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Hello Alexa, How do We Fix Fashion?

As apparel retailing suffers through ongoing bankruptcies and store closures while trying to survive under the looming shadow of Amazon and its growing online apparel sales, it’s clear that the fashion industry needs a fix.

The problem, however, is that fashion’s problems can’t be fixed with cachet.

These days fashion is about more than fashion. An industry of the new new thing, in the new new place, worn by the new new face doesn’t work anymore.

Fashion has found itself off the runways and red carpets and onto the business pages with record store closings in 2017, bankruptcies due to excessive debt and retail space—not to mention Amazon’s dominance in online apparel sales. But Amazon is too easy to hold responsible as the cause of industry woes since value, convenience and immediacy are meaningful to shoppers. Cachet may not be what you order, but rather, how you order it.

(Hello, Alexa, what knit tops do you have in Russet Orange?)

In fashion today, the back office is the new black. The focus now is on what’s going on behind the scenes of endless Fashion Weeks in New York City, London, Paris and Milan, and the requisite live streams on social media. The unfashionable side of fashion deserves the spotlight perhaps more than it ever has in the past.

As a former sourcing agent and founder of Sourcing Journal, I see global fashion from the back of the room, which most often means Bangladesh, Pakistan, China or Turkey. These backrooms are where clothing is made, and where I once made my living by delivering goods to retailers in a relentless chase for cheaper, faster and better (if possible) product.

In such competition, the price of cotton, currencies, shipping, customs, letters of credit, and every rivet or component, all mattered. I became an expert to simply survive in the business.

Today, more recognize that fashion is the world’s most global supply chain, its most complex, and just maybe its most inefficient. Fashion matters, which is why undertaking to answer the burning question of how to fix fashion, is of critical importance.

Does Gucci’s singular luxury success story suggest a fix for fashion? Kering, its parent company, recently reported financials for the first quarter of 2018, pointing to revenue up more than 36 percent on a comparable basis to $3.75 billion. With growth of nearly 49 percent year over year, Gucci’s sales hit $2.25 billion in the quarter alone, and last year the brand’s sales reached $7.4 billion.

Those watching the luxury industry over the past two years may wonder how long the brand’s growth and relevancy can last under creative director Alessandro Michele and CEO Marco Bizzarri. The investor community is asking Kering leader Francois-Henri Pinault the very same question: When will its fashion bubble burst?

Frankly, everyone may be suffering from amnesia. This Gucci moment is no different than Louis Vuitton’s boom in the ‘90s, or Burberry’s revival in the aughts. It, too, will pass.

This is a trend-driven pop culture cycle, not a business model anyone can actually recreate. It is no wonder that luxury’s churn of top talent is taking a toll on companies and designers themselves.

Does that mean fashion as pure style is over? Not in the slightest. Fashion just needs a major reboot that has little at all to do with style.

Fashion is still a business and its economics should outweigh what front-row fashion bloggers are posting. The search for an elusive industry fix must now embrace a strategy for business growth that is sustainable regardless of fashion waves.

In the formula for retail success, where is the mention of speed-to-market, on-demand manufacturing, reduction of inventory liability or same day delivery? I rarely hear companies focus on their factory base as a key ingredient to success. Walmart’s efficiencies of store distribution are its competitive advantage of a $500 billion retailer. However, Amazon has since taught Walmart and everyone else that rapid, free and direct customer delivery is an advantage along with price and convenience.

These advantages are meaningful, yet none is about what you wear.

There are two extremes we are seeing in retail right now. The first is the “Wayfair effect.” Countless new ventures spend a premium on marketing, website traffic and customer acquisition, all the while boasting about revenue growth. But without new rounds of funding or going public, these companies can’t survive because their capital is based on future value that never seems to arrive.

Let’s take a closer look at Wayfair. The e-commerce furniture firm appeared to be set for success, having disrupted a market, but hasn’t exactly achieved its end—yet.

A recent article in The Wall Street Journal pointed out, “The company’s shares are up 115% in the last year, valuing it at $8 billion. Since its founding in 2002, Wayfair has mastered the art of selling and delivering furniture online, a logistical challenge, but it hasn’t figured out how to do it profitably. Now new competition, high marketing costs, low customer retention and its need to keep raising cash loom as risks to Wayfair’s future.”

This is an example of a so dubbed “disruptive” company taking market share by focusing on customer acquisition and convenience at all costs. While the top line has attracted institutional and individual investors, this bubble could also meet its bursting point because the economic model depends on future profit that may not arrive.

At another extreme, what about department stores with years of down quarters that finally have a good season? Their strategy is to close down stores and reduce inventory levels to revive sales performance. This offers the optics of a turnaround, but fundamentally, nothing has really changed inside these retailers. Consumers certainly don’t shop these brands differently—it’s simply that they have fewer stores, smaller spaces and less inventory.

Amazon’s investment in “last mile” logistics is its winning formula for online dominance, satisfying its Prime shopper in two days or even two hours. This, too, has been over-dramatized as an industry panacea, and is more realistically a “raise the bar” cost factor for competitors.

Consumers expect instant gratification. In an on-demand world, companies must invest aggressively for quicker delivery and less hassle. On top of complex supply chains, expensive logistics are required to win a fickle customer. Even as the last mile becomes more efficient, we are still left with Wayfair’s conundrum because it is costly. Delivery to the doorstep may still mean returns of most of what’s purchased, thus increasing retail shipping costs to liabilities when all logistics are fully factored.

Like chasing Gucci, maybe trying to be like Amazon and Walmart is a mistake. These companies excel in distribution of goods to stores and delivery direct to consumers. These skills are actually quite different, as Walmart learned when forced to acquire Jet.com and executives with online logistics experience. Each retailer affirms that the last mile matters–both in dealing with getting stock to stores and with consumers ordering online–but what about a “first mile?”

Specifically, the first mile refers to goods earlier –or more upstream—in their manufacturing cycle. My experience in this area has evolved into a mission to illuminate where sourcing begins and economics are important to understand. In other words, do we really accept a digitalized last mile, brought to us by Jeff Bezos, and let stand an analog first mile? That’s at least how John S. Thorbeck, of Chainge Capital, explains it based on collaboration with Prof. Warren H. Hausman of Stanford University.

Thorbeck contrasts Amazon’s last mile with Zara’s advantage in rapid product design, sourcing, order and make. He says, “First Mile is where Zara’s example is instructive and accessible. Zara mobilizes the financial metrics of speed and flexibility, valuing both over or alongside low cost. This is a working capital equation, enabling it to source and sell with lower risk and investment.”

The “First Mile” is a significant source of value. Efficiency is doing more with less cost, productivity is doing more with the same cost, but Zara actually produces superior returns with higher costs. In Zara’s case, that includes owning 11 factories in Northwest Spain, flying goods twice per week to all global stores, and choosing the foremost high street locations. Profitability is unparalleled, capitalizing on high margins without high markdowns, according to Thorbeck.

Which is the way to go? Fortunately, Thorbeck and Hausman have demonstrated in research and case studies that the untapped economics of fashion and the first mile are significant and achievable.

“It is an industry considered 30 percent less productive on average, according to McKinsey, than leading industrial sectors,” Thorbeck says. “The under-leveraged landscape of advantage is the First Mile, the best opportunity for superior consumer and capital performance. First Mile strategies for speed represent process innovation of the first order.”

Convergence of first and last mile strategy is a formula for end-to-end innovation that allows a low profit, low growth industry to fix itself. It’s about aligning speed and flexibility in the first mile with convenience and delivery in the last mile. The business models for fashion’s future are based on convenience and immediacy (Amazon), or fast and fresh fashion (Zara). Each of these approaches brings premium market value by reducing the risk of a risky, volatile business.

Companies are constantly looking to be more like Zara by reducing order quantities and increasing speed to market. These same retailers and brands have trained their customers to expect coupons and discounts. Zara, and other successful retailers like TJ Maxx, have trained their customers to come in weekly by creating demand spurred by scarcity and excitement.

Speed may be the currency to enable retailers to reduce inventory risks and convert product to cash quicker, but it won’t work of the customer can’t adopt new shopping habits. Retailers chasing a “first mile” model may end up with new styles each week, but if it isn’t product consumers are interested in, it may yield little more than inventory overflows. Speed is about more sales at full price rather than more stuff more often, but companies have to invest in getting consumers to care about shopping their product.

How valuable is speed? As Thorbeck and Hausman conclude, “We estimate increases in market cap due to supply flexibility range from 30 percent to nearly 40 percent.”

Cowen & Company, the investment bank, recently reported on how Gen Z and Millennials will reshape apparel and footwear, with this emphasis: “Speed in design, merchandising and supply chain will be key to future margin structure, ROIC and equity valuation.”

To achieve it, the concept of collaboration must be redefined at a more meaningful level. No retailer can solve supply chain complexity alone. It requires new thinking, new leadership, new technology, new ways of costing and new ways of sharing value and risk. The difference is turnaround versus transformation. The former is merchandise for the short term, but the latter is culture and profit for the long term.

For those who think copying Zara, Amazon and Gucci is the way to reinvent retail, good luck. However, the lessons from each are clear: superior fashion performance is possible year after year, as long as the back office doesn’t play second fiddle to what’s happening on the frontlines of fashion.

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