Can Digital Tools Help SME Fashion Brands Adopt More Sustainable Demand-driven Business Models?
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Around 30% of new clothes and returned items remain unsold. This is a huge environmental and business challenge given that around 100 and 150 billion items are made annually. Making items that go unsold is wasteful and damaging to the environment. Most fashion brands end up with unsold inventory: since once internal 70%-80% discounts have been done they cannot just give items away.
The choice then is to either try to pass on items to off-price outlets or destroy them. Off-price solutions are often not an option for small brands, since large volumes are required to make the effort worth the while. And for many luxury brands, the choice has been to burn or bury overstock rather than have the brand damaged through their items appearing in discount retailers.
Global fast fashion brands have still made huge profits from producing low-cost clothes at a vast scale, offering wide varieties, and then writing off large quantities of unsold inventory. This unsustainable business model became possible through the outsourcing of production to low-cost countries and disregarding externality impacts (e.g. environmental degradation).
The situation has been changing. There is a trend amongst global fast fashion brands towards just-in-time or quick response (QR) production. The fast fashion brand Zara started pioneering more responsive and lean production approaches in the late 1990s: Customer desires were stimulated through the rapid translation of fashion show looks. Then, to reduce delivery times, Zara near-shored production. Sales data then helps guide small batch cycles, i.e. if something is selling the company makes more; if not it stops making the product. This approach has been taken to the next level by the Chinese ultra-fast fashion brand Shein, which has added predictive social media analytics and in-house production software to guide suppliers in making batch sizes of around 100 items — exceptionally small for a global brand.
Despite such impressive advances in reducing inventory risk, fast fashion is still innately unsustainable. It encourages overconsumption, low-quality materials, and consumable clothes. While there will always be people primarily driven by price, there is growing awareness of the damaging impact of the fashion industry and an increasing interest in more sustainable brands.
How can SME brands adopt demand-driven small batch cycles and/or pre-orders?
Traditionally markup prices account for anticipated discounting and excess stock. The cost savings from removing inventory risk could be used by SME brands to be more price competitive, or the better margins could increase profitability rather than focusing on a relentless drive to sell more items. Made-to-order customization can also increase value. People can be willing to pay 20% more for personalized items (Stephens 2017).
The common practice of trying to deal with excess stock via discounting is damaging on a number of levels: brand perception, price competitiveness, and sustainability credentials. To help avoid inventory risk and excess stock, many brands have been experimenting with pre-orders, i.e. items go into production only if a minimum amount of orders is reached. McKinsey, in its 2019 State of Fashion report (Imran et al 2019), identified pre-orders as one of the main trends to watch. There are many challenges, however, preventing making pre-orders a mainstream activity. Orders need to be collected, delivery time expectations need to be met, and customer buying habits are deeply ingrained.
Creating pre-order incentives
Pre-orders and mass made-to-order are already proving to work when there are sufficient customer incentives. Pre-orders and trunk sales have become a regular practice on upmarket/luxury e-commerce platforms (e.g. Moda Operandi) and within luxury brands’ own websites. Digital design tools and high-tech production facilities (e.g. fabric laser cutting and fly knitting) are enabling niche brands to offer personalized customization; including both design and sizing.
Demand-driven tools in ethical hands can enable brands to flourish without pursuing mass production. For example, the Danish high-tech fashion startup Son of a Taylor provides made-to-order customized T-shirts. This completely avoids unwanted excess stock.
Customization in itself also has the potential to contribute to sustainability concerns, since the better fit and personalized elements increase ownership value and therefore usage longevity. Mass customization tools currently available are good for simple items or highly-complex additions (e.g. embroidery or cutout complexity). While most complex items still require substantial human involvement, certain kinds of whole garments can be completed using computerized fly knitting.
Computer-controlled fly knitting is a method of knitting that uses a machine to knit fabric in a single piece, rather than knitting separate pieces and then sewing them together. Fly knitting is often used to create lightweight, stretchy fabrics that are used in athletic wear and other clothing items. Fly knitting became popular for making sports shoes. Its flexibility, speed and efficiency make it suitable for producing small quantities of unique designs and styles, which is ideal for limited production runs.
In recent years, facilitated by digital design and automated production techniques, we have seen the increasing use of limited-edition drops (particularly with trainers). Fashion drops are when items are “dropped” into sale independently of traditional seasonally-driven inventory changes. This trend shows the growing potential of mass customization and made-to-order production becoming a mainstream phenomenon.
There are both technical and sociological challenges to overcome to make pre-orders a regular way of purchasing items. In particular, the delivery windows need to meet customer expectations. Investigations I have done via my Pricetap startup customer discovery research, indicate that two months is a rule-of-thumb maximum delivery period before customer frustration starts to become an issue. The pre-order process must also include the time used to collect the orders.
Traditionally shoppers are used to being able to buy an item from a shop immediately. And delivery times for e-commerce orders have also been getting shorter and shorter. In many parts of the world, next- or same-day delivery has become commonplace. So expecting shoppers to be willing to wait weeks, or even a couple of months requires that the added value of pre-ordering or made-to-order is readily apparent. Luxury brands have been using exclusivity as a key driver. Niche brands have been using personalization. Some dedicated pre-order brands (e.g. Asphalte) have been investing in media content (e.g. high-production value videos) to highlight the added construction and material value that pre-ordering enables for each extensively researched item. The sustainability benefits of reducing excess stock are also highlighted (e.g. Anna Ruohonen).
In addition to highlighting pre-order/made-to-order benefits, faster delivery times still make it easier to encourage people to make advance orders. Delivery timeframes can potentially be shortened by making use of customer online engagement: for example, by using wish-listing information to collect initial interest in items before ordering the necessary upfront materials. Without the raw materials already purchased, many traditional small brands would not be able to collect orders and deliver even within a two-month timeframe.
The use of digital prototyping is growing and this introduces the potential to also collect purchase intent interest on virtual items before deciding to put them into production. The purchase intent data can be collected both passively and via direct shared intentions to improve demand prediction; for example, analyzing social media engagements (e.g. likes, comments, etc.) and other direct customer interactions (e.g. in-stock requests).
Market pressures during the COVID-19 pandemic have opened up three specific opportunities that could help enable SME fashion brands to also become more demand-driven. The first was the accelerated adoption of global e-commerce platforms with large solution developer communities (e.g. Shopify). The second was market pressures leading to more leverage for brands to negotiate smaller production runs. And the third is the growing use of digital design tools that enable realistic virtual prototyping, i.e. digital prototypes can be used to gather interest and purchase intent data without even having to make physical sample items.
Sustainably-leaning SME brands can learn from the current and emerging demand-driven practices to reduce their inventory risk, provide more personal value, and thereby be more competitive. There are sociological issues that could help or hinder the adoption of pre-order purchasing, such as the willingness to wait for delivery, wanting to experience items physically, and other factors.
A demand-driven approach alone is insufficient to make a business sustainable, as it depends on the company’s values, the values of its suppliers, the way it uses resources, and its impact on the environment. While fast fashion brands have been developing demand-driven approaches, they still have a large negative impact on the environment due to their approach to hyping up overconsumption and making consumable clothes.
Why so much unsold inventory is destroyed
Unsold inventory challenges affect all sectors of the fashion industry. Many brands have been destroying clothes that can no longer effectively be discounted, while luxury brands have been destroying goods to protect the perceived brand value from being diminished by discounting (or appearing in discount marketplaces). There are also tax reduction incentives in some territories to destroy (often by slashing) unsold inventory. Within the last decade, there have been notorious reports of well-known brands like Burberry, Louis Vuitton, Coach, Michael Kors, Juicy Couture, Cartier, and Montblanc destroying hundreds of millions of US dollars of inventory.
The industry has generally acted to reduce the destruction, e.g. Burberry has promised to cease the practice. But the core problem of overproduction has not gone away, e.g. H&M admitted to sitting on $US4 billion of unsold clothes.
An additional challenge with fast fashion brands is that, in creating the ability to meet rapidly changing fashion trends, they rely on outputting and pushing the purchasing of low-cost clothing that does not endure and is often quickly discarded.
Acquiring highly reliable information concerning clothes production and sales is challenging. There is a massive range of variation between estimations: for example, studies on the number of garments made annually range from 80 billion to 150 billion. And historically brands have deliberately been opaque about practices like burning or burying unsold clothes. Most of the reports are the result of leaked information, or the cross-referencing of clothes imported and officially incinerated in markets like the Netherlands where nearly all clothes come from abroad (Ecotextile News, 2016).
The exact numbers may never be known, but there is no doubt that the general scale of overproduction is massive. And the wastage in all cases would be reduced through improved demand prediction and more responsive lean production processes.
A few highly innovative brands have been making significant strides in moving to demand-chain solutions and processes, but the majority of brands still use long-established supply-chain approaches. This means they have to take risky production decisions far in advance. Often relying only on dated sales information and in-house assumptions. This then relies heavily on costly downstream expertise (marketing, sales, etc.) to try and manage the demand. This is often a losing battle for items that simply turn out not to be popular enough.
Legislation needed to reduce overproduction
There is a growing consensus that legislation is needed for the fashion industry to fundamentally change. France has already banned the destruction of unsold clothes — including via exporting. And in 2022 the EU proposed a range of fashion-focused sustainability regulations. These include banning the destruction of unsold (and returned) items.
SME fashion brands can have a closer relationship with their communities and more production/sales flexibility. This should help strengthen their ability to comply with potential regulations, improve their operational efficiency, and sustainability credentials.
Into the future
It will be interesting to see how social media influencing/engagement, social proof, and artificial intelligence intersect between gathering and influencing intentions. And how the intention data can then be processed into improved demand prediction.
References
Imran Amed, Anita Balchandani, Marco Beltrami, Achim Berg, Saskia Hedrich, and Felix Rölkens. (2019). The State of Fashion 2019. The Business of Fashion and McKinsey & Company.
Stephens, D. (2017). Reengineering Retail: The Future of Selling in a Post-Digital World. Figure 1 Publishing
Thomas, Dana, 1964-. 2019. Fashionopolis: The Price of Fast Fashion — and the Future of Clothes. New York, Penguin Press.
