Amid all the calls for fashion’s sustainability, one message should emerge as the forerunner where others may fail to resonate: sustainability and profitability are the same.
That is to say, both create value, and that value will be the only savior for fashion’s outmoded model, made worse by a pandemic-induced slump.
“The financial magnitude of upside benefit in fashion is that we can be sustainable, profitable and at a lower cost,” John Thorbeck, chairman of Chainge Capital said speaking at Sourcing Journal’s “Fashion’s Business Model for Sustainability” event last week. “The benefit of this financial opportunity has to be shared end-to-end in all tiers of the supply chain—material, factory, brand and retailer.”
Sound like a pipe dream?
It isn’t if fashion can get out of its own way, and its old models, says Thorbeck, who considers this the industry’s biggest opportunity “by far.”
Nodding to Harvard John and Natty McArthur professor Rebecca Henderson’s notion of “architectural innovation,” or fitting pieces of the process puzzle together in new ways, he said that’s what fashion is facing for its recovery: a need to entirely reimagine the supply chain, orienting its focus further upstream, where the capital for this new, more sustainable and more profitable version of this industry in peril will come from.
It’s a new model for value that reduces risk and shares reward instead of reducing prices and sharing risk.
“The source of this value is upstream, closer to factories, closer to materials. And it’s the upstream levers in the analog part of our business that ties directly to downstream profitability,” said Thorbeck, a proponent of postponement as a key to unlocking capital.
If fashion can stage capacities and hedge materials to reduce inventory risk into and through the season, he said, that would postpone the risk of finished goods so forecasts improve with time. It would mean optimizing total profit over solely ex-factory costs, so the industry can reduce the markdowns it has come to rely too heavily on, as well as minimize lost sales and lost working capital. That means more money for things like investing in sustainability and resilience.
“Most importantly, it means sharing risk, sharing value and sharing upside with suppliers, rather than a total focus on lowest cost,” Thorbeck said. “The hard work is to change culture and that means focusing on supply flexibility more than lowest cost. The required change is to be collaborative, not adversarial; to be relational, not transactional; and to create and share value, not extract it.”
If the economics of sustainability aren’t enough to drive its relevance home, maybe social capital—or the risk of losing it—might do it.
In recent days, fast-fashion purveyor Boohoo has landed itself in the crosshairs of a social impact crisis that has already cost it more than just some bad press.
Since allegations of underpaying workers and putting them at risk after COVID-19 cases went unaddressed in Britain’s garment-producing district of Leicester where Boohoo sources thousands of styles, the company has lost more than one-third of its value. In the past five days, Boohoo’s stock went from 308 pounds ($387) a share to a current 212.70 pounds ($267) late Wednesday afternoon. That’s a more than 44 percent plunge in less than a week.
While sell-side analysts are seeing the share price weakness as an opportunity, Morgan Stanley analysts aren’t buying it.
In a research note last week, Morgan Stanley said, “Unlike most of our peers we do not see this as a buying opportunity…we think this could become a case study in taking ESG issues seriously.”
“ESG criteria are becoming increasingly important in many investors’ decision making processes. There were already a number of concerns about the group’s corporate governance (last month, for example, advisory group ISS advised voting against Boohoo’s management remuneration policy) and there is rising investor awareness of the environmental impact of the entire fast fashion industry,” the analysts continued. “Boohoo therefore would now seem to have difficult questions to answer on ‘E,’ ‘S’ and ‘G’ factors.”
Beyond its stock price, Boohoo is bleeding social capital, and the incidents surrounding the brand are evidence of fashion’s need for a rethink.
“Social capital is built on the values you communicate and practice,” Thorbeck said. “Boohoo’s disconnect of purpose and profit is costing them billions in market value. Purpose + profit has to be embedded in values the consumer respects and expects.”
The roadmap out of predicaments like this and forward into more purpose-driven businesses can be found in both humanizing the approach to the people that make up the upstream supply chain, and the kind of process innovation Thorbeck propounds in the “Zara Gap” financial model he co-authored with Stanford University professor emeritus Warren Hausman. That model links speed with market value by embracing lead time optimization. It quantifies the impact of postponement on market capitalization. It understands that the difference between first mile and last mile economics is “significant,” according to Thorbeck, which is something a company like Amazon knows all too well.
Managing lead times and orchestrating capacities, materials, production and transportation for higher margin but at lower risk, using a “new level of aggregate analytics that quantifies speed and flexibility” will help companies manage shared risk and create shared value, he said.
“We can increase market capitalizations and earnings in companies of nearly 30 to 40 percent. So, the magnitude of benefit that we’re talking about is not incremental, it’s really transformational and generates the capital that we need for change going forward,” Thorbeck said. “Process innovation is really profit advantage.”