Stitch Fix – Fashion’s Most Innovative Retail Company
Stitch Fix, an innovative retail e-commerce company, leverages AI and data science to win in today's retail industry.
Stitch Fix, an e-commerce retailer started in 2011 by HBS grad Katrina Lake, was recently named “World’s Most Innovative Retailer in 2019” by Fast Company. The company, now valued at over $2 billion and with an active user base of 3 million customers, has leveraged their data-driven capabilities to become a digital winner in the apparel space.
A Lagging Retail Industry
What makes Stitch Fix a sure digital winner in this space? It’s important to consider where the apparel industry was before Stitch Fix joined the scene. By 2011 more than a quarter of clothes were sold online, with department stores increasingly on the decline. Customers were valuing convenience and ease over the time-consuming experience of shopping in-stores. But even within e-commerce, customers still had to go through the process of navigating multiple websites, perusing excessive quantities of inventory, trying on clothes at home and returning any purchases that didn’t fit. While improvements had been made over department store shopping, e.g. customers could now try on clothes from the comfort of their homes, the discovery process and time-consuming returns process left a lot to be desired. When we look at the rise of tech companies aimed at increasing consumer convenience (Uber, AirBnB, InstaCart, BlueApron, TurboTax, etc.) we can see how the retail industry was lagging in these types of innovations.
Stitch Fix Process (1)
Leveraging Data
Stitch Fix addresses several of the problems they saw in online shopping. First, they solve the “discovery problem” – that is, customers often found themselves overwhelmed with optionality, confronting endless pages of inventory online. The “analysis paralysis” phenomenon is addressed with personalized offerings, based not just on the customer’s data, but on all Stitch Fix users’ data through an app feature described as “Tinder for clothes” allowing anyone to rate Stitch Fix’s offerings. With this feedback, Stitch Fix has gathered more than a billion ratings that work to train the company’s algorithm to understand a client’s style.
How do you mail customers clothes they’ll love, and that fit perfectly, without the client ever getting measured or viewing the inventory?
Algorithm Solutions
Stitch Fix has found a way to offer personal styling at scale through data innovation. “Algorithms drive Stitch Fix’s every move,” says Fast Company’s Laura Smiley. Algorithms do everything from detailed monitoring of inventory and repurchasing needs, to calculating the most efficient path for a warehouse worker to take, to matching precise measurements of clothing options with and extensive amount of client preferences. The data collected also fuels friendly relationships with their suppliers. Stitch Fix partners with over 1,000 brands, both indie and established, and is able to provide them unprecedented amounts of data on their products. Not only is Stitch Fix offering a relevant channel for brands to sell to clients (as opposed to traditional department stores or unsavory contracts with Amazon), but they are getting specific feedback on how they can improve their offerings that they otherwise wouldn’t have access to.
Embracing Data Science
What allowed Stitch Fix to reach its level of success has been its willingness to think of itself as a tech company. This is why it hired over 100 data scientists, why it focuses so much energy on gathering as much data as possible, why it thinks of itself as an “AI machine combined with human curation” and why it continues to push features that further “gamify” the app and increase stickiness among customers. Customers love the convenience and brands love the demand certainty and customer feedback that come from this data science approach.
Looking Forward
Since Stitch Fix has come to market, we’ve seen a growing number of imitators. Many revolve around the subscription model (DAILYLOOK, Dia & Co, Just Fab, Rent the Runway Unlimited, Box of Style, Fabletics, Trunk Club, etc.) and more and more retailers are embracing technology innovations themselves (Nike, adidas, Everlane, Nordstrom, Bonobos, etc.). Retailers are recognizing the need to own their customer’s data and sales channel themselves – selling through previous e-commerce options like Amazon and Walmart have become less appealing, especially as retailers worry about brand dilution and design IP.
While brand dilution is obviously not a concern for Stitch Fix’s partner retailers today, what Stitch Fix chooses to do with its mountains of customer data may become cause for concern. Stitch Fix recently began its own in-house design and production capabilities. This makes sense as Stitch Fix becomes more attuned to what their customers want, and an in-house brand allows them to iterate and refine inventory more quickly. While the company states it has no plans to become fully vertically integrated, it’s worth considering how the retailers they partner will view and respond to this move.
(1) https://www.fastcompany.com/90298900/stitch-fix-most-innovative-companies-2019
(2) https://risnews.com/stitch-fix-named-worlds-most-innovative-retailer-2019
(3) https://www.businessinsider.com/stitch-fix-personal-styling-overview
(4) https://www.elle.com/fashion/a15895336/katrina-lake-stitch-fix-ceo-interview/
That seems like very valuable user data that may extend even outside clothing! I would be surprised if someone’s sense of fashion didn’t also have some correlations with house decoration or other beauty-related areas.
I’m very worried that a company like Amazon, which is also very much a tech company, would be able to move into this space and dominate it. It seems like Amazon is likely to have more volume of users and be able to gather insights from other areas as well to apply to this area.
My guess is that since Amazon is not focused on clothing (their first attempt at fashion failed) Stitch Fix is likely to be around for a while. But I’d be concerned if Amazon turned its gaze once again towards this market.
It’s such a great concept, but I have a few concerns. Firstly, I would imagine competition is increasingly tough, especially from clothes rental services such as Rent-the-Runway as you mentioned. The trend towards more sustainable fashion is not in its favor. Secondly, I would be curious to see how the financials play out. It seems like customers get to determine their ‘budget’, and the stylists have to find a variety of clothes that fit that, which doesn’t seem to leave much room for upselling. I also wonder what the financial model looks like between Stitch Fix and the brands. Presumably Stitch Fix doesn’t carry any of the inventory, and serves just as a platform that can provide valuable customer data. It’ll be interesting to think about how this will evolve as they develop more in-house design and manufacturing. Lastly, to the point about in-house design, this of course could be seen as a conflict of interest from the brands. Perhaps one way they could resolve is if they work together with their partner brands to develop ‘special edition’ collections just for Stitch Fix, rather than make a private label.
Great article! I think stitch fix has a strong value proposition. However, with the rise of Instagram as a shopping platform, where you have access to large suite of fashion designers and can identify designers that appeals to one’s taste. I wonder if the fashion industry is becoming too saturated and becoming increasing difficult to differentiate oneself. Can stitch fix really offer personalized style to everyone? Do niche companies like fashion nova, runaway label, or real real have a winning strategy?
I definitely agree that it is the most innovative retail company, but I wonder if their business model is strong enough to win in such a tough marketplace.
Specifically, I worry that Stitch Fix will struggle to replace customers over time as I suspect the company deals with relatively high customer turnover. Birchbox recently added tiered pricing to incentivize longer term commitments from customers (https://www.adweek.com/retail/birchbox-is-laying-off-25-of-its-global-workforce/), which could be an interesting model for StitchFix to test.
I agree that it will be interesting to see how they end up using their data. Given the current situation of the traditional brick and mortar retailers, I can envision an interesting partnership that could help them emerge stronger and more in-tune with the current customers needs and desires and give Stitch Fix an additional, stable revenue stream.
It’s interesting to read about Stitch Fix in the context of when it began and compare it to the state of the retail / shopping industry today. In thinking about where it began, I agree with you that it absolutely changed the way that people “consume” fashion and shop and that it led to many of the imitators who are now encroaching on Stitch Fix’s space today. It was also able to wake up an industry that wasn’t really paying attention to digital and sparked brands to be aware that they should think about owning their own customer relationships in a more personalized way.
Another point that your post highlights is the need for the tech to be integrated throughout the company. By founding Stitch Fix and labeling it as a tech company, the employees are positioned to think about how they can best use the data they have to make decisions and create value. In the more traditional retail companies, like Nike and Nordstrom, they have struggled in integrating digital across all aspects of the company and it begs the question of the best way to integrate if not creating a new startup. Can companies like Nike really get others (internal and external) to view them as a “tech company”?
Another trend that I’m seeing across some of these articles, and one that I believe exists here, is that companies tend to look at “tech” as their salvation, their ability to disrupt a market (in this case) or get them out of a pickle (in other cases). While the tech for Stitch Fix is absolutely crucial to their business model, I wonder if Stitch Fix got so focused on developing their tech and AI that they forgot about the rest of the business model. In some ways, tech can be a low barrier to entry and others can build the capabilities that were once a company’s competitive advantage. I wonder if Stitch Fix could have created high barriers for entry in other aspects of its business model – like its customer base. For example, what if Stitch Fix had perhaps added a social element to the platform, developed closet sharing capabilities, clothing recycle, to keep their customers more sticky. I think it seems that while digital technology can transform a company and even an industry, it’s only a short while before other aspects of the business must also continue to innovate in order to stay competitive and relevant.
Great analysis of Stitch Fix Cherish! I appreciated the context to understand the customer pains in regards to retail before Stitch Fix existed. As other clothing brands become more sophisticated in utilizing personal data, I wonder how defensible is Stitch Fix model compared other competitors or even potential new entrants from larger players who also have power brands?