Outside View: Software and Platforms Are Eating the Fashion Industry
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Digital technology is either a blessing or a curse — and how it feels to you likely depends on whether you were born a digital company or are trying to become one. As a consumer, digital technologies are a boon — they enable us to purchase the products and services we want, how we want them and through whatever channel we want to obtain them. On the other hand, software and platforms have started eating many companies’ top and bottom lines as well as eroding their most precious asset — the brand they have worked so hard to create.
As digital advisers and board members, we have noted that all industries are confronting this same reality — technology start-ups have dramatically higher valuations than their industry incumbents. The ratio of market cap to revenue is a good indicator here — i.e., how much do investors pay for a dollar of revenue? For The RealReal, it’s 8.84-times and Rent the Runway was just funded at a valuation about 10-times its revenue. Compare that to legacy physical players like Nordstrom (0.29x), Macy’s (0.24x) and Walmart (0.62x) and you can see the difference. And for good reason:
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? First, legacy businesses are hard to scale due to the fact that they must acquire or produce all the product they sell, as opposed to some tech start-ups, which leverage the goods of a network or provide access instead of ownership.
? Second, new business models often rent what they sell — so they stay connected to the consumer through an ongoing subscription relationship. These types of businesses create deeper customer relationships and also obtain more data in the process.
? Third, digital marketplaces leverage that data and use machine learning to become smarter. By monitoring every interaction in the digital platform, they can better anticipate customer needs.
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Despite watching their investor valuations deteriorate, most leaders still say: “These trends don’t apply to my industry!” The facts, though, paint quite a different picture. Venture capitalists are pouring billions of dollars into one industry start-up after another, destroying traditional brands and their legacy business models. The above is true whether you are talking about cars (Uber), lodging (Airbnb), relationships (Facebook) or art (Etsy). Said differently, today’s technologies — AI and software — and the business models they enable are eating the economics of all industries, including yours! Think of the burgeoning popularity of platforms like Stitch Fix, Rent the Runway, Matchesfashion, The RealReal or ThredUp.
Market valuation is the clearest sign of this new reality. Stated simply, companies that sell products are usually valued by investors at less than 1-times their revenues. For every dollar of revenue you sell, investors pay less than a dollar. In comparison, companies that offer subscription businesses receive investor valuations upward of 5-times revenues from investors. And digital platforms or marketplaces can be valued as high as 10-times. This means that subscription businesses powered by software and digital platforms that are powered by machines can access more capital at a lower cost than their tradition-bound partners. Just as important, software-enabled subscription business and digital platforms can attract and retain more customers in snowball-like fashion. They use and gather reams of consumer data that can again be used to attract more suppliers as well as the very best technology talent.
Given this reality, every fashion brand, no matter how powerful, must now operate in three different horizons:
Horizon one: Make, market and sell your existing physical goods and services. To ensure you keep what you have, continue to innovate your existing products and services to refresh your brand so you can remain relevant in today’s marketplace. We have complete confidence that you know how to do this given all your years of experience. But it is important to note that this horizon is necessary, but not sufficient, to protect your future in which software is eating the world and this industry. And this includes e-commerce. It’s just table stakes.
Horizon two: Create a subscription model. Begin to find ways to scale your business faster and at lower cost using software. It’s now no longer enough to sell a dress or handbag once a year if you want to know your customers’ wants and needs. You need to be in regular touch with them all year long. To do that, think about how you can convert what you sell into a subscription offering that we call Fashion as a Service, or FaaS. The really important part here is to realize that data is really the battle ground of today and subscription models allow you to capture a lot more of it than just selling products as a simple transaction. Take Walmart’s partnership this past spring with children’s subscription service Kidbox, which provides the mass retailer access to 120 children’s brands it previously did not carry — plus access to reams of data on kids’ and their parents’ preferences.
Horizon three: Build, buy or partner with today’s digital platforms. Thinking of your brand at the center of a digital marketplace (e.g. platform) is a massive jump for almost every company and their leaders and boards. Relying on others, including your competitors, to create and offer products and services in a marketplace hosted by you means opening up your company’s brand to the world around you to ensure your future. It’s important to note that even if you can’t build your own digital platform and marketplace because you don’t have the board, leadership, investors, technology or skills to get there, you need to be on someone else’s if you want to be where today’s and tomorrow’s customers are. Look at Neiman Marcus and its decision to invest in Fashionphile, the online resale site for women’s luxury handbags, jewelry and accessories. Neiman’s thus killed two birds with one stone: It linked with a new digital platform and dipped its toe into the booming luxury resale market.
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When first confronted with the idea that every board and leadership team needs to operate in all three horizons, the response is — we are having trouble just doing Horizon 1 well. We understand, but customers already live in all these horizons and if you want to keep your brand and legacy revenues and profits then you have no choice because customers now have to power to select how they will purchase goods. And they prefer horizons 2 and 3 as do the venture capitalists.
Admittedly, this is not a simple proposition. The good news is that you do have the brand, the products and the customers to live in each horizon already. What you are probably missing is the right mind-set, skills and capital to help propel and support your future. Consequently, start by examining your board’s and leadership’s core assumptions about where value is created. This will be the hardest part of the journey — changing yours and their mental model. Once you overcome that, you can attract the capital and talent you need to make Horizon 2 and 3 a reality.
The bottom line: Software and digital platforms are eating every industry’s legacy companies. That is especially true for the fashion industry. Given the speed by which this erosion is happening, there is no time to wait. It’s time to take ownership of your future and start changing your business model by operating in all three horizons. If you don’t, you will soon be paying someone else for the privilege of accessing your customers, your data and even your brand. In the age of networks and platforms, brands, as we used to know and think about them in the fashion industry, will matter less and technology will matter more.
Barry Libert and Megan Beck are cofounders of AIMatters, the leader in AI-powered strategy. Barry advises global boards, brands and leadership teams on how to become AI-powered platforms. His clients range from Neiman Marcus to Barrick Gold and Deloitte. They are regular contributors to HBR, MIT and Forbes.
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