By Brian Laung Aoaeh and Lisa Morales-Hellebo
Authors’ Note: This is the third in a series of six articles about problems and opportunities in global supply chains, with a focus on the fashion industry. In this article we explore established and emerging business models in the fashion retail industry. If you have not read the first two articles in the series you may do so using the following links: The Fashion Supply Chain Is Broken and Where Will Technological Disruption in The Fashion Supply Chain Come From? However, reading those two articles is not a prerequisite for following this discussion.
Our Statement of The Problem
The fashion supply chain is broken and must be refashioned. This is the conclusion we have reached after studying the issue, starting in 2014.
We each independently became interested in supply chains in 2014. We have collaborated with one another in learning about supply chain since June 2016. In August 2017 we teamed up to start The New York Supply Chain Meetup. Building on that work, we have launched The Worldwide Supply Chain Federation with The Bangalore Supply Chain Meetup’s kickoff event on Saturday, November 24.
In September 2018, we teamed up to start building REFASHIOND: a venture firm that will invest in early-stage startups creating innovations that make global supply chains more efficient. We will initially focus on startups at the intersection of fashion and retail. You can learn more about us by visiting REFASHIOND’s website. We also provide more detail about our background in the first article in this series.
Our goal is to foster and participate actively in industry-wide dialogue about the future of the global fashion industry. We hope the result of such dialogue will be markedly increased inter-industry collaboration aimed at making the future reality more prosperous and sustainable than the present or the past. We’re excited about participating in such conversations with startup founders and fashion industry executives. Do not hesitate to email us if you would like to speak with us about our work, and possible collaborations or partnerships in the future.
On Thursday, November 15, 2018 we started the work of building an ecosystem of fashion industry companies, academic institutions, nonprofits, think tanks, government agencies, and emerging companies with an invitation-only executive workshop that preceded The New York Supply Chain Meetup’s one year anniversary celebration. Each member of the small group working on building this coalition is aligned on ensuring proprietary industry access, with repeatable, scalable, and expedited market adoption for the startups building the innovations and new technologies that will increase industry-wide supply chain efficiencies, and profits. You can request more information about that effort here: REFASHIOND Ventures.
We can be reached at:
* Lisa Morales-Hellebo - email@example.com, and
* Brian Laung Aoaeh - firstname.lastname@example.org.
Authors’ Note: Portions of this section are based on Brian’s prior work, dating back to 2011, and published on www.tekedia.com and www.innovationfootprints.com. Any similarities to that work is intentional.
Definition #1: What is a startup? A startup is a temporary organization built to search for the solution to a problem, and, in the process, to find a repeatable, scalable and profitable business model that is designed for extremely fast growth.
The defining feature of a startup is that of experimentation and discovery: In order to have any chance of survival every startup has to be good at performing the experiments that are necessary for the discovery of a successful and self-sustaining business model. For this reason, embracing uncertainty and comfort with failure have to be woven into every strand of a startup’s DNA.
A startup begins to transform into a company once it has successfully navigated the discovery phase of its life cycle. The tell-tale signs that a startup is transitioning into the company-phase of its life cycle are the appearance of the hierarchical and bureaucratic structures that companies need in order to operate smoothly.
Definition #2: What is a business model? A business model is the description of how a startup or a company creates and delivers value for its customers, while capturing value for itself, its investors, and the community to which it belongs.
Definition #3: What are Digital Immigrants? “Digital immigrants” is a term that is used to describe people who were born before the digital era: Generally, 1980 is used as the demarcation point. These are people who have had to become familiar with computers, the internet, software, and other digital products during young adulthood or later in life. Digital immigrants grew up before it became necessary to become adept at using digital technology, and this is evident in their relationship with digital technology.
Definition #4: What are Digital Natives? “Digital natives” is a term that is used to describe people who were born during the digital era: Generally, after 1980. These are people who have lived with computers, the internet, software, and other digital products since birth. They are more comfortable, and adept, with digital technology than with technology that predates the digital era.
Before we progress to talking about specific business models, it is worth noting that the digital immigrant versus digital native dichotomy is not without its detractors: For example, Brian Prentice, a research vice president at Gartner argues that this categorization is based on anecdotes, and generally arises in discussions that are prejudicial in favor of young people without accounting for the role that one’s socioeconomic and sociocultural environment plays in how quickly one can adopt, and become adept at using digital technology no matter the era in which one was born.
Since startups and companies are formed by people, it is not difficult to see how startups, and companies, start to assume the characteristics of digital immigrants or digital natives, depending on the traits that become dominant within the organizational culture of the startup or company in question.
In the next section, we will discuss specific business models. Where such a discussion would not make this article too long, we also discuss how they are executed differently by digital immigrant companies, and digital native companies and startups.
Fashion brands are companies or startups that design, develop, market, and distribute various forms of apparel and accessories under a moniker that is distinctive and unequivocally tied to the company or startup. You’ll recognize digital immigrant fashion brands such as Adidas, Balenciaga, Burberry, Dior, Dolce & Gabbana, Fendi, Givenchy, Gucci, Hanes, H&M, Inditex, Michael Kors, Nike, Prada, Ralph Lauren, Under Armor, Versace. Some digital native brands are Bonobos, Boohoo, Eloquii, Everlane, Gwynnie Bee, LuluLemon, MM.LaFleur, ModCloth, Reformation, Off-White, Outdoor Voices, and Vetements. A key trait of these companies is that they each seek to establish a direct and psychological bond of trust with the consumers who buy their products, so that such customers begin to identify closely with the brand. For this reason marketing is one of the critical activities in which such companies and startups engage. Vertically Integrated digital native brands have created such optimized supply chains that they not only offer quality products, but cost savings directly to their clients. Their efficiencies make them early adopters of personalized and on-demand methods of production.
A holding company is a company that is organized for the primary purpose of making investments in other companies. The holding company itself does not run any operations, but it controls the policies and operations of companies in its portfolio through it’s ownership of voting stock. The key function of a holding company is that of capital allocation. Given the way they are organized, holding companies are less well known by the consuming public. Some digital immigrant holding companies in the fashion industry are; Ascena Retail Group, Fast Retailing, Global Brands Group, Hudson’s Bay, Kering, LVMH, Luxottica, PVH, Richemont, VF Corp, Vipshop Holdings, and Tapestry. Among digital natives, Yoox Net-a-Porter Group stands as one example. However, it is owned by Richemont, which acquired ninety-five percent of its available stock in May 2018.
A multi-merchant retailer is a retail organization established for the purpose of selling a wide range of apparel and accessories on behalf of other companies. Omnichannel retailers make an effort to ensure that end consumers have a consistent and unified experience across the different retail channels that they operate. Multichannel retailers treat each channel as a distinct unit of the business and there is no consistency in the experience for end consumers. Multi-merchant retailers may operate physical stores, ecommerce website, and mobile apps. Digital immigrant multi-merchant retailers include Belk, Lord & Taylor, Macy’s, Nordstrom, Target, The TJX Companies, Saks 5th Avenue, Urban Outfitters, and Walmart. Digital native multi-merchant retailers include Asos, b8ta, Bulletin, Gilt, Moda Operandi, Revolve, RueLaLa, and Story.
A marketplace is an ecommerce website that connects buyers and sellers directly. In this sense a marketplace is the digital-first version of the multi-merchant retailer business model. Marketplaces create efficiency by reducing search costs for buyers and sellers. The most successful marketplaces gather enormous amounts of data that is used to make the platform more useful for both buyers and sellers. As you might imagine, each of the major marketplaces is a digital native. Some of the more well known digital native marketplaces are; Alibaba, Amazon, Asos, Ebay, Farfetch, JD.com, Jet.com, Rakuten, and Zalando. Digital immigrant companies that operate marketplaces include Walmart, Macy’s, Urban Outfitters, and Anthropologie.
The subscription ecommerce model is one in which consumers join a platform, paying a monthly fee and providing information that allows the platform operators to curate products that are delivered to the consumer, at an agreed upon frequency. The most common delivery pattern is monthly. However, to reduce customer churn, some platforms allow consumers to choose to receive a new subscription box less often than once a month, without suffering any penalties. The platform operator gathers data about fashion preferences from individual consumers who become members. Using that data, the platform curates items of clothing that match consumers’ stated preferences. Consumers outsource the chore of choosing what to wear, and enjoy the convenience of having new clothes that match their preferences delivered to them at home. Stitchfix, Trunk Club, and Bungalow Clothing each allow their members to receive a box of new clothes every month. Each member pays only for what the member decides to keep. As you might guess, subscription commerce is implemented primarily by digital natives, and so it represents a small portion of the entire market’s annual revenue However, it is proving popular with certain groups of customers. So, the opportunity to enable subscription commerce for the rest of the fashion retail industry explains why recently, Gwynnie Bee introduced a new product: CaaStle, a turnkey Clothing as a Service platform that is designed to enable digital immigrant fashion retailers to implement the subscription commerce business model.
Reverse Commerce aka Recommerce
The recommerce business model is one in which previously owned products are sold to consumers who are willing to buy something that has been previously used or owned by someone else in exchange for the dramatic savings that accompany such a transaction. There are at least two primary models. In one model, the digital native startup authenticates inventory, and then purchases, photographs, warehouses, and markets that inventory before sale. This is the model adopted by The RealReal.
In the other model, the startup creates, markets, operates, and maintains an ecommerce marketplace that established existing physical consignment stores use as means of reaching a wider audience of consumers. In this way the operators of the consignment stores focus on what they do best - obtaining, authenticating, and curating merchandise, while the marketplace operator does what it knows how to do best - creating a platform that reduces the cost buyers and sellers incur as they search for, and transact with, one another. This is the approach adopted by LePrix.
The sharing economy business model enables collaborative consumption by substituting access to luxury fashion and accessories for the substantially higher cost that accompanies outright ownership. In this way, consumers can access luxury fashion on-demand at a fraction of the cost of ownership. As consumers become more cost-conscious, sharing economy business models in the fashion industry become more attractive because such merchandise is often characterised by high value and low usage. One sharing economy business model involves rental access to luxury fashion. In this model, the startup or company owns the merchandise and rents the merchandise to consumers for a fraction of the merchandise retail value. Armarium, Rent the Runway, and StyleLend operate this business model. Another business model in this category is executed by peer-to-peer platforms, which enable individual end-consumers to connect and transact directly with one another. ThredUp, Tradesy, and Poshmark are examples of peer-to-peer platforms. These platforms face the logistical challenges of ensuring consumers can transact directly with one another in a seamless, smooth, and brand preserving manner. As a result many initially pure peer-to-peer platforms have started adopting features associated with the rental model.
At this point we must note that although these definitions are neat and seem to clearly demarcate the boundaries between these generic business models, things are much more messy in the real world. For example, some multi-merchant retailers may also sell merchandise produced by private-label brands that they control - enabling them to compete directly with the merchants they serve. A holding company may own any number of companies operating any of the business models described above within its portfolio.
Differences Between Digital Immigrants & Digital Natives
It is easy to assume that the differences between digital immigrant and digital native companies is only skin deep. That is a mistake. In this section we briefly touch on three ways in which they differ. This discussion alludes to topics we discussed in the second article in this series, it also borrows from Big Bang Disruption: Strategy in The Age of Devastating Innovation, by Larry Downes and Paul Nunes.
Digital immigrants are often led by people who adhere to the Michael Porter school of strategy which advocates pursuing a strategy that is focused along one of three axes of strategy: Cost Leadership, Differentiation, or Focus. Digital natives use advances in information technologies to enter the market by competing simultaneously on all three axes of strategic focus by introducing products that are cheaper, more highly personalized for individual consumers, and better in the ways that matter most to individual consumers than the comparable offerings from their digital immigrant rivals. If you read our second article in this series you’ll recognize this as a scenario in which digital natives simultaneously introduce a demand-side disruption and a supply-side disruption. This combination is what makes the market shift devastating for digital immigrants.
Digital immigrants will typically target an initial niche, and then gradually expand the target population to which marketing is applied. After a relatively short experiment to establish product-market-fit, and because they operate along all three strategic axes simultaneously, digital natives use social networks and mobile marketing techniques to target their marketing at the entire market, at once. The speed at which digital natives scale creates a self-reinforcing and accelerating cycle that makes it difficult for digital immigrants to keep pace. For example consider Alibaba’s adoption of Singles’ Day as a focus of its marketing efforts leading to reports by the BBC that: Sales hit a record one billion dollars in 85 seconds, were within touching distance of ten billion dollars within an hour, and totaled nearly thirty-one billion dollars after the 24-hour shopping extravaganza wrapped up. In the United States, Amazon has pursued similar strategies with targeted marketing aimed at boosting sales on Black Friday, Cyber Monday, and Amazon Prime Day. The embrace of sourcing and procurement, supply chain management, and supply chain logistics as key to meeting customer expectations is a critical factor contributing to the overwhelming success that companies like Alibaba, Amazon, JD.com, and Rakuten have experienced.
As we outlined in the first article in this series, digital immigrants tend to drive innovation from the top down. Often, by the time the process is complete, consumer tastes have evolved away from the product that the digital immigrant company invested so much time, effort, and financial capital to bring to market. In contrast, digital natives use data-informed strategies to drive innovation from the bottom up, in low-cost experimental cycles with comparatively tight feedback loops that are designed to establish the true extent of demand before large investments are made to produce merchandise. Moreover, digital immigrants are typically not saddled with the sort of debt-service obligations with which their digital immigrant rivals must contend. For a digital native, many failed but inexpensive experiments provide invaluable data to help determine what will ultimately stick with end consumers. For digital immigrants the exact opposite is true, executives avoid internal or external appearances of failure until billions of dollars of unsold inventory makes the painful reality impossible to ignore.
Digital natives are more likely to develop an internal innovation, perfect it over time, and then sell it as a product in its own right to other digital natives, and to digital immigrants. Gwynnie Bee’s CaaStle is an example. Zalando has spoken openly about its desire to become the fashion industry’s operating system.
The preceding discussion is summarized in this diagram.
Wrapping Things Up
What does the future hold for digital immigrant fashion companies? What role does supply chain innovation play in the interaction between incumbent fashion companies, and technology-enabled new entrants. Will technology eat fashion retail, as it has some other industries?
As we pointed out in our second article in this series, uncertainty makes giving a definitive answer to any of the preceding questions difficult. However, we believe there’s one thing that is a near certainty: Collaborative, distributed supply chain networks are the foundation of software-enabled fashion industry business models, and software-enabled business models are the future of every industry.
Evolving consumer preferences and demands make it too difficult for every fashion company to operate a supply chain that is one hundred percent proprietary. Instead, the future belongs to supply chain platforms - some internal, others external, and each supporting the industry’s goals and enabling cooperative-competition amongst digital natives and immigrants.
Next in the series: What Are The Trends Driving Disruption In The Global Fashion Industry Today?
About REFASHIOND Ventures: REFASHIOND Ventures is an early-stage venture capital investment firm that is being built to invest in early-stage startups creating innovations that make global supply chains more efficient, starting with startups at the intersection of fashion and retail.
About REFASHIOND CO:LAB: REFASHIOND CO:LAB is the systems design, research, and strategy consulting arm of REFASHIOND Ventures. REFASHIOND CO:LAB helps organizations create competitive advantage through supply chain innovation.
About The Worldwide Supply Chain Federation: The Worldwide Supply Chain Federation is the collaborative, and mutually supportive coalition of grassroots communities focused on technology and innovation in the global supply chain industry. The New York Supply Chain Meetup is its founding chapter.
 We are paraphrasing Steve Blank and Bob Dorf, and the definition they provide in their book The Startup Owner’s Manual: The Step-by-Step Guide for Building a Great Company. We have modified their definition based on a discussion in which Paul Graham, founder of Y Combinator discusses the startups that Y Combinator supports.
 A business model reflects uncertainty. A business plan reflects relative certainty.
 The terms Digital Immigrant and Digital Native were coined by Marc Prensky in his 2001 article: Digital Natives, Digital Immigrants.
 Boohoo and Lululemon are both publicly traded.
 A subsidiary of Walmart.
 Lisa has been an advisor to LePrix since January 2013. She met Brian in 2016 through an introduction from Elise Whang, CEO of LePrix.
 We categorize companies based on the activity that yields the majority of revenues.
 Digital immigrants tend to be saddled with ongoing, legacy capital expenditure costs that do not prove as efficient as the more recent capital investments made by their digital native rivals.
 Brian discusses efficient scale and cost advantages further in this January 2016 blog post: Revisiting What I Know About Efficient Scale, Cost Advantages, & Early Stage Technology Startups available at https://innovationfootprints.com/revisiting-know-efficient-scale-cost-advantages-early-stage-technology-startups/