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October 26, 2020

Business Model Innovation – Otrium

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Outlet fashion – typically associated with physical malls – is seeing a big surge this year as the pandemic bites into retail’s core business, disrupts supply chains, and dramatically shifts demand. The acceleration of the eCommerce boom, however, has helped some new players pick up the slack. That’s why we are going to dive into the business model innovation (BMi) behind a new startup in Europe.

What is Otrium?

Otrium is an early-stage startup based in the Netherlands focused on helping fashion brands more efficiently and profitably sell their excess merchandise. They have built a front-end platform to sell direct to consumers, while managing the brands’ inventory through a back-end platform, effectively creating an ‘intelligent’ digital outlet store for major fashion brands.

Otrium Mobile App

The company was started by two founders – Max and Milan – in their 20’s after they had to solve the ‘excess stock problem’ for their own clothing brand Breaking Rocks.

The pair, who met at primary school, discovered the excess stock problem after they sold their clothing brand Breaking Rocks in 2015. After the sale they needed to shift €100,000 worth of unwanted stock from their warehouse.

Sifted

They currently have more than 200 brands and a million users (Q2, 2020) and raised a €26M Series B to scale the concept.

With the new generation of consumers showing increased awareness around sustainability, there’s a demand for innovative retail models offering solutions for end-of-season stock.

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How Does It Work?

While the exact business model of Otrium is not disclosed, what we do know is that they had to experiment and iterate for a couple years (the company was founded in 2016) before they arrived at their current business model, which is being scaled-up.

We tried out more than a few business models.

Mollie

The core of the BMi here is price optimization and giving fashion brands an alternative to flash sales and stock buyers. By optimizing the excess stock for price and not being beholden to industry middlemen, they give brands more revenue (important in a downturn) and high-quality exposure to Otrium’s audience.

Otrium, which is based in the Netherlands, takes a cut of each sale made on their platform. It doesn’t disclose the exact revenue sharing agreement it offers brands but says it offers up to three times more than they would get from a stock buyer and twice as much as they would get from a flash sale.

SIFTED

Forbes

The key to achieving this is price optimization (presumably using machine learning) to determine how to price each brands’ goods to its userbase of consumers.

The company uses analytics and a pricing engine to determine what items should cost and then sells merchandise from different brands to more than one million registered users, preventing goods from being thrown away. 

IAmsterdam

Otrium indexes the stock in their own warehouse, sells it on their platform to consumers, and transfers the cash to the brand right away. This helps the brands maintain their cashflow without being squeezed by the traditional middlemen (ie. stock buyers) who would be looking to buy goods at rock-bottom prices and flip it to some kind of discount retailer to make a profit.

According to McKinsey, the value of excess inventory from spring/summer 2020 collections is estimated at €140 billion to €160 billion worldwide (between €45 billion and €60 billion in Europe alone) — more than double the standard level for the sector

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Customer Acquisition

The pandemic has radically changed the game for fashion retailers, many of whom do not have the digital capabilities to deal with surplus inventory themselves.

The spread of COVID-19 has thrown a big wrench in the fashion machinery. “Brands are having a tough time now”, says Daniëls, referring to the world during the pandemic. The lack of sales from retailers has left fashion brands with an enormous surplus on inventory. At the same time, these companies are forced into a new way of working, so they have to speed up their digital transformation and facilitate the rise in online shopping.

Silicon Canals

This has created an enormous funnel of new customers for Otrium on the brand side of their business model.

Otrium said that since the beginning of the pandemic it has seen interest from brands double, and the firm’s revenues grew 40 percent in the past month.

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This momentum helps them attract more consumers to the platform, as the average products are discounted by ~50-75%. The array of mainstream brands – for both men and women – explains why their userbase has nearly doubled over the last year.

Currently, the platform has over a million members, ready to scoop up some of the not-so latest fashion, up from 600.000 just a year ago

Silicon Canals

The additional funding will help the company scale into new markets and continue to acquire customers as competition in the space inevitably increases.

Competition

In the physical world, you would traditionally have stock buyers/brokers who would buy the stock from brands and then sell them to other middlemen/wholesale liquidators at auctions. This stock would typically become available to consumers at outlets such as Winners or Nordstrom Rack.

Another alternative would be to have big discounts (flash sales) at the end of a season and liquidate as much inventory as possible. This would typically happen at specific times of year, meaning consumers are habituated to participate either online or at branded outlet stores (ie. Black Friday, Boxing Day).

The boon of platforms such as Farfetch has created yet another alternative for brands to offload excess inventory. Farfetch, however, is reserved only for luxury brands. For some of the company’s core ‘partners,’ this could be a bona fide option, but it is not a mass-market solution. They do have a Sales page though, where products are discounted from 10 – 60%. Perhaps a pseudo-competitor to Otrium, but Farfetch is – and probably always will be- a luxury fashion etailer.

Another area of the retail fashion market that has boomed this year is Resale fashion on platforms such as ThredUp that allow brands to sell thrift via the consignment model. This is in addition to their peer-to-peer (and brand) secondhand model of upcycling clothes. While not a direct competitor to Otrium, it sells into an adjacent market and could become a direct competitor in the future.

There are a few direct competitors to such as The Outnet (part of the Net-A-Porter/Yoox group) and a handful of smaller platforms in the European region.

Given the overall size of the fashion market and the scale of the problem, you would expect to see much more competition in this space in the years ahead. For now, however, Otrium seems to have found a niche in the market thanks to an innovative business model and a scalable technology platform that is capable of optimizing pricing for brands to maximize their returns on excess inventory.

Despite all of the new technologies coming out for retailers and fashion brands, business model innovation (BMi) is what’s needed to preserve margins and maintain pricing power amid the monumental challenges of this pandemic. Otrium has found an innovative model to do just that, while simultaneously helping consumers buy high-quality products at discount prices.

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