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Start-Up School | Chapter 6: Scale Your Business Carefully

Every business has its own path to scale, from a fledgling start-up into a global brand. However, there are a handful of common challenges every brand must face, including hiring, growing the supply chain, market expansion and marketing.
Illustration by Elin Svensson
By
  • Cathaleen Chen

This article is published in tandem with Start-Up School, BoF’s new resource comprised of a practical guide and supplementary tools, templates and frameworks to fuel your journey to successful entrepreneurship. Become a member to access.

To scale a business is to grow the size and scope of a company. For a fashion brand, this can mean expanding into international markets, acquiring customers via online advertising or entering a new channel, such as opening retail stores.

But like scaling Everest, scaling a business comes with a multitude of risks.

Just look at Birchbox, the makeup subscription service that raised nearly $90 million from venture capital firms and at one point boasted a valuation of half-a-billion dollars. But as the company grew, it never crossed into profitability, a problem compounded by spending aggressively to acquire new customers. Last year, after failing to find a buyer, it sold a majority stake to an existing investor, Viking Global, for just $15 million.

Moncler successfully scaled by going global: after entrepreneur Remo Ruffini acquired the outerwear brand in 2003, when its annual turnover was less than €50 million, he rapidly opened stores and shop-in-shops everywhere from Switzerland to Singapore. By maintaining a consistent customer experience across these locations and investing in new designs for its signature puffer jackets, Moncler transformed from a niche European brand into an international luxury powerhouse with €1.4 billion in sales last year.

“Since the very beginning... Moncler has followed a clear strategy of international growth based on a simple assumption — keep a strong control of the business with no filter between the brand and the consumer,” Ruffini wrote in an email.

Moncler followed a traditional scaling model, methodically reinvesting profits into the business to grow over a period of decades. Start-ups relying on venture capital often view scaling as a means to drive revenue growth, with profits coming later as high volumes, new products and efficient distribution channels push down costs.

If you try to do everything, you're not going to do anything well.

For start-ups flush with venture capital, it may be tempting to invest simultaneously in every channel and every element of their business to grow revenues. This can lead to trouble.

“If you try to do everything, you’re not going to do anything well. You can blow through a lot of money by trying to do too many things at once,” said Yael Aflalo, founder and chief executive of sustainable clothing label Reformation. “In the years we tried to do too much, we were unsuccessful. In the years when we were measured and focused and had fewer goals, we succeeded very well.”

Ultimately, there is no single recipe for how to scale. However, there are a handful of common challenges every brand must face — hiring, growing the supply chain, market expansion and marketing. Here is BoF’s guide to scaling in a responsible and sustainable way:

Build Teams and Processes to Prime for Future Growth

While it's impossible to do everything in-house — it takes teams of engineers to build a standalone e-commerce platform, for instance, and most fledgling brands have no business operating their own warehouses — the safest way to grow is to build out an internal team that can oversee these crucial processes. This may mean using Shopify to run an online storefront but having an e-commerce whiz on staff to ensure smooth operations.

For more than a decade, Nanushka, the Budapest-based contemporary clothing line, was mostly a local business. In 2016, founder Sandra Sandor enlisted help and investment from her long-time partner, Peter Baldaszti, to go global.

Baldaszti said he cut ties with an international distributor and built a 13-person team to manage wholesale accounts. That’s helped the label develop stronger relationships with retail partners and showrooms.

You have to take your fate into your own hands.

Similarly, Nanushka had previously outsourced e-commerce, with poor results. After bringing those operations in-house in 2017, online sales grew rapidly, and today make up about 30 percent of total sales.

Today Nanushka is carried by 245 stockists in major cities around the world — that’s up from 25 stores in 2016. Nanushka grew its revenue from $1.3 million in 2016 to $9.6 million last year, and is on track to reach $20 million in sales by the end of this year, the company said.

“You have to take your fate into your own hands,” Baldaszti said. “Build an amazing team. When I joined there were only 18 people, and [soon] it will be 100. None of our successes would have been possible without the extreme passion of all these people.”

Elyse Walker opened her first multi-brand store under her name in 1999, but said she was only able to expand by putting her faith in someone else. “I spent the first 10 years building this brand myself,” Walker said. “But I realised I need to invest emotionally and take a chance on someone else to grow my company further than I can ever dream of… and so I found my soulmate in Summer Holl.”

Under Holl, who became the retailer’s president, the company has doubled in size every year.

By the end of this year, Elyse Walker is on track to have six stores, including four smaller-format locations called Towne. The goal is to grow both sales and profits by stocking new stores with proven best-selling merchandise, as well as a new private label line. And with the team now largely in place, hiring can slow down and margins should expand.

“Now we don’t feel the need to keep doubling. We’ve built the back-end to support future growth,” Walker said. “Our revenue will double over the next three years but our profit margins will triple.”

Finesse Your Logistics for Happier Customers

Shipping costs and inventory are often two of the biggest pain points for fashion and beauty start-ups, particularly those relying on e-commerce to drive sales. Many founders start out shipping orders themselves, with their apartments or garages filled with product.

Eventually, you’ll need to hire someone to manage your logistics. Though companies typically have a chief operating officer tasked with keeping orders flowing smoothly and inventories under control, third-party logistics (3PL) providers typically handle day-to-day details. These providers manage warehouses, arrange shipping, handle returns and support other back-end services.

You have to understand that if you don't get it right you can hurt yourself by not being able to satisfy the demand.

“It’s pretty easy to ship 100 orders a day. But when you get to 1,000 or 10,000 a day, it gets to a really complicated point and requires resources,” said Bruce Welty, founder and chief executive of Quiet Logistics, which has helped scale brands like Glossier, Away and Outdoor Voices. “You have to understand that if you don’t get it right you can hurt yourself by not being able to satisfy the demand. You can be completely successful and then suddenly screw it up.”

There are a number of things that can go wrong in the distribution process for an e-commerce brand — lost packages, late deliveries, mismanaged inventory, etc. Mishaps add up, and eventually, if not brought under control, they can tarnish a brand’s image and hinder sales.

Customers also expect perks like free shipping and returns that are routinely offered by Amazon and other large e-commerce players. Those are expensive services for a small business to provide, but logistics companies often negotiate lower shipping rates in bulk for multiple small clients.

Back Up Your Supply Chain

When a company is scaling, demand is rapidly increasing and supply must follow. But that’s easier said than done: what if a popular item sells out and the manufacturer is already operating at capacity? What if a key material runs out?

The key to supply chain management is to always plan for the worst-case scenario, said Jill Layfield, chief executive and co-founder of Tamara Mellon, the luxury shoe brand that relaunched two years ago as a direct-to-consumer operation. The brand increased the number of factories it works with from two to five so that one will always be available to rush an order. Layfield and her team built "sensitivity models" for demand, and test out the factories to see how quickly they can turn around an order.

“You need to have redundancy across suppliers and also have regional diversity [among suppliers],” she said. “If one thing goes wrong in one area, for instance, you can go to another part of the country.”

Some brands operate their own factories to reduce the chances of surpluses or shortages, or to ensure production matches a brand’s quality standards and ethics. A third-party manufacturer may prioritise other clients’ orders, which is why some brands operate their own factories. Owning the supply chain also means reducing the chance of surplus and shortage, or to ensure production matches a brand’s quality standards and ethics.

If you have directly controlled factories, that gives you this extra flexibility.

“It’s about having control over your supply chain,” Baldaszti said. “If you have directly controlled factories, that gives you this extra flexibility.”

Optimise Direct-to-Consumer Channels

When Tamara Mellon herself first branched out to create her own line in 2013, she positioned the business as a wholesale brand with multiple product categories, including apparel. But the venture went bankrupt, and the company was dissolved.

This time around, Tamara Mellon the brand is solely direct-to-consumer — and the model is paying off.

“There’s a big advantage when you cut out wholesale, and that is around [margins],” said Layfield. “The other reason direct-to-consumer businesses do so well and grow so fast is because, for the big companies that scaled in a different way, switching to direct would be way too expensive.”

Direct-to-consumer sales also make for a better relationship with consumers. For Moncler, expanding its retail presence in the form of branded shops within wholesale partners like Saks Fifth Avenue and Bloomingdale’s as well as standalone stores allows for more direct and intimate contact with the consumer.

Ultimately, brands must figure out for themselves what works and what doesn’t — a potentially scary cycle of trial and error. But Aflalo offered a bit of advice:­ you don’t have to go at everything alone.

“I think that sometimes when you’re facing a problem and it’s like you have no idea how to handle it, if you just call someone who’s done it before, they can probably answer it for you,” she said. “When I was younger, I was too proud to ask people for advice. But now I just pick up the phone. I do it constantly.”

Editor's note: This article was revised on 23 April, 2019. A previous version stated that Elyse Walker will open eight stores this year. It will not. The retailer plans to open six.

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