Strategy and Operations

Going Hybrid: The Next Stage for Fashion Retailers

hybridToday’s fashion companies operate in a highly competitive environment, driven by increasingly fickle, price-conscious consumers, rising costs and clothing trends that change at light speed. With increased drops, the proliferation of SKUs and an incessant demand for newness, the big three—retailers, brands and manufacturers—are battling it out for market and wallet share.

We know we’re preaching to the choir. You know better than anyone that there is a need to control business activities as much as you can—control over everything from product concept to consumer purchase. What’s emerging is the hybrid business model, where the big three are integrating across the supply chain in an effort to protect margins.

Why is this so important for retailers? If you haven’t thought about going hybrid, chances are that your competition has. Wall Street demands growth and with increased competition, international expansion and the rise of omni-channel retailing, retailers are seeking new ways to maintain that growth and stand out from the crowd.

The New World of Fashion Retail

If you visit any mall in America, you’ll see that the marketplace is oversaturated with both domestic and foreign brands, all offering a fresh fashion perspective for consumers looking for the latest and greatest in both style and shopping experience. But the competition extends further and further beyond a traditional retail format. Today, manufacturers are getting into the hybrid game and squeezing out retailers by selling directly to consumers. According to an Economist Intelligence Unit survey the percentage of manufacturers selling directly to consumers is expected to grow 71% over the next year to more than 40% of all manufacturers. Web-only brands like Asos, ModCloth and Warby Parker are also on the rise. These brands represent a reversal of the traditional retail model with a laser focus on vertical integration of manufacturing, branding and distribution.

Fashion retailers are branching out globally to counteract the increased competition on their home turf. As this migration takes root, new challenges emerge as companies seek to balance efficiency with market responsiveness. How will retailers handle local fulfillment while still reaching consumers in a timely manner? How will they control the customer experience via the web or in a store 5000 miles away? With global markets demanding different variants, visibility across the supply chain will grow in importance.

Omni-channel retailing is also throwing a wrench in the traditional retail model. Consumers today are more savvy shoppers

and they are seeking a consistent experience from a retailer, whether they are in a store, on the computer or using a mobile device. To achieve this consistency is paramount; since research has shown that omni-channel shoppers spend more and are brand loyal.

The Fashion Hybrid Model

These are just three phenomena that are changing the game for traditional fashion retailers. To effectively compete, retailers should evaluate if integrating deeper throughout the supply chain makes sense. The benefits are apparent for those retail executives who have already done so—greater control over product, price point and time-to-market. This control allows retailers to develop product offerings that are aligned with their brand strategies and target specific audiences through unique attributes. Retailers are able to ensure those offerings get the price right the first time. By gaining control over the entire development process, the hybrid retailer can design a product that suits specific price and margin points. Eliminating the middleman will eliminate supplier markups and take many of the costs out of the system. Finally, retailers can gain greater control over product availability to ensure they respond to market demands in a timely manner.

The Fashion Hybrid Model in Action

Examples of fashion hybrid retailers are plentiful. Just think about the growth of private label brands. While originally defined as generic offerings to compete with national brands on price, these brands have quickly elevated their status. According to the Private Label Manufacturers Association, private label sales surpassed $108 billion in 2012. Private label brands give retailers the advantage of exclusivity and offer control over factors such as pricing, packaging, production and merchandising.

Supply chain integration can take a number of forms. Take for instance China’s Youngor Group, a manufacturing powerhouse doing everything from growing fibers to turning these fibers into clothing and taking that clothing directly to the market. The company has branched out to all types of menswear, producing for other brands but also managing more than 400 of its own stores and 2000 other distribution points. Youngor Group’s production, branding and retailing prowess really packs a punch in that the company can very tightly control everything including quality, timing, product design and fit, and the all important customer experience. Supplier integration can also mean forging tight partnerships with suppliers and truly collaborating with them, such as what PVH and VF are doing and Zara and H+M have done. All are examples of a tightly controlled concept-to-retail process that are proving to be fruitful. The lines of traditional retail have never been more blurry.

Is it for you?

Fashion retailers know they need to up their game. As they continue moving toward a hybrid business model, they are focused on developing exclusive products—whether that means private labels or capsule collections—to drive consumer interest and loyalty. At the end of the day, product must be aligned with the brand experience. Retailers have a leg up on the competition when it comes to the customer experience by controlling how consumers physically interact with their products in store.

But how many elements of the customer experience are not controlled? Many parts of the fashion and apparel development process have been outsourced over the years. Product development is as important to managing an effective product lifecycle as is the supply chain, and the two should work hand-in-hand. As companies move closer to the hybrid model, they are coupling strong process with advanced technology to enable this collaboration.

In our next installment, we will focus on how elements such as fashion design, newness and fit should support a retailer’s brand strategy. And we’ll offer our insight on how best to do it.

 

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