Is This Amazon’s Newest ENEMY?

Old foe eBay (NASDAQ:EBAY) may be among Amazon.com’s (NASDAQ:AMZN) biggest rivals at the moment, but the top retailer is facing increased competition from another front: clothing start-ups that make items to order and cut down on middlemen or the need of big warehouses. Venture firms have stepped up investment in niche websites that ship straight to consumers and can thus charge lower prices and land higher margins, according to Bloomberg.

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According to Forrester Research, the U.S. e-commerce market will reach $327 billion in 2016, up from $202 billion last year. Venture firms such as New Enterprise Associates, Accel Partners, Lightspeed Venture Partners, and Battery Ventures helped online retail funding more than double last year to $328.7 million. But most of the investment is going to custom clothing startups such as J. HilburnAmerican Giant, and Bonobos.

Retailers are typically forced to mark the price of a garment up three times to account for its journey through the supply chain, according to J. Hilburn chief executive Hil Davis. By making items to order, companies like his can eliminate costs associated with running warehouses and stores and discounting obsolete merchandise. J. Hilburn has an average gross margin of 54 percent, compared to Amazon’s 2011 gross margin of 22 percent and Macy’s (NYSE:M) 40 percent.

“J. Hilburn will sell shirts that are made out of the same fabric mill in Italy that a Zegna would sell at Neiman Marcus for $300,” Battery Ventures’ Brian O’Malley told Bloomberg. O’Malley’s firm is an investor in the startup, which has raised a total of $12 million. “They can sell that same shirt totally custom-made for the customer for less, and do that still with healthy margins because there are a lot less middlemen along the way who need to get paid.”

Even traditional department stores are beginning to realize the difference. Earlier this year, Nordstrom (NYSE:JWN) led a $16.4 million investment in Bonobos, an online menswear company that began in 2007 as a research project by Stanford Graduate School of Business students Brian Spaly and Andy Dunn.

There is still some way to go as while Amazon and Macy’s have a broad appeal, the success of companies like J. Hilburn depends on a small group of devoted customers. But still, small clothiers draw venture backing “because consumers are excited about shopping and finding things in new ways,” Josh Goldman, a partner at Norwest Venture Partners and an investor in the website ModCloth told Bloomberg. “It used to be about search — that was Amazon,” he said. “Now it’s about curation.”

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