With the coronavirus crisis re-writing the rules of fashion retail, new opportunities are also emerging for manufacturers to build their own brand and sell directly to consumers, explains Roit Kathiala.
The last few months have accelerated the pace of change within the fashion industry. The coronavirus pandemic triggered unprecedented lockdowns around the world, with fashion – still classified by most as a discretionary spend – among the sectors hit the hardest as job losses and the looming economic crisis stifled consumer spending. Shoppers chose to shift their spending to essentials and, with stores shut and a heightened risk of inter-personal interactions, headed online like never before.
While e-commerce has turned out to be the sector’s saving grace, at the start of the pandemic a large number of retailers nevertheless cancelled billions of dollars worth of goods on order with factories around the world, much to the angst of their suppliers, consumers, worker rights groups and global media. This left millions of vulnerable factory workers with no means to earn a living, no savings or alternative employment to fall back on, and not even government support to help them sustain themselves and their families.
Fashion retailers and brands have long held the disproportionate leverage or the “power” in the relationship with their suppliers, largely due to overcapacity and intense global competition between factories for business. Some brands and retailers use this to enforce discounts, conditions and policies on their suppliers almost unilaterally. The suppliers, in most cases, have no choice but to agree and perhaps factor the additional risk into their pricing strategy for that customer.
This has been the state of affairs for decades, with only a few retailers, brands and suppliers being able to successfully build long-term strategic partnerships. So can something change in the industry? It can and here are the reasons:
Reason #1: Digital
Digitisation has disrupted many industries including fashion, mostly by making the process of connecting consumers to goods and services more efficient – faster and with no intermediaries.
As an example, look at Uber. It replaced the taxi company – the intermediary – and found a better and more convenient way to connect customers directly with the cab driver. It also allowed the driver to monetise his own car, hereto an idle asset, directly with the customer, in his own time and without being bound to limitations imposed by the taxi company. Simply said, it built a direct connection utilising low assets, low capital and improved customer service, experience and transparency.
Through digitisation, Uber connected both the customer and the cab driver, sidestepping the middleman – the taxi company.
Likewise for fashion, e-commerce has given brands the opportunity to sell directly to their customers without the need of department stores or even physical retail stores. This trend has been gathering momentum and has translated into serious trouble for the department store sector, as well as being a boost for brands who can now directly engage with their customers and realise better margins. According to the US Department of Commerce, e-commerce accounted for 38.6% of all fashion sales in the US in 2019 – which was 10 points up from 29.9% in 2017. This year’s numbers are going to be way higher due to the tectonic shift caused by the pandemic.
Reason #2: Localisation of manufacturing
Decades of globalisation have seen supply chains expand into multiple countries and geographies, putting producers at a significant physical distance from consumers and leaving them dependent on instructions from retailers on what to make – and sometimes how to make – products the brands believe their customers will buy. However, working with multiple brands in multiple geographies gives the vendors a good insight into global trends and innovation, and has become a valuable resource of supply market and global trend intelligence.
Most recently, the need for speed, increasing global trade tensions, and disruptions caused by the pandemic have accelerated the shift to localising some parts of the supply chain. This is good from the perspective of rebalancing and mitigating risk, but also gives the ability to react much faster to consumer demand, which is a necessity in today’s fashion business.
Vendors who previously had the knowledge and advantage of seeing market trends from the perspective of multiple retailers and brands, are now themselves in the market close to the customer either through sales and design offices or starting factories.
Reason #3: Value-added vendor services
In the past decade, vendors have increasingly been asked to provide more and more value added services, which could include design input, raw material sourcing, quality management, trend and product input, e-commerce packaging, shipping and credit financing.
With these extended capabilities, they are equipped to move up the value chain, build their own brands, and provide the products that customers need and want. And thanks to e-commerce they don’t need stores or retail intermediaries and can even elevate their offering to customers by adding other services where they have good skills, like repairs, alterations and customisation.
A manufacturer becoming a brand and selling directly to customers is not new. Some of the most successful brands and retail companies owe their origins to manufacturing, or still have deep roots in manufacturing their own products.
Some of the most notable ones are :
Benetton: Probably one of the first major vertically integrated brands from fabric production to stores. As Benetton expanded its stores, it also expanded its vertical model with a mix of owned and controlled exclusive facilities that gave it an immense advantage as it grew from the 70s to the 90s.
Inditex: The story of the growth of Zara and its parent company is well documented, but a lesser known fact is that the world’s largest specialty retailer started as Confecciones Goa, a modest workshop making dresses and quilted dressing gowns. Its skills and expertise in manufacturing have contributed to a large extent in the creation of its unique and speed to market supply chain.
VF Corporation: The $8.4bn revenue company that includes powerful brands like Vans, The North Face and Timberland still operates four manufacturing facilities in the Americas that supply around 6% of its global need.
Luxury brands: Numerous luxury brands from Gucci to Burberry have their own manufacturing factories that have helped them in their journey of growth and innovative product development.
LC Waikiki: This lesser known but fast growing Turkey based retailer started as a manufacturer to other brands, bought a majority stake in one of its customers – LC Waikiki – in 1997 and have grown it to over $3bn in revenue and a fleet of over 1,000 stores spread over 47 countries.
There are many such examples where manufacturing has created a competitive advantage enabling a strong extension into brands and a direct-to-consumer business.
Here’s how a manufacturing background helps:
• Strength in technical skills and raw materials – the know-how to create high quality products efficiently and quickly.
• Vertical integration enables higher margins.
• Elevated expertise in manufacturing and supply chain gives an edge in being agile to respond to customers.
• Market intelligence that comes from working for multiple brands.
These strengths also come with their own set of challenges, which vendors must overcome to successfully compete as direct-to-consumer brands:
• Owned manufacturing can limit the ability to offer a complete assortment to the consumer versus what they can produce themselves. Not to forget: customers buy lifestyle and factories produce categories.
• They must develop an exceptional understanding of consumer tastes and trends as well as their knowledge of product quality and performance.
As the new rules of the next-generation of fashion retail emerge from the ongoing disruption, it is even more important for brands and retailers to stay ahead in the game of understanding and servicing their customers – and to make sure they invest in their supply chain talent and infrastructure so they have the capability and the skills and don’t disproportionately depend on their vendor base to provide key services to their customer.