A view of Amazon packages at the 'Deutsche Post' DHL shipping center in Rheinberg, Germany, 28 November 2017. The DHL shipping center is directly connected to a Amazon logistics and distribution center.DHL Shipping Center in Rheinberg, Germany - 28 Nov 2017

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.

And while it’s easy to blame Amazon for much of the industry’s woes, value, convenience and immediacy are increasingly key for shoppers. Moreover, the industry’s real problems can’t be fixed with brand cachet alone. Instead, cachet may not be what you order, but rather, how you order it.

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

This shift is making the back office the new black. The focus now is as much 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 as it is on the clothes. The “unfashionable side” of fashion now deserves the spotlight as the “last mile” and the “first mile” of the supply chain take center stage.

Edward Hertzman

Edward Hertzman  Courtesy image.

At first blush, the easy thing to do would be to follow other successful brands. But does the recent success of Gucci, for example, offer 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 Gucci’s growth and relevancy can last under creative director Alessandro Michele and ceo Marco Bizzarri. The investor community is asking Kering leader François-Henri Pinault the very same question: When will its fashion bubble burst?

Taking a look at the past offers a clue. The current “Gucci moment” is no different than Louis Vuitton’s boom in the Nineties, or Burberry’s revival in the Aughts. This is a trend-driven pop culture cycle, not a business model anyone can actually re-create. It is no wonder that luxury’s churn of top talent is taking a toll on companies and designers themselves.

So, is the solution to mirror the success of online retailers? Maybe not. Models like that of Wayfair, an e-commerce furniture firm, require spending a premium on marketing, driving web site traffic and investing on customer acquisition. Yes, the topline swells, but without new rounds of funding or going public, these types of companies can’t survive because their capital is based on future value that never seems to arrive.

Wayfair appeared to be set for success, having disrupted a market, but hasn’t exactly achieved its end — yet. The company’s shares have soared, but it remains unprofitable — and continues to be saddled with high operating costs.

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 topline 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 either.

Meanwhile, 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?”

Supply chain tactics.

A strategic approach to the supply chain can boost sales and profits.  Shutterstock / Kidsana Maimeetook

Specifically, the first mile refers to goods earlier — or more upstream — in their manufacturing cycle. But 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 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 T.J. 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 if the consumer doesn’t adapt to the new product frequency. Retailers chasing a “first-mile” model may end up with new styles each week, but if it isn’t product consumers are interested in or even know to look for, 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.”

To succeed, retailers and brands must focus on collaboration. 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.

Edward Hertzman is founder and president of Sourcing Journal. The publication is owned by PMC Media, which is also the parent company of WWD.

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