Commerce is defined by where and how the merchant gets paid.
Maybe, call it direct-to-closet commerce.
Users fill out a detailed style profile and San Francisco-based Stitch Fix, using a combination of artificial intelligence and human stylists, sends five items to shoppers, who pick what they want and send back the rest. Shipping is free both ways and there’s a $20 styling fee that goes toward the price of any items bought.
There are other merchants working on similar models, but results have been uneven. (Nordstrom Inc. bought Trunk Club for $357 million in 2014, but the business has not lived up to expectations and was hit with a $197 million writedown last year).
Meanwhile, Stitch Fix seems to be picking up steam. It produced revenues of $730 million in 2016 and marked its third year of profitability.
The company is the buzziest of Silicon Valley’s fashion plays and is attracting the attention of investors and brands for its top and bottom lines and its ability to meet customers’ individual needs.
In many ways, it’s the business model retail has always wanted. Stitch Fix knows every one of its users inside and out and is learning more about them as individuals with each order. Customers essentially start out in the conversion-ready fitting room (it’s just in their own homes). And inventory can be bought and presented to select customers in a very targeted fashion.
There are, of course, the unspecified costs of shipping and customer acquisition and technology development. The company has 5,700 employees, including 3,400 stylists and 75 data scientists.
At least for now, though, it’s all balancing out, tilting in Stitch Fix’s favor.
Here, Lake, who leads Stitch Fix as chief executive officer, tells WWD how she and her team are doing it.
WWD: You set out to disrupt retail. Have you done that now or has retail disrupted itself?
Katrina Lake: It’s a really interesting time in world history. The rate that people are willing to try new things and try new technology is just mind-blowing. It is an opportunity to reshape any number of businesses to better fit the way the consumer is living today.
What you really want [in a retail experience], is you just want jeans that fit. It’s not that people want to spend a day at the mall, but what they want are jeans that fit their body so they can do all the things in their life and feel confident.
It’s been tough for brick-and-mortar to be able to evolve quickly enough because of the rapid rate that the consumers are changing the way they do things.
WWD: We’re at a moment where a lot of retailers and a lot of e-commerce companies are struggling. Why is the Stitch Fix model different?
K.L.: The consumer-centricity is what’s really different about it. Everything we do is in service of the customer. What I love about our business model is, the better we are at personalization, the better our business is, everything is just aligned in this great way.
There’s no way that the future of buying things is that you’re going to go into the mall and you’re going to go into a bunch of different stores and have people help you and get you what you want. Or there’s no way that you’re going to have 30 browser buttons open. I just don’t think either one of those can possibly be the future.
The future is: The vast majority of what we buy is going to be based on a recommendation. That’s kind of coming back to square one if you think of…the department stores of the Fifties, you learned things from people you trusted, it’s kind of coming full circle.
WWD: What’s the future of personalization? Will we all be wearing tailor-made (or machine-made, tailored-to-fit) fashions?
K.L.: Right now we don’t do tailored to fit, but we take points of measurement. On a men’s woven shirt we’ll take 30 points of measurement. While we’re not carving out a specific product just for you, we’ll deeply understand the product to make sure we get the right one. I could imagine a world where custom fit could be something we do. But the reality is there’s tons of product out there.
WWD: Do you own the inventory? How much of the Stitch Fix model is about inventory efficiency?
K.L.: In retail, you live and die by inventory. It’s the most important liability that you have at any point of time. We talk about matching the customer to items, but the broader thing is that we know enough about our customer base in the aggregate that we can match inventory so that we turn inventory pretty efficiently and we can minimize risk. Of course, we’re still going to have styles that work and styles that don’t. This is still fashion.
If you had a store and could recognize who’s going to come into your store and what their size is going to be and also their style, that understanding helps so much.
WWD: Since you choose what products customers receive in their fix, does that make brands less important?
K.L.: The vast majority of what we sell is branded product. We actually see ourselves as a healthy part of the ecosystem for brands. With department stores struggling, we are sometimes the only full-price channel that’s growing for these brands. Brands have really struggled. Some of our customers love the brands that they’re getting and they still have that connection to the brand and they actually see us as a matchmaker for us to give them brands and introduce them to brands.
WWD: How do you manage returns, which are a big problem for e-commerce companies?
K.L.: We don’t even think about them as returns, we think about the fitting room experience. Part of our model is we want you to try on [the five looks sent in a fix]. We don’t expect that all five are going to work every time.
We really built our own operations, we built our own software, we optimize around [returns]. So we don’t make it hard to return things; you can just drop them in the USPS box. It’s part of our business model and we’re profitable despite it.
WWD: Growing is the name of the game. How do you keep growing? Do you need stores of some sort?
K.L.: We don’t have plans for stores. With stores, there has to be a real reason for being. It can be a brand experience. It can be customer service — with an Apple store it is all about customer service.
The growth [at Stitch Fix] has been taking this backbone of personalization and applying it to a new customer. Men’s, in six months, grew to be as large as women’s was in three years. If you think about men’s, it’s a different product, it’s a different customer. And, yeah, we’ve learned a lot doing women’s for six years, but how much of that translates? It’s been really fun and exciting to see that a lot of those learnings translate and that we can become good at doing new businesses.
WWD: Do you have investors who are going to be looking to get their money back anytime soon?
K.L.: We’ve been profitable for a while so in a lot of respects we are able to control our destiny. We don’t really need capital, so this is not something we’re ever going to be forced to do, to raise a round or add more capital. But that being said, we’re really here for the long term and want to build a healthy business that’s going to be successful for many decades to come, so we’re planning for continued growth.
WWD: Do you plan to take Stitch Fix public?
K.L.: I can’t comment on any future financing.
WWD: Fashion’s been trying to figure out the right mix of art and science for years. Do you think you have it right now or are you still finding the balance?
K.L.: I think we are further along than anybody that I’ve seen. But at the same time, I think it’s exciting that we’re still at the tip of the iceberg. We use data science to help our stylists do their job right. It’s the two things working together.
It turns out that a human working with a computer is going to be better than the world’s best human or the world’s best machine. The two working together are so much more powerful.
WWD: Are you ceo of a tech company or a fashion company? Does it even matter?
K.L.: It’s certainly both. The whole idea of a tech company I think at some point is going to go away. I strongly believe that every single company is going to have to be a tech company if they want to survive. We are a fashion company, but what we are truly exceptional at is using technology and data science.
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