Mail-order startup draws an investor

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Posted: Friday, October 18, 2013 12:00 am

Kacia Hosmer, a 28-year-old mom in Pittsburgh, hates shopping in crowded malls. So when it comes to buying clothes, she uses Stitch Fix Inc., an online mail-order service that lets her receive curated packages based on style preferences.

Venture-capital firm Benchmark is betting the country is filled with people like Hosmer. The investor, which made its name backing eBay Inc. in the 1990s, led a $12 million investment in Stitch Fix on Thursday to help the San Francisco-based company staff up and meet growing demand.

Stitch Fix is elbowing its way into a market known as subscription commerce, which has proved challenging for many predecessors as copycats have pushed down prices. That led womens’ e-retailer Inc. to sell itself to rival JustFab Inc. and forced BeachMint Inc. into a management overhaul. And then there’s the perpetual threat of Inc.

Stitch Fix, founded in 2011, is taking an algorithmic approach to shopping, seeking to learn so much about its users that it can predict the fit and style of clothing a person will like. Customers get a package of items, pay for what they keep and are asked to send the rest back within three days in a bag with prepaid postage. Hosmer has been spending around $100 a month.

“I don’t have to go to a store, bring it home to try it all on and potentially have to bring it back,” said Hosmer, who works part time as a blogger. “And I don’t have to do it with a 2-year-old in tow.”

The company asks users questions elaborating on body shape and style — preppy or classic, for example — and then sends a box of five pieces of clothing curated specifically to those tastes. Customers can opt to have boxes sent monthly or can just choose to get shipments when they need to refresh their wardrobe.

While Stitch Fix is going after women, Chicago-based Trunk Club Inc. is providing a similar service for men. The startup offers products from more than 50 high-end brands, and consumers spend on average $500 per trunk, said CEO Brian Spaly. Trunk Club has 100 full-time stylists communicating directly with clients.

Both companies are still early in their development. Trunk Club, founded in 2009, is forecasting revenue this year of $40 million to $50 million, up from $10 million last year, Spaly said in July. Stitch Fix said sales in 2012 were in the single-digit millions and expects tenfold growth this year. The company said the fresh capital is being used to serve more customers and to bolster its fulfillment operation.

Stitch Fix, Trunk Club and other e-commerce startups are strapped with high shipping costs, another challenge in taking on Amazon, which offers tiered pricing, including free shipping on anything over $25.

To mitigate postage costs, Stitch Fix charges $20 for customers who choose not to buy anything. The company is aiming for users to keep two items per package at $65 each this year, said Katrina Lake, Stitch Fix’s CEO.

Another way Stitch Fix keeps costs down is by having users send an e-mail telling the company what they’re sending back, so the system knows which items it can plan to redirect to other customers.

“It protects us against markdown risk and having to hold too much inventory,” Lake said.

Trunk Club’s Spaly says the subscription-commerce model can work if the process is habitual and enjoyable. By improving every shipment based on what a customer likes and doesn’t like from previous packages, Spaly is letting data drive the business.

“That’s really different than having a fickle customer base that can just as easily turn off the switch,” he said.

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