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March 25, 2021

Business Model Innovation – Factory-to-Consumer (F2C) Fashion

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Connecting the Dots. Is a Factory-to-Consumer (F2C) model the gateway to scaling up a Made-to-Order model where consumers and factories are only one hop away? We dive into the Business Model Innovation (BMi) behind two innovative players in the space who are coming together to help scale a more sustainable growth model for the fashion market.

It was recently announced that the Farfetch founder’s other startups (PlatformE) acquired fellow Portuguese startup Springkode (terms undisclosed) in a deal that opens an entirely new path for the sustainable fashion market.

Recently we did a post that analyzed the Sustainable Fashion Marketplace business model looking at the contrast between the eCommerce model (the typical wholesale-markup model) and the Platform model (á la Farfetch). The conclusion was that there is some kind of Business Model Innovation required to change the growth model around fashion in order to scale-up the industry.

Springkode is a transparent, sustainable fashion marketplace that has one distinct feature from most other D2C (Direct-to-Consumer) brands and ethically-curated marketplaces – it’s garments are shipped to the consumer directly from the factories that partner with the company (B2B2C).

Springkode
Springkode

“The business (Springkode) has implemented this technology in more than 30 factories, permitting the production and transport around the world from clients who buy directly from the producers”

Observador – PlatformE Buys Springkode *Translation

PlatformE was co-founded by one of Farfetch’s founders – José Neves – and two others in 2016 and has raised $16.6M in Venture Capital. It is a high-tech play towards personalization and made-to-order, working with the world’s biggest fashion houses to shift the production model and reinvent the fashion supply-chain to reduce waste.

PlatformE

The new standard for made-to-order production (MTO). PlatformE is powering at scale customization, personalization and digital collections across industries. We are enabling the world’s transition to waste-free and sustainability, revolutionizing the way brands capitalize on inventory. No more dead stock.

PlatformE – Crunchbase

PlatformE

While these are two different types of companies with two different business models – Springkode (Factory-to-Consumer Marketplace, B2B2C model) and PlatformE (Made-to-Order, B2B model) – the acquisition brings together two players who can build scale into the sustainable-fashion arena through both technological and business model innovation.

“The merger permits us to accelerate the scale for a number of brands, retailers, and producers with a focus on sustainable growth”

Observador – PlatformE buys Springkode *translation

How does the F2C Fashion Business Model work?

+ Springkode Pitch Deck – 2019

The best way to think about the F2C Fashion model is by imagining a small collective of designers and garment-makers in a given factory in Europe who are at their sewing machines. In most factories, their job is to produce garments for the world’s luxury fashion brands. In these factories, however, the collective takes waste material from big orders and turns into their own collection. These garments can be ordered on an eCommerce platform like Springkode and are then shipped directly to the consumer (Factory-to-Consumer) with no middleman in-between.

Instead of working in studios and boutiques – and separating design from production, then production from sales – the dots are connected directly between the place the clothes are produced and the end consumer.

OBSERVADOR 2018 – SPRINGKODE STARTUP

This is not fast fashion, and at a price 70% less than products of the same quality in high-end boutiques, it is definitely value for money, but not in a way that is currently luring Gen Z or millennial shoppers.

Forbes 2019 – The Farfetch For Factories?

Instead of reselling dead stock materials for pennies on the dollar, these collectives spin them up into small batches of high-end garments. It’s just that these high-end garments don’t have a notorious brand attached to them, so they sell them for significantly less than retail cost that those same garments would be sold for in high-end boutiques on a quality comparable basis. Prices ranged from €27 – €169 for various types of garments.

Ostensibly, the case could be made for reselling the 3-5% excess materials, however despite the €50 price-tag per meter, the resale value of such materials B2B is as low as 50 cents per meter, says Moreira, meaning factory owners prefer to hold on to the fabric in case it can be used for a client sample in the future. In reality, much of it eventually ends up in a landfill.  Not under Springkode’s new business model.

Forbes – The Farfetch For Factories?

Springkode built a transparent platform with consumers that enabled this B2B2C business model (business-to-business-to-consumer) to take hold. The platform indexed the brands and their respective products, created product images and videos, and helped manage the sales and invoice pipeline. They took a fixed commission on sales, although how much isn’t clear. It was an eCommerce platform with more industrial backbone, ensuring that the finished good went directly from the factory it was made to the consumer who ordered it.

The Springkode e-commerce platform allows manufacturers to sell their products and ship them straight from their factory to the consumer while dealing only with the B2B element of the transaction.

Forbes – The Farfetch For Factories?

The vision did start to seem a little bit like the ‘Farfetch for Factorieswith one major difference – no more than 50 units per design were produced from the ‘dead stock’ materials in each batch. It was not a brand or clothing line specifically that is designed to scale, but the factories themselves. This model incubated at a time when factory-level production for fashion was being outsourced to the Oriental countries, and along with that many of the traditions of craftmanship and design in countries like Portugal.

OBSERVADOR 2018 – SPRINGKODE STARTUP

To compete with the prices of the Oriental countries, the European industry has to acquire competencies, that until now, was only with the brands. Today, the factories have capacity to design and develop the product, they are not mere production units. They innovate, they are up with the trends, the design, they take control of the product, they just don’t have a brand.

Observador 2018 – Springkode Startup *Translation

Springkode – Partners

The partnership with DHL helped to scale the logistics element of the front-end consumer brand for Springkode, even though the majority of their sales were localized regionally, compared to a platform like Farfetch that ships and offers returns globally.

It’s true that their supply chain is incredibly short—in some cases spanning as little as a couple of geographies. With 75% of sales currently in Portugal, followed by Spain, then the U.K.

Forbes – The Farfetch For Factories?

If you tie the pieces together, the Springkode business model (ie. F2C Fashion model) disrupts the idea of a retail brand at its core in the era of sustainable fashion, an idea that fits perfectly with the vision of more decentralized, on-demand production.

“We firmly believe that the industry will move towards more transparent and integrated business models, pushed by a new and more conscious consumer. Therefore, it made sense to connect manufacturers and consumers and work on connecting the dots.”

Eco Age

What is the Business Model Innovation in Factory D2C Fashion?

If we look back to the original vision of the Springkode founder, taking that idea from its inception to the point where it can scale and make a global impact on the fashion supply chain required a partnership (or being acquired).

Firmly in Moreira’s sights is an international factory partnership, which will trigger the next phase of optimization of the platform and the continuing refinement of this new “B2B2C” marketplace.

Forbes – The Farfetch For Factories?

The business model innovation itself was taking a low-value good (ie. dead stock fabrics) and turning it into a higher value good (ie. high-end garments), and in the process removing the need for a wholesaler or retailer. The value lies in the garments themselves – the materials, the craftsmanship, the story – and not in the front-end brand that sells them. It took slack in the supply chain, made it productive, and created high-value goods in the process.

The real benefit of this business model is that it capitalizes on several expensive inefficiencies in the current fashion business model, namely excess materials, factory downtime, complex supply-chains, the oversupply of stock, warehousing and waste disposal. This makes the new business model a winner in sustainability terms, as it utilizes down-time to use up excess materials and offers exclusivity direct to end consumers, with a maximum of 50 pieces made per style.

Forbes – The Farfetch For Factories?

Combine that with the up-and-coming ‘Made-to-Order’ trend that is synchronized with a philosophy in the sustainable-fashion movement of zero waste. There are many adjectives that get attached to the trends in sustainable fashion – slow fashion, circular economy, etc – but from an economic perspective, consumers appreciate garments that are made with a high-degree of craftsmanship, ones that are by definition rare. In the same way that Springkode limits production to 50 units per run, PlatformE saw from its inception that Made-to-Order would have both a sustainability (no waste) and exclusivity (higher value) dimension to it.

PlatformE pushes a “Order Added Value for Personalized Product Experiences” message on their homepage. And even though there are few details as to how this works in practice, the idea behind mass customization at scale has to be driven by a technological engine.

Personalization is a trend that is driven by a business model. The concept behind the combined entity is to scale-out an on-demand production model whereby points of sale are connected to the manufacturer directly. Factory-to-Consumer (F2C Fashion) is not scalable unless the endpoints are connected across the network.

Consolidating the two companies’ intellectual property, development capabilities, and networks will enable PlatformE to accelerate the scale of the number of brands, retailers, and manufacturers that focus on sustainable growth, both on the financial and environmental aspects, PlatformE said

Fibre2Fashion

Competition & Their Business Models

The on-demand model differs heavily from traditional wholesale manufacturing that relies on, usually seasonal, bulk orders of products which designers hope customers will buy. A problem with this form of production is that it often leads to a large amount of dead stock and product wastage. With rushed production lines to fulfill seasonal quotas, it is also possible that wholesale production can compromise on product quality.

TechPacker

Let’s assume that the main competitive business model to PlatformE going forward is fast fashion. There is nothing particularly innovative about the fast-fashion business model, it is effectively an outsourced version of the traditional wholesale manufacturing model. It relies on cheap labour and mass production in third-world countries where materials can be sourced in bulk. The combination allows them to produce economies of scale on the production side, while selling them on popular high-street retail locales at a discount to luxury fashion.

Fast fashion can produce fashionable clothes for pennies on the dollar and sell them to typically younger consumers at a discount to retailers, yet still make huge margins. Because fast fashion also encompasses a rapidly-changing trends cycle, consumers buy garments every season and thus the wheel keeps turning. There are hundreds of billions of garments produced every year, and the vast majority of those come from the fast-fashion business model.

One could argue that the Platform eCommerce model used by platforms like Farfetch has also been disruptive to the fast-fashion business model, as it boosts the revenues & margins of its partner brands – luxury retailers and boutiques – and allows them to scale-up their eCommerce units. Not only has this model helped them scale up volume, but it has also helped them improve margins compared to the wholesale model.

Farfetch itself takes a % of ‘Brand Margin’ and ‘Retailer Margin’ (28.8% Take Rate in Q4 2020). This business model has helped turn Farfetch into a luxury eCommerce powerhouse; however, only a small % of ‘Farfetch’s platform GMV’ is in the sustainability category (the Positively Conscious line).

Naturally, a founder of a category-leading platform wouldn’t build another platform to compete with their own business. PlatformE was complementary to retail luxury brands, which is in turn beneficial to Farfetch. The combination of Springkode + PlatformE creates a new growth model for the factories through a combination of on-demand, made-to-order runs for retail brands and the creation of a more robust F2C model for consumers.

Fundamentally, the combined entity enables the scaling-up of a certain type of sustainable, factory-led model that reduces waste and produces more bespoke garments. Whether or not this includes Springkode’s front-end marketplace for consumers – enabling them to purchase directly from the factory – is still TBD. At scale, this would create a much different looking fashion market in the future.

BMi – Key Components of the Canvas

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In this new model, there are three major groups whose interests come together around this new business model: Factories, Retail Brands, and Consumers.

Value Proposition:

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What unique value does a company’s product or service create for customers?

Factories can produce higher-value goods and likely benefit financially from the Made-to-Order model. They can also further explore how to scale-up their own F2C lines.

Retail Brands* increase the value of the products they sell to their customers through personalization, and also can lower supply-chain costs related to materials and latency.

Consumers get the ‘farm to table’ benefit of knowing where their products came from, along with a bespoke, personalized set of garment(s) shipped directly to their home.

*Purely sustainable brands may be able to scale-up their own production model, while luxury brands may be able to start producing more sustainable goods at better margins.

Customer Segments:

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What group(s) of customers is a company targeting with its product or service?

Since consumers are still the main end-customer of retail brands, and luxury retail brands are the main end-customer of factories, we would expect that the characteristics of the Customer Segments in this model would be similar to the broad trends we see in sustainability across Fashion.

Major fashion houses trying to create new sustainable fashion lines that can be produced on-demand in locales worldwide. Younger, more eco-conscious consumers looking to purchase clothes at a certain aesthetic and pricepoint that fit their own sustainability ethos.

Customer Relationships:

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How does a company plan to build and maintain relationships with the customers it is serving?

The PlatformE technology gives the retail brands a level of connectivity to the products being produced in the supply chain that is unique. This helps improve the overall Customer Relationship.

End-to-end connectivity and visibility is absolutely a paramount to achieve smarter ways of developing, launching and monitoring fashion collections, capsules or drops, according to PlatformE.

Fibre2Fashion

On the consumer end, the technology that Springkode built helps to maintain the Customer Relationship between the factory and the end consumer.

Customer Channels:

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What channels does a company use to acquire, retain and continuously develop its customers?

Springkode worked with a network of factories in Portugal, while PlatformE worked with a network of global fashion brands. Springkode’s end platform was consumer facing, while PlatformE is a business application.

Revenue Streams:

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How is a company pulling all of the above elements together to create a revenue stream(s) and generate cashflow?

In the end, the retail brand will sell its clothes to the consumer, but the entire value chain from order through to delivery will be disrupted. Retail value of the garments is higher, production costs are theoretically lower, delivery costs may be lower, while material costs may be lower. The impact on the margin should be very positive for brands, while PlatformE makes money in the middle.

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The above 5 Building Blocks represent the right side of the canvas, and contribute to the Revenue side of the business model.

Key Resources:

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What assets and knowledge does a company possess that allow it to deliver its value to customers in ways that other companies can’t?

Combined relationship across the industry. PlatformE technology. Springkode logistics with factories. Team synergies after the acquisition.

Key Activities:

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What activities does a company engage in that allow it to execute its strategy and either establish a presence in the market or gain market share?

The new acquisition is the main key activity for the purpose of scaling-up the model at this point.

Key Partnerships:

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What strategic and cooperative partnerships does a company form to increase the scalability and efficiency of the business?

As the new model takes hold, there will likely be many new partnership opportunities that emerge.

Cost Structure:

What are the key costs associated with running the business and how can key partnerships/resources be leveraged to reduce the cost structure?

Technology – R&D team of engineers to continue innovation, software developers to maintain functionality of current product.

The remaining 4 Building Blocks come together to form the left side of the canvas, and contribute to the Cost Structure of the business model.

This image has an empty alt attribute; its file name is BMCanvas_LeftSide-1.png

A business model is defined as:

“the rationale of how an organization creates, delivers and captures value.”

Explained - components of the canvas

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

Business Model Analytics

This is an example of where one could imagine some very interesting business model analytics in the relationship between the business metrics and the sustainability metrics.

On the business side, we can see that increasing Order Value (higher AOV) would be expected. Lower turnaround time and less waste (by default) mean a better customer experience and improved economics from a margin perspective. Where the margin is captured within the consumer – retail brand – factory model is likely determined by the platform itself.

On the sustainability side, metrics like Average Shipping Distance per order would be interesting to track, especially if the model evolves towards something resembling a cluster, where the garment is purchased, produced, and shipped within the same geographic region. Furthermore, if some brands actually produce less garments as a result of this model, then the downstream supply chain impact on materials manufacturing could also be significant.

As the emergent model here is so new, it is hard to say what the most relevant business model analytics will be going forward, but Made-to-Order fashion does completely change the value flows across the entire supply chain, so there will most likely be a significant shift in key metrics for brands and factories alike.

What is Business Model Innovation? Innovation using the Business Model as the main mechanism, rather than product or technological innovation. Reinventing a business model – or creating a new one – is a matter of remixing the core components of a business model and developing new value propositions, revenue streams, and cost structures.

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