The Apparel Industry's Digital Transformation - RISK & REWARD
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RISK & R E WA R D The Apparel Industry’s Digital Transformation
Clothing and fashion sales are moving
RISK & REWARD
online and offshore, opening the industry to
great fraud risk. Companies are increasing
their use of machine learning
If you like your commerce exciting, you could do worse and big data
than diving into the retail apparel industry. Apparel
and fashion provide a thrill a minute — and by thrill, we
Overall, compared to 2016, fraud
mean both the exhilarating and the terrifying.
rates in apparel declined in 2017
from nearly 9 percent to to just under
Department stores and clothing chains are closing left 8 percent, according to Signifyd’s
and right. Fashion is fickle. Consumers are empowered Ecommerce Fraud Index. But, the
and less brand-loyal than ever. Sales growth was news isn’t all good.
sluggish in 2016 and a touch better in 2017. And when
it comes to 2018, the word “upheaval” comes to mind. During the hectic holiday season,
which is also the time when most
But apparel has the one thing every industry needs: retailers see their largest sales
potential. It’s just a matter of who is going to seize it. volume, fraud losses increased
substantially in the apparel vertical.
The apparel industry is a nearly $400-billion-a-year Year-over year, fraud losses in apparel
were up 21 percent for the 2017
business in the United States, according to U.S.
holiday period, the index found.
Census Bureau figures, and a $2.4 trillion play globally,
according to the latest figures available from the And fraud still has a significant effect
McKinsey Global Fashion Index. on apparel margins, especially at the
high end, a trend we’ll explore further
Moreover, 2017 sales were much stronger than 2016’s later in this report.
pace, McKinsey says, and 2018 will remain strong with
global apparel sales on a path this year to grow by as A key definition is in order to
much as 4.5 percent. better understand these statistics.
The Ecommerce Fraud Index
This report will dig into what those number mean for the calculates fraud losses by taking
future of the apparel industry, while exploring how the the total number of fraudulent
shifts in the segment bring changes and new threats orders – whether detected and
prevented, or shipped – as a
from fraudsters who prey on online retailers.
percentage of total orders.
In particular, we’ll look at:
• The rapid shift of apparel sales from brick-and-mortar to online stores.
• The blowing up of brands and millennials’ penchant for house brands and non-branded
clothing.
• The commoditization of clothing and consumers’ move to opposite ends of the fashion
spectrum — luxury or discount.
• The dominance of Asia and emerging markets in capturing apparel sales growth.
• The evolving role of online fraud in the apparel industry.
While the apparel industry’s vital signs are strong, the industry isn’t immune
to the same powerful forces affecting all of retail. In the coming year, apparel
sellers are going to be faced with the need to embrace artificial intelligence
and emerging technology in an unprecedented way. It will be the cost of doing
business with consumers who are growing increasingly sophisticated by the day.
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The demand for frictionless
retail
As apparel shopping moves online, consumers are demanding memorable
experiences, including quick and easy checkout. As mobile becomes the digital
shopping tool of choice, the need to fill out long forms with personal information
is a deal-killer for shoppers. Then there is Amazon and its nearly friction-free shopping.
With cart abandonment rates already hovering near 70 percent, retailers don’t want to do anything
to make checking out more of a hassle.
That’s great news for consumers and great news for fraudsters too. Online retailers insist on building
a smooth process for customers. The processes don’t require a lot of identity authentication and
typically include features like guest checkout.
Guest checkout makes it easier for fraudsters to impersonate a legitimate consumer because there is no
need to log in.
Fraudsters also employ more sophisticated techniques, such as using stolen personal information,
to take over consumers’ credit and online accounts.
The rate of account takeover in apparel was up 1.9 times, according to a recent quarter-to-quarter
snapshot based on Signifyd’s data. For purchases over $500 the rate increased nearly five times.
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“Adoption of disruptive technologies like advanced robotics, mobile internet, advanced analytics,
virtual and augmented reality and artificial intelligence is accelerating, with the potential to
disrupt entire industries – including fashion,” says “The State of Fashion 2018,” prepared by
McKinsey and the Business of Fashion, or BoF.
That might sound ominous, but in fact, for some apparel sellers, it is actually an opportunity.
“For those leaning forward and willing to help design the new features of the modern fashion
system, the opportunities at hand to truly connect with fashion consumers across the globe have
never been greater,” the McKinsey and BoF report says.
“Adoption of disruptive
technologies like advanced
robotics, mobile internet,
advanced analytics, virtual and
augmented reality and artificial
intelligence is accelerating, with the
potential to disrupt entire industries
– including fashion.”
Apparel Sales are
Increasingly Moving Online
Beyond the big picture, there are smaller, but significant, trends that are
driving the industry and keeping executives busy searching for and seizing the
right strategy.
First is the fact that more people are shopping online for clothes than ever before. As McKinsey and
BoF pointed out in their first apparel report, produced in late 2016, revenue from online sales of
apparel, footwear and accessories was set to increase from 10 percent of total ecommerce revenue in
2016 to 17 percent in 2017.
There is no reason to expect that the increase is slowing down, they added, while predicting that
online apparel sales will increase 10 percent every year through at least 2020. Whatever hesitancy
consumers might have had around buying clothes online, those worries are clearly a thing of the past.
Consumers have completed the transition to digital —
relying on digital devices during the shopping process is simply a part of buying clothes
and accessories today.
Think about your own life. Modern consumers spend hours on digital devices. Messages beyond a
brand’s control — in the form of user reviews and social media posts — play an ever-increasing role
in consumers’ buying decisions.
Consumers now expect a consistent brand experience no matter the channel they are shopping on.
And they expect their product searches and purchases to run seamlessly — and for support to be
available any time of day or night.
The need for speed and responsiveness extends to order fulfillment and delivery, too. McKinsey
and BoF point to Gucci, for example, which has teamed with Farfetch to get customers in some
cities the shoes they order within 90 minutes of clicking the buy button.
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Exclusivity means higher rates of fraud
Creating high-priced, luxury buzz comes with its own fraud challenges. A pair of rare sneakers can
instantly be resold for many times its sticker price, whether the shoes were purchased by a legitimate
shopper or a fraudster. For instance, those Yeezys? Resellers instantly offered them at $1,500, seven
times their original price.
For the fraudster, the sneakers make a tempting target, given that demand will far outstrip supply.
In fact, you could call one of apparel’s dubious fraud distinctions “the Yeezy effect.” It turns out that
of the eight industries that Signifyd analyzed, apparel had the highest rate of stolen financial fraud
for orders between $100 and $500. Moreover, while the overall rate of online fraud in apparel was
8.13 percent, the rate for orders over $500 was 21.37 percent, according to Signifyd data.
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.Amazon: The tipping point anything from anywhere at any price point,
Amazon is both a cause and an illustration and that is a big change.”
of the shift to online clothes buying. The
800-pound-plus gorilla of retail has partnered For its part, Amazon is just getting started in
with designers to launch its own private-label the clothing business. Investment bankers
clothing lines. Cowen & Co. predicts that Amazon’s clothing
and accessory sales will grow almost 30
By the end of 2017, Amazon, including its percent in 2018, reaching $28 billion.
marketplace sellers, was pulling in 40 cents
of every dollar spent online for shoes and Amazon is not the only giant enthusiastically
clothing, according Euromonitor. Amazon’s moving into its own brands. Walmart this year
cut of sales was nearly twice what it was just launched four new private apparel brands in
three years before. an effort to build its fashion chops and better
compete with Amazon.
Amazon’s apparel sales, including of its own
Lark + Ro, Buttoned Down and Essentials The overall shift is blowing up brands,
labels, is proof positive that fashion brands which have decided to either acquiesce to
have neither the cachet nor draw that they Amazon’s dominance or to double down on
once did — at least among younger shoppers. their own exclusivity and brand loyalists.
Adheer Bahulkar, of consultancy A.T. Kearney, For instance, luxury brand Louis Vuitton won’t
summed up the shift for Bloomberg in a story sell on Amazon. Neither will Rolex. Michael
that posited that the “retail apocalypse” is Kors, Calvin Klein and Kate Spade, on the
being fueled by “no-name clothes.” other hand, have entered deals with Amazon
to sell on the site, according to Reuters.
“Every new generation is becoming less and
less brand-loyal,” Bahulkar says. “Millennials Interestingly, Nike decided to both give in to
don’t care as much about logos. They will buy the power of Amazon and double down on
the power of its own brand.
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Apparel is the most popular online financials fraud of the eight industries covered
in a 2017 fraud study published by PYMNTS.
retail category
com and Signifyd.
As apparel sales move increasingly online, those It stands to reason that apparel would see more
who commit online fraud are naturally following. than its share of the stolen financials increase,
Fraudsters see the industry’s growing reliance on because apparel is one of the most heavily
digital innovation as an opportunity to exploit shopped retail categories. It is the category
new systems. in which consumers are most likely to have
made a purchase in the last year — 77 percent
It’s one thing to walk into a store and steal have made a purchase in the last 12 months,
an item; it’s another to steal large numbers according to a PwC report.
of user IDs and passwords and commit mass
fraud. Companies must be as innovative in their Worldwide, 28 percent of shoppers purchased
methods of combating fraud as they are in their most or all of their clothing and footwear online
sales methods. in the last 12 months. It follows logically that
the category shoppers are most gravitating to
There is work to be done. In fact, the apparel online is the category that will suffer from the
industry experienced the largest rate of stolen highest rates of fraud.
First, in the summer of 2017, the shoe and sportswear juggernaut decided to sell directly on
Amazon in an effort to better compete with Amazon marketplace sellers peddling Nike products.
Then, Nike also headed down another path. Within months of the Amazon announcement, Nike
CEO Mark Parker said the company would focus its marketing efforts on 40 of the 30,000 retail
partners it had traditionally worked with, BoF reported. Those 40 “strategic wholesale partners,”
the publication reported, were channels that were able to build out special Nike stores within
their stores.
The idea was to better control the Nike brand and experience, while supplying those special few
stores with Nike’s marquee products and leaving its commodity products to the non-descript
mass marketers.
Ignoring 29,960 of its 30,000 partners gave Nike the time and energy to focus on selling directly
to consumers through its own stores and websites, the BoF story said.
Nike’s strategy shines a light on the idea of selling
directly to consumers, a move that more and more
brands and manufacturers are embracing.
A BoF story focused on brand strategies
talks about Coach and Michael
Kors pulling out of department
stores. It singled out Canada RISK & REWARD
Goose’s similar move Fraudsters take advantage of transition periods
and said the outerwear
brand had set a goal of The apparel industry has the highest incident of stolen financials fraud
making half its profit compared to all other industries studied by Signifyd, according to Signifyd
by selling directly to data. It’s possible that the ongoing transformation of retail is one cause for
consumers. the fraud assault that apparel is facing.
Why would that be?
As more and more consumers turn to internet sites for their purchases, retailers
such as JCPenney, Bebe and Rue21 are closing brick-and-mortar stores at a
record pace and moving online. Department stores in particular are struggling
with high overhead from bloated real estate costs, which is hampering their
ability to compete with online retailers.
Fraudsters may take advantage of the new systems and services stores offer.
For instance, fraudsters see a dark opportunity in buy-online-pick-up-in-store
programs.
By picking up orders in person, fraudsters needn’t worry about fraud filters
that might flag a change of address submitted to reroute a package to a
fraudster.
In-store systems don’t always talk to ecommerce systems and so a
fraudster could place a high number of orders in a short period of
time and pick them up at different store locations. That way he or
she could avoid suspicion that the high velocity of orders would
otherwise raise.
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The democratization of luxury fashion
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Of course, not all apparel is created equal and the McKinsey/
BoF report underscored a number of trends it first reported Personal information is
in 2016. Consumers are migrating to the extremes, moving readily available online
up to luxury items and down to discount clothes, while
moving away from products at mid-market price points. While apparel retailers are
plagued by all three major fraud
A recent report by Deloitte says over one-fourth of American categories (friendly fraud, account
millennials made no luxury purchases of $500 or more in takeover and stolen financials),
the last 12 months. As fast fashion — trendy, affordable, and stolen financials remains a serious
quickly made apparel from stores such as Zara and Uniqlo concerns for apparel retailers and
— gets more popular, young people are buying fewer high- their customers. It makes sense
end items. given the frequency and scope of
data breaches and the vast trove of
Instead, they’ve turned to high-end accessories to make personally identifiable information
their luxury statements. that is gathered in each.
Consumers are expanding
Retailers have already been reacting to the hollowing out of their digital footprints daily and
the middle of the apparel market. They’re trying new ways stealing financial information
of attracting customers. Consider the “see now, buy now” is a growth industry of its own.
trend. Consider the explosion of massive
criminal hacks, such as the
Rather than present designers’ latest works to an exclusive Equifax breach, which exposed
group of insiders and media at fashion shows and then the personally identifiable
waiting months to sell them to the public, brands are information of more than 147
streaming fashion shows live and offering outfits for sale on million U.S. consumers.
the spot.
Fraudsters are sharpening their
That’s no way to build a sense of exclusivity, of course. And skills and changing their tactics.
It is a recipe for increasing and
so a number of brands are creating limited-release, celebrity-
increasingly sophisticated fraud
backed products. For instance, Adidas sells only a limited attacks. Luckily, fraudsters are not
number of its Yeezys, the sneaker of rapper Kanye West. the only ones sharpening their
game.
The resulting footwear frenzy ensures that each release
sells out in a day.
The athletification of fashion in
Lululemon, Under Armour, and Nike are
general among the brands that brought athleisure to
Consumers are embracing casual, fueled prominence. Other brands have jumped on
in part by a desire to always look like they the bandwagon, including Gap and J. Crew.
are headed to or have just left the gym, Athleisure is growing even faster abroad
whether at work, dinner or church. in countries like China, Japan, and India –
where industry estimates say the category is
Athleisure togs continue to be the strongest growing at a rate of 20 to 25 percent annually.
segment of apparel, a trend that McKinsey
and BoF noted in 2016. And while sales have Some industry analysts predict athleisure is
cooled somewhat, athleisure is a segment just a fad that will fade, just as acid washed
that is still growing — and growing faster jeans did in the 1980s. Others see this as a
than any other clothing segment. Love it trend that has staying power, as more and
or hate it, “athleisure” is here to stay. The more people gain flexibility in their work
clothing category that combines athletic lives and employers become used to seeing
and leisure wear, exploded in 2016 with 8 workers show up in athletic wear. Indeed,
percent growth – more than double any athleisure is expected to reach $83 billion in
other category in apparel. Its torrid run has global sales by 2020.
slowed a bit since, but McKinsey reports that
it is still expected to be the fastest-growing
category in apparel going forward.
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Fraud in athleisure
One thing about athleisure: The duds often are not cheap and
they’re often purchased several items at a time, which has some
implications when it comes to fraud. Signifyd’s 2017 fraud study
with PYMNTS.com shows that overall fraud rates for transactions
under $500 dropped while rates for orders over $500 increased.
For apparel specifically, one type of fraud — account takeover — on
orders over $500 has seen a five-fold increase.
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The U.S. and Europe are losing Naturally, executives in emerging markets
dominance in the apparel field were more sanguine than those in developed
markets, which are losing share. Only 32
Despite the general upward trajectory of percent of the developed market executives
online apparel sales, there is one key point said they expected business conditions to
in McKinsey and BoF’s “The State of Fashion improve or remain the same in 2018.
2018” report that might put a damper on the
celebration for apparel sellers in the United
States. The synergy of online and brick-and-
mortar stores
The authors predict that 2018 will mark the first
year ever that more than half of apparel sales McKinsey expects the apparel segment to see
will originate outside of the United States and modest growth in the coming years, running
Europe. at between 3.5 and 4.5 percent in 2018.
Apparel retailers will have to keep in mind
The trend will continue and accelerate through that that growth will vary widely depending
at least 2025, meaning now would be a good on the market category and geography.
time for apparel retailers in the United States
and Europe to explore expanding into new Established markets won’t have as much head
markets, if they haven’t already. In particular, room for growth, while developing markets
the report says, demand is growing rapidly in in Asia, the Middle East, Latin America and
south and east Asia and in the major cities of Africa will be poised for expansion. Clothing,
the developing world. shoes and accessories priced at the mid-
market will perform sluggishly compared to
Fashion is fickle and apparel retailers will luxury goods and discount goods.
continue to struggle with shrinking margins
due to global competition and consumers’ The apparel segment’s digital transformation
expectation that they shouldn’t have to pay full will continue unabated. As in any
price. Retail executives surveyed by McKinsey transformation, there will be winners and
and the BoF reflect the good-news/bad-news losers. Those who will have the best chance
reality of the apparel business. of winning will be those who revel in the
disruption and embrace innovation and the
technology that has the power to disrupt and
to save an industry.“To augment rule-based decisioning and make risk scoring better
able to detect fast-changing fraud patterns, supervised and
unsupervised machine learning (ML) are gaining ground.”
– Forrester Research Inc., 2017
In a rather uncertain industry, one thing is based on investigator feedback. Making
certain: The growth in apparel sales will sure that the ERFM solution has big data
continue to be online. And as online sales processing and storage capabilities will
grow, online fraudsters will follow. go a long way in ensuring scalability and
(near) real-time risk scoring and decisioning
Progressive companies are already turning even in the face of increased sales volumes,
to new models of fraud prevention, called seasonal peaks, and ingesting more identity
guaranteed fraud protection. The model and contextual data such as GPS geolocation
relies on big data and machine learning and and device fingerprint.”
comes with financial guarantees on approved
orders that later end up being fraudulent.
The arrangement shifts fraud liability from For a deeper dive into the fraud
merchants to fraud protection providers.
statistics for the apparel industry,
Forrester captured the change in its Vendor download Signifyd’s Ecommerce
Landscape: eCommerce And Retail Fraud Fraud Index.
Management Solutions, Q3 2017, Forrester
Research Inc., October 2017:
“To augment rule-based decisioning and make
risk scoring better able to detect fast-changing
fraud patterns, supervised and unsupervised
machine learning (ML) are gaining ground.”
The report later explained: “Because of the high
cost of model maintenance and tuning, legacy,
rule-based-only systems are increasingly
inadequate in today’s fast-changing fraud
landscape. Unsupervised machine learning
solutions are starting to provide relief, as they
may require less training effort and adapt
automatically to changing fraud conditions
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