Does the plus-size clothing market have the potential to triple?

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In today’s Rad.Daily, we initiate coverage of the Plus-Size Women’s Clothing Sector.

$91m has been invested across nine leading startups (four of which have not disclosed financing) in this sector. The category has attracted interest from some of the leading venture capital firms, including Index (Navabi), Sequoia (Dia & Co), and recently through their September 2017 investment in 11 Honore — an online fashion retailer that sells high-end designer clothing to women who wear sizes 10–20 — Forerunner Ventures, Greycroft Partners, and Upfront Ventures.

Companies in this sector are approaching the opportunity using a variety of models. Some are vertical brands (5 companies) and some offer multi-brand e-commerce (4 companies), while 2 of the vertical brands and 1 of the multi-brands also offer a subscription box option.

Due to business model-driven valuation considerations, we think it is unlikely that any of the startups in this sector becomes a billion dollar company.

That said, we think there are a number of reasons to be bullish on this sector. There is a clear unmet need. And at the intersection of unmet need and reasonably sized TAM should be opportunity. Plus-size women have often been overlooked by large retail chains and the fashion world more broadly. A heightened sense of this market gap, combined with the rise of e-commerce, creates a market opportunity to better serve this customer group. We think the market opportunity is somewhere between ~$4b (SAM) and $27B (TAM) but could increase to the extent new models are far superior to those that existed prior (see “unmet need”).

An unmet need:

As it relates to the unmet need, here are three pain points we’ve identified with the status quo:

1. Limited retail selection: Retailers and department stores have historically underrepresented plus-sized women’s clothing among their selection. For example, only 16% of J.C. Penney and 8.5% of Nordstrom dresses are plus-size. Overall, although 67% of American women wear size 14 or above, plus-size clothing accounts for only 17% of the women’s apparel market. As another point of evidence, according to a Dia&Co survey conducted in January 2017, 72% of customers do not believe fashion designers create designs with the average woman in mind.
2. Frustrating shopping experience:
   In addition to selection in retail locations being unrepresentative relative to the general population, the in-store shopping experience can be frustrating or embarrassing for people who do not fit into available clothes.
3. Inconvenience of in-store: The in-store shopping experience can be an inconvenient one for several reasons. First, traveling to and from department stores can be time-consuming. Second, customers do not have insight into the availability of items at retail locations before actually visiting them, which can lead to coming away from a shopping trip empty-handed. This pain point may be particularly acute for the plus-size female category, which faces more severe selection constraints than other demographics.

Market opportunity is likely understated.

The U.S. women’s plus-sized apparel market was sized at $20b in 2016. We believe this likely understates the magnitude of the opportunity. We sought to size the opportunity through calculating a bottom’s up TAM. In calculating a TAM, we consider women of age who buy clothes themselves and are plus size or larger (67% are size 14 or larger).

There is some debate about what is ‘plus-sized,’ but consensus seems to be between 12 and 16, and thus 14 seems reasonable for the purposes of calculating an addressable market.

Spending patterns may understate the TAM. While women on average spend $75 per month on clothes ($900 per year), lower-income people are more likely to be overweight than higher-income people. This constrain our TAM, as we use annual spending of ~$300 per year. If we used the average spending per year, we’d have an $81b TAM instead of the $27b we calculate. The following table offers some basic sensitivities:

Lower spending may be influenced by the lack of attractive plus-size options. If we assume that with better options the plus-size woman will spend more on average, our TAM would clealry increase.

From a SAM perspective, online penetration of US apparel is only 14%. There are reasons to think it would be higher for plus-size (current options are unsatisfactory and new models are being launched digital-first) and reasons why it could be lower (fit is a real consideration for all but perhaps moreso for a consumer who has been ill-served traditionally).

Potential

Using what we think to be a reasonable multiple range, companies in this sector will need to generate revenue of of close to $300m and likely $400m or so to be valued at a billion dollars. While that’s only 1.5% of our TAM, it’s ~10% of a reasonable online SAM, and it’s also — honestly — just a lot of revenues for a product-based company. And so, given the pain points and business models, we see a likely $100m valuation company within this sector (and some are already there).