CARMEL, United States — What can fashion executives learn from Apple’s trillion-dollar milestone? The question is compelling to retailers whose future will be largely determined by disruption and technology. Apple, too, faced such uncertainty and its successful transformation is now reflected in its record-breaking market capitalisation.
In a recent New York Times editorial, Mihir Desai of Harvard Business School considered why Apple may be the future of capitalism. His perspective is that Apple’s financial model makes it different, an elegant achievement obscured by its impressive product design and engineering. It is a model that emphasises cash flow over profits. He writes: “Apple is not simply immensely profitable; in 2017, it generated $16 billion more in operating cash flow than profits. It does that in part by running its day-to-day operations in a distinctive way. Typically, a company has to use external funds to fund the process of stocking goods and collecting revenue from customers. Apple’s model turns this upside down."
The model Desai articulates echoes the thoughts of Professor Warren H. Hausman of Stanford University and a decade of our research, case studies and consulting. We ask: what can retail adapt from electronics-based speed and flexibility for fashion? In other words, can current culture, practice and profit for global apparel and footwear be turned upside down?
Before we offer a view of that answer, let’s acknowledge that fashion’s famously insider culture has been slow to learn from outside its industry and experience. In fairness, this is the world’s most globalised supply chain, and its most complex, even if the product itself is not complicated. Still, the costs of insularity, denial and resistance have been high, with Amazon being the prime example of dominance led by an outsider. Incumbent retailers lost out online, and are equally defensive to invasion by new venture models: Third Love (personalising a product niche), Rent the Runway (rental), StitchFix (subscription) and Poshmark (peer to peer). And many more. In current structure built on volume, long lead times, lowest cost sourcing and price promotion, fashion profitability has been eviscerated. It is a model waiting to be turned upside down.
Fashion profitability has been eviscerated. It is a model waiting to be turned upside down.
How is Apple’s future of capitalism relevant to fashion? In the days of laptops and printers, the electronics industry was distinct from fashion and nowhere near its complexity of style, colour and size across multiple collections. However, that is much less true today and electronics and fashion are both trend-driven short lifecycle goods similar in risk, process, consumer and velocity, even if not in SKUs. Nike’s strategy mirrors Apple's strategy to double innovation, speed and direct-to-consumer selling. Nike is a pioneer in outsourcing manufacturing, but it is a long way from Apple’s global “asset light” agility. With only one footwear supplier in the Americas, Nike is aware that nearshoring and automation are not enough to turn its 40-year-old futures model upside down. If Nike expects to double sales without doubling its Asian supply base, process innovation is required.
Anancio Ortega, the founder of Inditex, is no less an outsider than Steve Jobs or Jeff Bezos. Zara’s fresh, fast and frequent fashion is admired, envied and analysed worldwide, but, as with Apple, its financial model is the reason for its outsized valuation. Zara’s speed and flexibility allow it to maintain high margins by cycling global collections in seasonless operations which generate negative working capital. It operates upside down. Professor Hausman and I modelled our industry analysis around capability for supply flexibility, or postponement, with Inditex alone in upper right quadrant of the “Zara Gap.” Margin and turn do not explain its outlier distance from competitors because Zara achieves its earnings with far less inventory and working capital. Its business is capital generation, just as is Apple’s. Unlike Apple, Zara owns 11 of its factories and airfreights goods twice weekly to a worldwide network of high street stores. Neither company requires lowest cost to command premium prices for its brands.
Fashion’s over-reliance on spreadsheets, emails and manual transactions keeps its analog supply chain unresponsive to a digital consumer.
In retail today, the apocalypse or not question seems beside the point. It is transform or die, and table stakes are now winner take all. In our Stanford-based work, we see few who are poised to turn their businesses upside down, and more that pursue shortcuts, half-measures and PR in place of risk reduction matched to financial returns. An abbreviated list includes: marketing drops, see-now-buy-now trade shows, speed-to-market disguised as VMI (vendor managed inventory), platforming, express lanes, predictive analytics unlinked to supply, automation, nearshoring, and, finally, digitalisation, the idea that data visibility can link and lift a laggard supply chain to relevance. Ask yourself if these fit the definition for disruption: “The theory of disruptive innovation describes a process by which a product or service transforms an existing market by introducing simplicity, convenience, accessibility, and affordability… thereby making them available to a much larger population.” (Clay Christensen, Innovator’s Dilemma, emphasis mine).
Fashion’s over-reliance on spreadsheets, emails and manual transactions keeps its analogue supply chain unresponsive to a digital consumer. How is this record and pace of change going to integrate big data, machine learning and artificial intelligence? Data science is not just software, and its higher technical capability cannot alone fix a flawed, fragmented and adversarial process that is a shell game of risk avoidance.
What is required to turn fashion upside down? Our Stanford projection is conservative, yet estimates increased market values from 30 to nearly 40 percent. How should industry adapt innovation — from Apple and others — for opportunity at that magnitude of benefit?
- Process innovation. Most retailers seek parity in operations, satisfied to be among best in class while betting on branding and style. Where is genuine process advantage? For Amazon, it is last mile logistics. For Apple and Zara, it is first mile, or upstream, speed and flexibility. All three mobilise cash flow.
- Shared value and risk. Process innovation means end-to-end, not a retail balance sheet alone. What incentives create and share value with partners, versus best price and volume? What is strategy for capital generation across materials, vendors and customers?
- Tools. Data science brings high potential to elevate data sharing and integration. Is your digital strategy and talent all consumer-facing? While predictive demand insights can be mined from sales, search and social media data, how is decision-making linked to supplier performance and capital?
- Metrics. Supply flexibility is not captured in conventional financials because so much benefit is outside of statements. Do you measure speed by forecast accuracy? What is your Markdown to Stockout ratio? Do you know your negative working capital “tipping point”?
In its milestone moment, Apple lore reminds us that Steve Jobs was once 90 days from bankruptcy. Apple found its mission and model in uncertain times. Now in the grip of uncertainty, is it fashion’s mission to sell more goods in more channels more efficiently? For a low profit, low growth and low-tech industry, that future is a long going out of business sale. Fashion’s future is to reinvent style, speed and capital. The only way up is upside down.
John Thorbeck is the chairman of supply chain analytics firm Chainge Capital LLC.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.