Online Apparel and Footwear Sales ($MM)

Source: Euromonitor and Wells Fargo Secudities, LLC

AMZN Accounts for ~50% of Domestic TAM Growth in 2020

Although ecommerce seems to be pervasive, we’d note that it actually still represents a relatively
small portion of total retail sales. According to data from the U.S. Census Bureau, the U.S. ecommerce
industry is ~$790B (as of 2020) - which accounted for 14% of total retail sales ($5.6T), as the online
channel grew +32% in 2020 - marking a signicant acceleration vs. recent years (usually low-to-
mid teens growth). By comparison, the brick-and-mortar channel (which normally grows +LSD) was
marginally negative LY, resulting in a signicant channel shift online.
It should be noted, however, that these numbers include several retail categories that cannot be
sold (or are presently challenging to sell) online - namely gasoline, cars, grocery, pharmacy. When
we exclude these categories, we nd that the true ecommerce penetration (as a percent of the
addressable market) has actually grown to 27% of sales. To put this into perspective, just 8 years ago,
ecommerce accounted for only 5% of total retail sales and 11% of addressable market sales, so we see
that this channel is expanding very rapidly and taking share from traditional brick-and-mortar retailers.

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 5 - E-Commerce Penetration Is Rising Rapidly

30.0%

25.0% 26.9%

20.0%

15.0%
14.0%
10.0%

5.0%

0.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

E-comm penetration (total retail) E-comm as % of addressable market

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

We can also look at the apparel/footwear industry specically, and we nd a rapidly-rising penetration
of ecommerce sales. Based on eMarketer data, we nd a roughly $133B market for online apparel/
footwear in 2020 – which represents almost 30% growth from 2019. This is more than 4x the size
of the market from 2012, and because of the strong growth for the apparel/footwear online market
(relative to LSD growth for the industry overall pre-COVID), this means that ecommerce penetration
has risen from sub-10% in 2012 to 25% pre-COVID (2019) to 35-40% penetration during the COVID-
aected year of 2020.
In 2021, we expect online sales of apparel/footwear to remain at (against the tough compare of
2020 and amid a return to shopping in stores by consumers), so the share of softlines done online may
decline (to ~34% by our estimation), though this is still meaningfully above the pre-COVID level of
25%. Thus, we believe that a large portion of the channel shift that occurred in 2020 will be "sticky".
Exhibit 6 - Online Apparel/Footwear Industry Sales By Year
140,000 132,675 132,675 40.0%

120,000 35.0%
102,480
30.0%
100,000 91,069
76,753 25.0%
80,000
63,606 20.0%
60,000 53,098
44,733 15.0%
37,507
40,000 32,105 10.0%

20,000 5.0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E

Total online apparel/footwear market As % of total apparel/footwear sales

Source: Euromonitor and Wells Fargo Securities, LLC

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Industry Update Equity Research

Pivoting back to the broader U.S. retail market, brick-and-mortar sales growth was generally in the
+LSD range heading into COVID. Interestingly, though Census Bureau data show a steep decline
in 2Q20 amid COVID-related lockdowns/closures (-8.7%), the brick-and-mortar industry actually
recovered decently well in 2H21 (normalized growth of +3-4%). We'd note, however, that the
composition of this sales growth was likely dierent than it was pre-COVID: rather than shopping
at clothing stores and department stores, consumers have been shopping more at channels such as
mass merchants (e.g. WMT/TGT), home improvement (e.g. HD/LOW), sporting goods (e.g. DKS/ASO),
etc. We'd also note that retail sales may also be beneting from shifts in wallet share, as consumers
are spending less on "experiences" (travel, sporting events, music concerts, dining out, etc.), with
those savings likely being invested on goods for the home. Meanwhile, e-commerce growth has risen
dramatically, as the pandemic has accelerated the shift online.
Exhibit 7 - U.S. Quarterly Retail Sales By Channel
E-commerce Brick and Mortar Brick/Mortar (Addressable Only)
YoY growth ($) YoY growth (%) YoY growth ($) YoY growth (%) YoY growth ($) YoY growth (%)
4Q20 59,583 32.1% 40,606 3.2% 14,212 2.4%
3Q20 53,758 37.0% 42,442 3.4% 22,491 4.2%
2Q20 61,690 44.4% -107,291 -8.7% -55,880 -10.1%
1Q20 18,651 14.6% 16,716 1.5% 4,571 0.9%
4Q19 26,050 16.3% 31,790 2.6% 9,594 1.7%
3Q19 22,152 18.0% 35,854 3.0% 13,853 2.6%
2Q19 16,987 13.9% 29,480 2.4% 12,627 2.3%
1Q19 13,194 11.5% 7,231 0.7% 4,810 1.0%
4Q18 15,106 10.5% 25,642 2.1% 10,674 1.9%
3Q18 15,031 13.9% 39,195 3.4% 15,641 3.1%
2Q18 15,379 14.4% 47,441 4.1% 17,491 3.3%
1Q18 15,203 15.3% 43,320 4.1% 17,872 3.9%
Source: U.S. Census Bureau and Wells Fargo Securities, LLC

As mentioned earlier, brick-and-mortar sales trends held up better than expected in 2020 in
aggregate, but there was a wide disparity in performance by store type. Notably, specialty apparel/
footwear stores were essentially the hardest-hit sub-sector, with sales -26% in 2020. After that,
department stores (with their softlines-oriented assortments) were also highly-pressured at
-18%). On the other end of the spectrum, we see double-digit growth at categories such as home
improvement (+14%) and sporting goods (+17%).

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 8 - 2020 Retail Sales By Store Type

20%
17%
15% 14%
12%
10% 7%

5%
1% 2%
0%

-5%
-5%
-10%

-15%
-14%
-16%
-20% -18%

-25%
-26%
-30%
Specialty Dept stores Gas stations Electronics Home Autos/Parts Health Gen. merch Grocery Home Sporting
softlines Furnishings (ex-dept improvement goods
storeS)

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

Another noteworthy development is that ecommerce penetration continues to grow rapidly, and
perhaps more importantly, at an accelerating rate. To be specic, coming out of the nancial crisis
ecommerce penetration (addressable market only) consistently increased 100-110bps every year, but
then it accelerated consistently beginning in 2014, to the point that penetration improved ~200bps in
2019. Then, not surprisingly, e-commerce penetration experienced a meaningful step-function higher
in 2020 amid the COVID pandemic. Specically, with e-commerce growing +30-35% LY and brick-and-
mortar sales (addressable categories) roughly attish, e-commerce penetration increased by more
than 500bps in 2020 (meaning that 3-4 years of penetration growth were achieved in 2020 alone).

Exhibit 9 - E-Comm Penetraton Experienced 3-4 Years of Expansion In 2020 Alone

550 526
500
450
400
350
300
250
187 199
200 175
145
150 119 130
103 105 106 102
100
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YoY change in e-comm penetration among addressable categories (bps)

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

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Industry Update Equity Research

While it is no surprise that Amazon is exerting signicant pressure on the retail industry today, we
believe the extent to which the ecommerce giant is aecting traditional retailers specically is less-
understood. We estimate that Amazon’s domestic GMV was roughly $290B in 2020 - which includes
3rd party sales on the Amazon marketplace (but excludes Whole Foods). To estimate AMZN’s GMV,
we gross up Amazon’s product-related revenues (excluding shipping revenues) by the percentage of
overall units that 1P (rst party) represents.
Notably, because of the impact of the COVID-19 pandemic (which shifted a signicant portion of
demand online), AMZN's domestic GMV grew by ~45% in 2020, which was well above the growth
rates experienced in recent years (e.g. ~20% growth in 2018 and 2019). While their 2020 growth
is impressive all by itself, we’d also note that it represents ~$90B of incremental GMV YoY. For
comparison, we looked at the quarterly sales data from the Census Bureau for the comparable period
(excluding categories that we believe are not currently comparable to AMZN’s assortment - auto
dealers, gas stations, food/beverage stores, and pharmacies). This yields an “addressable market”
for AMZN that includes “Non-Store Retailers” (the group of online/catalog pure-plays that includes
AMZN) and key brick-and-mortar players as well (softlines, department stores/mass merchants,
electronics, home furnishings, oce supplies, sporting goods/hobby stores, etc.).
The key takeaway we discovered is that total sales across Amazon’s entire U.S. competitive set
(inclusive of Amazon) grew ~$180B in 2020 (compared to Amazon’s $90B GMV YoY increase,
excluding Whole Foods). Thus, this suggests that Amazon alone accounted for ~50% of the growth in
their addressable market. This marks the 21st consecutive quarter that AMZN’s share of growth has
exceeded 20%, demonstrating how dominant AMZN is becoming in the retail landscape (with 2020
obviously exacerbated by the pandemic).
Exhibit 10 - AMZN As % of TAM Growth (LTM Basis)
70.0%

60%
60.0%
53%
51%
50.0%

40.0%
33%

30.0% 26% 27% 26% 27%

24% 24% 24% 25%

20.0%

10.0%

0.0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

AMZN as % of addressable market growth (LTM basis ex-Whole Foods)

Source: Company reports, U.S. Census Bureau and Wells Fargo Securities, LLC

While we tend to look at AMZN’s share gains on an LTM basis to smooth out quarterly volatility, we
think it is also instructive to isolate 4Q results. When viewed in this manner, we nd that AMZN’s
domestic GMV grew at a low-40’s rate (as trends moderate from Q2's peak of nearly +60%),
accounting for almost $27B of incremental GMV YoY. By comparison, the addressable market grew
by ~$160B in 4Q (or +10% YoY). As a result, this suggests that AMZN accounted for over 35% of
TAM growth in 4Q (the peak was 2Q20, when the TAM ex-Amazon shrunk, meaning that Amazon
accounted for all the growth in the retail industry (and then some).

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 11 - AMZN as % of TAM Growth By Quarter

455%

65% 63%

55%

45%
36%
35% 30%
28% 29% 29%
26% 25% 25%
23% 22%
25%

15%

5%

-5% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

Amazon as % of addressable market growth (ex-Whole Foods)

Source: Company reports, U.S. Census Bureau and Wells Fargo Securities, LLC

Notably, when comparing AMZN’s GMV growth to the performance of traditional softlines retailers,
we saw that signicantly widened the spread in growth between the softlines space and AMZN (note
that we're looking at AMZN across all categories, not just softlines). Specically, when we look at
the average comp growth or the softlines space (sales-weighted), we see +LSD growth throughout
2018-2019, and signcant pressure in 2020 from the pandemic (troughing at a nearly 40% decline
in 1Q20). On the other hand, AMZN's domestic GMV accelerated from the typical 15-25% growth to
much higher growth rates (peaking at nearly 60% growth in 2Q20).

Exhibit 12 - AMZN Domestic GMV Growth Vs. Softlines Retail Comps

58.6%
60.0%
46.7%
41.7%
35.5%
40.0%
27.1%
24.1% 24.1% 22.5%
19.3% 19.4%
20.0% 15.8% 14.3%
COVID pandemic causes
3.6%
widespread store closures
3.2% 3.8% 2.9% 1.6% 2.0%
1.1% 0.6%
0.0%

-3.5% -3.9%
-20.0%

-22.9%
-40.0%
35,000 -37.8%
Apparel/footwear GMV on AMZN
-60.0% $29,510
30,000
1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

4Q20

25,000 $23,700
YoY U.S. GMV growth Average comp growth for softlines retail

Source:
20,000 Company reports and Wells Fargo Securities, LLC

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Industry Update Equity Research

Brands/Retailers Adapting to the “New Normal” As AMZN Branches Out

Amazon has clearly disrupted the online and brick and mortar retail space, and shows no signs of
slowing their push for dominance across categories. Instead of using a branded website or visiting a
physical store, an increasing number of consumers are opting to utilize the site’s expansive assortment
of products/brands and their convenient/aordable shipping options to meet their household and
discretionary shopping needs. Historically, however, luxury and fashion apparel has under penetrated
the product assortment. Amazon is typically known as a low-cost/high-convenience retail option in
their dominated categories – features that the fashion customer are not necessarily trying to optimize,
but Amazon continues to place bets on the fashion opportunity. Though Amazon has been able to
rapidly disrupt other retail sectors (e.g. electronics, books, grocery) based on their sheer volume
and scale capabilities, that strategy does not necessarily work when it comes to the nicky fashion
customer or discerning luxury shoppers who are looking for a shopping experience and merchandising
guidance.
Amazon Pushes Into Luxury, Beauty & Fashion
The company has made a strong push into fashion over the past few years, and more recently, luxury
as they seek to draw in the fashion customer – typically done through editorial content, a premium
shopping experience, curated assortments, quality design, and/or brand power. In the fashion apparel
case, Amazon’s seemingly endless selection is actually a barrier to most fashion shoppers– it appears to
have little fashion point of view. Amazon is working on rectifying this through a variety of initiatives.
Luxury Stores: Amazon launched “Luxury Stores” in September 2020, a dedicated portion of the
platform to sell 1P luxury goods. While luxury brands have been reluctant to sell to Amazon (since
they care signicantly about brand presentation, consumer perception, scarcity value, etc.), Amazon
adapted their oering in such a way to overcome these obstacles, attracting Oscar de la Renta as the
rst brand on the new platform. 1) The luxury products are completely isolated from “mass” brands,
and can only be accessed if a customer either searches for the brand directly or for certain key search
terms such as “luxury clothing”. Thus, the brands don’t have to worry about their goods showing up
a page next to a lower-tier product. 2) It gives the brands control over the pricing, since it is a 1P
transaction (whereas a 3P seller can charge whatever they want). 3) At the request of the brands,
Amazon does not allow reviews of these products, which goes against Amazon's consumer-centric
vision of their business (demonstrating how badly Amazon wants to make this work). 4) The ability
to leverage Amazon’s logistics network is another key selling point (as some carriers have struggle to
keep up with the surge in shipping demand among COVID). Though it’s still early, "Luxury Stores" does
demonstrate how hard Amazon is working to make inroads in the luxury industry, and the fact that
they may be starting to breakthrough in terms of building relationships with some brands.
Private Label: Amazon Fashion has a dedicated home page that breaks ltering categories into
occasions (e.g. dresses are categorized into “Casual”, “Night Out”, “Cocktail”, etc) to better facilitate
the online shopping experience. Amazon has also undertaken a step up in its physical (highly visible
ad campaign called “Delivering Fashion”) and inuencer marketing (partnering with well-known
bloggers), and are pushing more curated content and assortments to emulate the more emotional and
compelling shopping experience fashion consumers look for. The site also rolled out its own private
label apparel brands in February 2016. Today, the site has over 100 private label apparel brands– the
largest number of private labels across all of Amazon’s categories.
Personal Shopper by Prime Wardrobe: Amazon’s rst notable push into connecting with the
fashion apparel shopper was Prime Wardrobe (announced June 2017) – a “try before you buy” model
(free delivery/returns) oering name-brands (e.g. Calvin Klein, Levi’s, Adidas) for Prime members.
Customers receive their items, then try them on in their home before deciding whether or not they
want to keep the item. After that, the customer only pays for the items they elect to keep. While this
gained some traction, a large number of consumers viewed the experience as overwhelming due to the
number of products to choose from.
In July 2019, Amazon responded to this feedback by launching “Personal Shopper by Prime
Wardrobe” (in direct competition with the SFIX model). Personal Shopper is $4.99/month in addition
to an Amazon Prime subscription, focused on convenience and providing shoppers with a stylist who
provides personalized recommendations. Stylist recommendations are based on an initial survey
that is lled out when customers register, as well as follow up communications highlighting what
the customer would like to receive in their box. Upon receiving their list of items, members select
up to eight items to be sent out and then have one week to try them on. Similar to Prime Wardrobe,

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Personal Shopper members only pay for the items they decide to keep and return shipping is free on all
of the times that are sent back.
Prestige Beauty Presence: Outside of apparel, beauty appears to be a category that Amazon has
its sights set on with a dedicated Luxury Beauty page and a recently launched professional platform.
Beauty is a category that seems primed to shift online given its high price points and replenishment-
based nature.
Historically, the moat around the prestige beauty category appeared solid, as consumers seemed
to value highly the in-store experience and specialty beauty retailers invest heavily into their online
channels. Furthermore, prestige wholesalers have long been insistent that they do not plan to work
with Amazon due to the lack of control they would have over the content, experiences, and services
that are integral to a prestige beauty brand. So far the list of prestige beauty brands willing to sell
directly through Amazon is short, but that could be changing. With the rise of direct-to-consumer
and indie beauty brands, Amazon oers these brands a channel with which to easily access a broad
customer base without the administrative cost of a traditional beauty retailer (Ulta, Sephora).
Potentially a sign of a coming shift in the beauty industry, Lady Gaga launched her makeup line
exclusively on Amazon – an unprecedented approach to a branded beauty launch suggesting that
customers may be warming to the idea of purchasing this category on the multi-category site.
Professional Beauty Platform: In June 2019, AMZN announced that they were moving into the
professional beauty space, launching professionals-only platform (users are required to log in with
a beauty license number) that allows professionals to receive specialized pricing. This strategy is in
direct competition with SBH’s Beauty Systems Group, a retailer of beauty supplies to professionals
only (shares were -17% vs. SPX at on the day of the announcement) who maintains that professional
customers and the vendors who sell to them both prefer an in-person experience – a mistake in
judgement that many traditional retailers have made.
The ease and familiarity of the Amazon customer experience combined with the increasing acceptance
of online shopping could entice both users (vendors and salon professional customers) to transition
more of their professional business to Amazon, and increased likelihood that vendors will eventually
begin to sell directly to Amazon Pro (as other wholesalers have done before them) instead of through
distributors (such as BSG).
The Drop: Amazon announced a fashion concept called “The Drop” in May 2019. The concept “drops”
limited edition collections of fashion-forward styles designed by popular fashion personalities for a
restricted amount of time (or until they run out of fabric - items are made to order, requiring longer-
than-usual shipping times). The concept capitalizes on the popular exclusivity and made-to-order
concepts - two features that are important to the fashion customer. Furthermore, each drop has
a built-in audience of whichever fashion personality is being featured – giving Amazon access to a
demographic who typically wouldn’t shop on Amazon.
It seems that Amazon’s strategy to the space is a “test and learn” approach, as they are clearly still
trying to determine how to best leverage their many advantages to most eectively drive fashion
purchases. They have launched many initiatives over the past decade within apparel alone, and we
would expect them to continue to do so. Even if Amazon has been slower to become a “category killer”
in fashion than other products, their moves are clearly siphoning sales away from traditional retailers.
Biggest Threat to Retailers: Amazon Raises The Bar For Delivery Speeds
The most notable impact that Amazon has had on retailers is raising the customer bar for shipping
speeds and costs. While 1-2 day shipping was formerly reserved only for those willing to pay
exorbitant delivery fees, Amazon has invested heavily into their supply chain in order to make
expedited shipping more accessible to the broader consumer. Amazon Prime has long oered free
2-day shipping on a broad assortment of items on their site. As an increasing number of consumers
become Prime members (an inevitability, as Amazon accounts for a growing portion of wallet share),
the average online shopper will only come to expect more from online retailers who are competing
with the behemoth site.
Notably, in early 2019 Amazon announced that they would be moving to 1-day free shipping on a
select assortment (more than 10 million items do not require a minimum order to qualify for the perk)
for Prime Members – a revolutionary move again raising the bar for online retailers. Illustrating the sti
competition in the online shipping race, the following month Walmart announced that they would be
oering free one-day shipping as well - emphasizing that this benet will be available to all customers

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Industry Update Equity Research

for no fee (a dig at Amazon’s required Prime membership, though Walmart’s free shipping has a $35
order minimum). As a result of Amazon’s massive push to reduce the speed and cost of delivery, it will
likely be necessary for online retailers to continuously invest in their supply chain capabilities if they
want to keep up with customer expectations.
Brand-Specic Approaches to Amazon Vary Greatly
Branded goods have been reluctant to fully seize the Amazon opportunity, worrying that expanding
into this high-volume channel could damage brand equity. Instead, many have focused on improving
their own online experiences, but some are realizing this is not enough and are cautiously developing
relationships with Amazon. As mall trac continues to decline and department stores are falling out of
favor, vendors need to look elsewhere for growth and Amazon is the most obvious vehicle for this, in
our view.
Though some retailers believe that their product category is well-insulated from the Amazon threat,
others are taking a “if you can’t beat ‘em, join ‘em” perspective, particularly the companies with large
wholesale businesses (HBI, PVH, VFC, RL, CRI, SKX, SHOO, and up until 2019, NKE). Many vendors
are partnering with Amazon to establish a comprehensive brand presentation on the site, with
assortments that minimally compete with existing channels. Perhaps more importantly, partnering
with Amazon allows brands to better police 3rd party distribution on the site and maintain control of
their brand image/equity.
Some retailers are testing partnerships with the company in more creative ways - for example, CRI
manufactures a private label business for Amazon (“Simple Joys”), PVH’s Calvin Klein now sells directly
to the channel; VFC’s The North Face rst initiated their partnership in part in order to clean up
unauthorized distribution; and Destination XL is expanding into wholesale by leveraging their brand
and Amazon’s distribution to better reach an underserved demographic (the brand is partnering with
Amazon to produce and brand a line of private-label product marketed as “Amazon Essentials Fit by
DXL).
Exhibit 13 - Timeline of Retailer Partnerships

Source: Company reports and Wells Fargo Securities, LLC

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Interestingly, most wholesale-focused brands seem to be amenable to partnering with AMZN at

least in part (typically with a limited assortment not oered anywhere else, such as with CRI, VFC and
initially, NKE). Branded specialty apparel retailers have been especially slow to work with AMZN. Most
mall-based apparel retailers believe that their fashion-forward, exclusive product is best experienced
in-person, through a compelling and personalized in-store experience. Many of these brands feel that
as long as they continue to invest in their own unique, branded online experience, they can continue to
compete with Amazon.
However, we are beginning to see a shift in this approach. While brick-and-mortar based retailers
historically saw AMZN solely as a competitive threat, we are witnessing a distinct trend towards
Amazon partnering with traditional retailers in order to provide a level of brick-and-mortar interaction
for the Amazon customer, while also providing an auxiliary trac benet to the retailer.
While brick-and-mortar shopping is certainly in secular decline, customers still appreciate an in-store
option (particularly for returns). Partnering with retailers who have a pre-existing store base provides
customers with a physical touchpoint to interact with Amazon. Retailers also view this partnership as
extremely benecial, as this approach could prove to be an eective driver of foot trac to stores,
which have been less and less protable as secular trac trends have long been in decline. These
retailers have struggled to stem the tide with a variety of largely unsuccessful trac-driving strategies
over the past decade, and partnering with their online competition may actually prove to be a mutually
benecial endeavor. For example, CHS launched a program where customers can buy Chico’s product
on Amazon (a select assortment only available to Prime members), but make returns in Chico’s stores.
While most brands would be concerned about control if selling through the online retail platform, CHS
retains control of marketing, pricing, and promotions in its new partnership. Most notably, in early
2019 KSS announced that they would be accepting Amazon returns at all stores, and have cited it as a
signicant trac driver in their conference calls since.
An AMZN Defection: NKE
We may be cycling into the next phase of vendor AMZN approaches. NKE began shipping a select
assortment of lower-priced styles directly to Amazon in 2017 in an attempt to better control their
online distribution (the Nike brand had been available on Amazon via 3rd party sellers for some time,
but never directly from the company). This move was notable in that NKE is one of the strongest
brands and largest vendors in the world, and it appeared to be capitulating to the AMZN pressure. The
strategy was heralded as the death knell for 3rd party retailers of NKE product (e.g. FL, Finish Line).
In November 2019, however, it was conrmed that NKE would cease its partnership with AMZN after
just 2 years, suggesting that the company is concerned more about brand presentation than consumer
reach. Interestingly, the company made it clear that this shift in strategy was an AMZN issue, not a
wholesale issue. The WSJ article that rst reported the defection cited a statement from NKE saying
that they “will continue to seek partnerships with other retailers and platforms,” potentially indicating
the challenges to partnering with AMZN from a vendor perspective.
Furthermore, this move illustrated that NKE would rather focus on developing online distribution
through Nike.com or have customer go through partners who do a stronger job of representing the
brand (e.g. Foot Locker). All in, just because AMZN can oer volume, the channel did not appear to ll
a clear “need” in NKE’s distribution strategy. It remains to be seen if other brands will begin to eschew
the lure of AMZN growth in pursuit of brand health and control.

Amazon Survey Work

We recently conducted a survey of 1,000 U.S. Amazon shoppers to gauge how consumer engagement
with Amazon has shifted over the course of the pandemic, and may shift in a post-pandemic retail
world. Amazon has long been siphoning sales from brick-and-mortar retail as the company has
expanded into a mounting number of categories, attracting shoppers with the compelling convenience
of one-stop shopping without leaving home. Not surprisingly, our survey found that consumers
increased their engagement with Amazon in 2020. Prior to the pandemic, 44% of Amazon customers
spent 1-20% of their discretionary spending with Amazon. During the pandemic, the 1-20% cohort
(the smallest non-zero increment available to survey takers) saw the largest changing, shrinking by
12 points. During the pandemic, the higher penetration buckets all increased by 2-4%. Notably, the
portion of shoppers who spent 80-100% of their discretionary dollars at Amazon nearly doubled in
2020.

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Industry Update Equity Research

Exhibit 14 - Consumer's Increased Their Amazon Spend in 2020

45%
Prior to 2020, nearly 45% of Amazon shoppers spent
40% 1-20% of their discretionary dollars on the site.

35% 32% This cohort shrunk to 32%

during the pandemic as
30% 28%
consumer's increased their
online spending.
25%
20%
20%

15%
11%
10%
5.3%
5% 2%

0%
0% 1-20% 20-40% 40-60% 60-80% 80-100%

% of spending done on Amazon PRIOR to 2020

% of spending done on Amazon DURING 2020

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC;

We can use this information to determine what portion of their discretionary dollars the average
shopper spends on Amazon - using a weighted average basis, the average Amazon wallet share
penetration is now 35% compared to 29% before 2020. Notably, this means that average spending on
Amazon has increased nearly 600bps in the last year.
Exhibit 15 - Amazon Overall Wallet Share: Pre-Pandemic vs. Pandemic

36.0% 34.7%
34.0%

32.0%

30.0% 28.8%
28.0%

26.0%

24.0%

22.0%

20.0%
Pre-Pandemic Pandemic
Amazon Wallet Share Amazon Wallet Share

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

The question that is weighing on the retail industry is how much of 2020's online share gains will stick
in a post-pandemic world. With brick-and-mortar stores now open and vaccines increasingly being

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

administered throughout the country, it remains to be seen to what degree consumer behavior is
forever altered. We sought to determine this by asking how consumer's expect to spend on Amazon in
a post-pandemic world. Once the pandemic is in the rear-view, the largest portion of respondents (by
2x) expect that their spending will not change vs. their pandemic spending (46%) - suggesting that a
signicant portion of the acquired market share will prove to be "sticky."
Exhibit 16 - Nearly 50% of Respondents Expect Their Amazon Spend To Remain Unchanged

When the pandemic is over, how do you expect25%

your
spending on Amazon will change? 20%

15%
I will spend LESS on Amazon than I did during
21% 10% than I did
the 2020 pandemic, but MORE
before the 2020 pandemic (21%)
5% on Amazon
I expect to spend even MORE 2%than
I was during the pandemic (11%)
46% 0%
11% 0% 1-20%
I will go back to how I spent before the 2020
pandemic (22%) % of spending done on Amazon PRIOR to 2020
% of spending done on Amazon DURING to 2020
My spending on Amazon won't change vs.
22% during the 2020 pandemic (46%)

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

Next, we sought to understand if the dynamics were similar for apparel/footwear categories. We
asked the same questions as above, but asked survey-takers to apply their responses to their apparel/
footwear spending on Amazon. First, we noticed much fewer respondents spend on apparel/footwear
on Amazon (73% of respondents of our pool of 1,000 Amazon shoppers). We also inquired, simply, if
survey-takers purchase fashion apparel/footwear, and found that an even smaller portion (65%) use
the platform for their fashion needs.
Exhibit 17 - 70% of Amazon Shoppers Purchase Apparel/Footwear, Even Fewer Purchase Fashion

Survey respondents were

required to be Amazon
shoppers

100%
100%
Fashion apparel/shoes
90% are not high-priority for
Amazon shoppers
80% 73%
70% 65%

60%

50%
I shop on Amazon I purchase apparel/shoes on I purchase fashion
Amazon apparel/shoes on Amazon
Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

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Industry Update Equity Research

When asked "what portion of your apparel/footwear spend took place on Amazon before vs. during
2020," the largest cohort was respondents who spent 0% of their total apparel/footwear spend on
Amazon (27%), while an additional 22% spend less than 10% of their footwear/apparel wallets on
Amazon. This points to the fact that Amazon still has a ways to go in being a top apparel/footwear
destination in the eyes of the consumer.
Unsurprisingly, we found a similar dynamic to general Amazon spending in which more consumers
bought higher portions of their apparel/footwear on Amazon in 2020. The higher penetration buckets
(customers who spent 30%+ on apparel/footwear on Amazon) all increased, while the smaller buckets
(0-10%) decreased.
Exhibit 18 - Amazon Apparel/Footwear Shoppers Increased Spend During 2020

30%
27%

25% The 0-30% cohorts shrunk in 2020

22% while consumers who spent 30%+
20% of their apparel/footwear dollars
16% on Amazon increased.
15%
11% 10%
10% 8%
7%

5%

0%
0% 1-10% 10-20% 20-30% 30-40% 40-50% Over 50%

Prior to 2020 During 2020

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

This suggests apparel/footwear wallet share of ~18%, +260bps ahead of pre-pandemic spending.

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 19 - Increase in Apparel/Footwear Amazon Wallet Share

19.0%
18.5% 18.3%
18.0%
17.5%
17.0%
16.5%
16.0% 15.7%
15.5%
15.0%
14.5%
14.0%
Pre-Pandemic Pandemic
Amazon Apparel/Footwear Amazon Apparel/Footwear
Wallet Share Wallet Share

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

When inquiring about how they expect their apparel/footwear spending habits on Amazon to change
post-2020, we saw a mostly similar breakdown to their expected general Amazon spending habits -
the largest cohort (43% for apparel/footwear, 46% for general Amazon spending) expects that their
habits will not change once life goes back to normal. A notable dierence is that 30% of respondents
expect their apparel/footwear spend to return to pre-pandemic behavior than for general Amazon
spending (vs. 22% for general Amazon spending). It is clear from our survey that apparel/footwear may
be slightly less "sticky" online in a post-pandemic retail world than general spending.
Exhibit 20 - Apparel/Footwear Spend Less Likely To Be "Sticky"
50% 46%
43%
More respondents expect their
40% apparel/footwear spend to return to pre-
pandemic behavior than for general
Amazon spending
30%
30%

22%
21%
20% 17%

11% 10%
10%

0%
I will spend LESS on Amazon I expect to spend even MORE I will go back to how I spent My spending on Amazon won't
than I did during the 2020 on Amazon than I was during before the 2020 pandemic change vs. during the 2020
pandemic, but MORE than I did the pandemic pandemic
before the 2020 pandemic

Expected Amazon Spend Expected Clothing/Footwear Amazon Spend

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

Next, we sought to dig into the appeal of various categories on Amazon. Our survey revealed the
three categories U.S. Amazon shoppers were most likely to purchase through Amazon were: 1)

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Industry Update Equity Research

Electronics, 2) Books, and 3) Shoes. We believe Amazon's selection and competitive pricing across all
three categories were the likely drivers for consumer preference of the three categories. Interestingly,
Shoes, which historically have been an in-store purchase, have now migrated online over the last serval
years highlighting consumers increasing comfort with buying sized product online, in our view.
Exhibit 21 - Three Categories Consumers MOST Likely To Buy On Amazon
16% 15%
14%
12% 10%
10% 9% 8% 8% 8% 7%
8% 7% 6% 6%
6% 5%
4% 3% 3% 2%
2% 1%
2%
0%

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

On the ip side, our survey revealed the three categories U.S. Amazon shoppers were least likely
to purchase through Amazon were: 1) Baby clothing, 2) Baby/kids product (toys, diapers, etc, and
3) Autoparts. We were surprised that Baby clothing and Baby product were two of the least likely
categories purchased through Amazon. We suspect many respondents to the survey may not have
children (only 20% of survey respondents were females between the ages of 18-39 and it is unclear
of that subset, how many had children). We also believe quality concerns of Baby clothing and Baby
product ordered through Amazon may be a concern, though that that is based on our speculation.
Exhibit 22 - Three Categories Consumers LEAST Likely To Buy On Amazon
16% 15%
14%
12% 11% 11%
10%
8% 7% 7%
6% 6% 6% 6% 6% 5%
6% 5%
3% 3% 3%
4%
2%
0%

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

We also honed in on what consumers enjoy most about shopping on Amazon. The top 3 reasons were:
1) Convenience over going to stores, 2) Broad selection of product, and 3) Fast delivery. Amazon
continues to enhance the consumer shopping experience through unmatched convenience that is
reected in a broad selection, and delivery speed that outpaces the vast majority of its multi-branded
retail competitors.

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Amazon & The Retail Rainforest: 4Q20 Edition Equity Research

Exhibit 23 - What Consumers Like MOST About Shopping on Amazon

25%
22%
20% 17%
14%
15% 12%
10% 9%
10% 7%
6%
5% 3%

0%

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

On the ip side, the top 3 reasons why people dislike shopping on Amazon were: 1) Paying for shipping
if not a Prime member, 2) Inability to return product to a physical store (though KSS has somewhat
mitigated this issue), and 3) Not carrying the brands the consumer wants. We believe the third reason
is the most important to highlight. Until AMZN becomes a platform that works with companies to
elevate brands, rather than viewing the relationship as transactional, companies who are ercely
protective of their brands (e.g. Nike), will not sell to AMZN.
Exhibit 24 - What Consumers Like LEAST About Shopping on Amazon
18% 16%
15% 15% 14%
15%
11%
12% 10%
9%
9% 7%
6%
3% 1%
0%

Source: Guidepoint (survey conducted March '21) and Wells Fargo Securities, LLC

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Industry Update Equity Research

Required Disclosures
I, Ike Boruchow and Tom Nikic, certify that:
1) All views expressed in this research report accurately reect my personal views about any and all of the subject securities or issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specic recommendations or views expressed by me in this research report.

Additional Information Available Upon Request

Wells Fargo Securities, LLC does not compensate its research analysts based on specic investment banking transactions. Wells Fargo Securities, LLC’s research
analysts receive compensation that is based upon and impacted by the overall protability and revenue of the rm, which includes, but is not limited to investment
banking revenue.

STOCK RATING

1=Overweight: Total return on stock expected to be 10%+ over the next 12 months. BUY

2=Equal Weight: Total return on stock expected to be 0-10% over the next 12 months. HOLD

3=Underweight: Total return on stock expected to lag the Overweight- and Equal Weight-rated stocks within the analyst's coverage universe over the next 12
months. SELL

As of March 16, 2021

55.0% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Overweight.
33.3% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Equal Weight.
11.7% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underweight.
Wells Fargo Securities, LLC has provided investment banking services for 58.9% of its Equity Research Overweight-rated companies.
Wells Fargo Securities, LLC has provided investment banking services for 46.7% of its Equity Research Equal Weight-rated companies.
Wells Fargo Securities, LLC has provided investment banking services for 41.2% of its Equity Research Underweight-rated companies.

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