NEW YORK, United States — The Internet is a two-faced phenomenon: a source of both incredible income growth and challenging complexity. This reality makes me more confident than ever that emerging brands have never had a more promising — nor a more challenging — environment in which to execute. The way I see it, small fashion labels in particular have more potential than ever, but face three major obstacles:
No actionable data. Small brands have limited visibility into their own numbers. That’s because they often market and distribute via channels, like department stores and other wholesale partners, which are out of their control. To make the situation worse, one channel sends you data in Excel spreadsheets, another sends you a PDF and so on. Consolidating all of your data into a unified, searchable database that anyone in the organisation can use to visualise trends is critical, but extremely difficult to develop.
No bargaining power. Size matters. Large national retailers and large manufacturers get much more favourable deals with suppliers than small businesses do. Established brands have economies of scale, which they use to beat the little guys. Building niche networks at each stage of the supply chain can give small companies collective buying power that approaches that of large companies (think about labour unions as a framework for collective bargaining), but this concept is vastly underdeveloped.
No capital — on terms that make sense. Small businesses and brands need money to grow, but there is no good place to raise it. An annual growth rate of 10 percent is pretty healthy for a small business. But venture capital firms expect much higher growth rates over the lifetime of their investment, making them a poor fit for small fashion companies. What’s more, many banks no longer loan to small businesses because, since 2009, they’ve been deemed “too risky” and lack collateral in case of default. Banks would much rather loan to large companies. And yet, for small fashion brands, finding lower-cost capital — investment with a lower return expectation than that of a VC — that also accounts for the risk an investor takes to supply that capital, is critical.
These problems led me to a series of solutions:
A networked data warehouse. Why not centralise sell-through data and inventory from a global network of independent businesses, enabling companies to spot trends quickly using data from across the network? Indeed, the answer for emerging businesses is a comprehensive information management system that can connect to each of the different technologies (from accounting software to sell-through reports), across online and offline environments, and can analyse up-to-the minute information for inventory. Access to a greater volume and higher quality of data makes it easier to spot trends. But instead of one data warehouse for each and every business, there must be one data warehouse for all of them. Businesses using a consolidated, networked data system will benefit from real-time information on their own sell-throughs and can also benchmark their data against the aggregated data of the entire network.
Shared resources. Exclusive product can give smaller businesses a competitive advantage. Developing these products is challenging, but it becomes easier when working as part of a network. That way, businesses don’t need to invest independently in a huge infrastructure for product development: the network could fund a small team that identifies the right product skills with a few product development coordination centres. Manufacturing, particularly for fashion, is complex. In Italy, for example, an apparel brand does not work directly with a factory, a brand works with a company that does all the sampling and, when products go into production, that company outsources each part of the “facon” to a different subcontractor. Some categories might be better suited for production in Portugal, Eastern Europe or Turkey. Evaluating the necessary expertise of factories or product development centres allows fashion entrepreneurs to develop new brands or product concepts. Ironically, the best way to develop exclusive products is to start with the expertise found in the global manufacturing market and build a brand concept around those capabilities.
A sales force of independent stylists. With its minimal cost and instant, expansive reach, e-mail has become the preferred marketing tool for brands of all sizes. However, customers are starting to ignore promotional emails and communicate increasingly through their mobile devices. Stylists are a powerful sales force for fashion brands, just as interior designers are for home brands, but they are constrained by lack of inventory and marketing power. This sales force needs a beautiful, mobile web application that enables them to curate and promote product selections they know their customers will love, receiving a percentage of the profit from each customer’s transactions no matter where they buy on the network.
Growth attracts capital. When small fashion businesses have access to the network outlined above, they will grow and attract capital — on their terms. The capital supplied to these small businesses will be non-dilutive, as the most suitable form of financing looks more like a loan (a small percentage of earnings as a fee, for a period of say, five years) than an equity investment.
Based on my own economic analysis, access to the services mentioned above, plus a loan with a 12 percent interest rate, can boost the earnings of a small fashion business by a staggering 35 percent to 70 percent a year for a period of five years. Upon paying back the loan, the business could be worth five to 17 times more. Hardly the next Facebook, but in aggregate these businesses will contribute to delivering a better experience for consumers and collective income growth for a large number of people throughout the supply chain. And that’s a good thing for small businesses in America and abroad.
Adam Pritzker is the chairman and chief executive of Assembled Brands, as well as the co-founder and chairman of General Assembly.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.