Business Modelling in the Fashion Industry [Video Transcript]

A business model represents the internal logic of a firm. As managing a business entails for a high degree of complexity, a business model allows managers to visually simplify the inner workflow of the firm and identify the 9 essential building blocks that bring value to the market.

In the fashion industry, we can additionally simplify this model by focusing on the 4 key factors that set firms apart: its value proposition, its customer segmentation,  it’s communication and distribution channels as well as the degree of complexity of the firm’s value chain. The core element of a business model is found in the connection created by the company’s value proposition  – or the solution – and the target market – or the customers the company wishes to help.

In this whiteboard animation, we are going to discuss the most important fashion business models, identifying the unique aspects of each model.

Fashion Designers. This business model is the one adopted by firms wishing to compete on the top tiers of the fashion pyramid. The business model of these typologies of companies revolves around a value proposition which is grounded on prestige and exclusivity.  In order to deliver the dream factor effect capable of associating aspirational values to a firm’s products, companies use fashion media to deliver a narrative capable of conveying intangible brand values. This is effectively done by creating an appeal through the fashion media industry and the press.

Another distinctive feature of this business model relates to the vertical integration strategy pursued by fashion firms in this segment. Designers will start controlling more in-depth the production pipeline by selecting licensees, or contract manufacturers which will create products using the licensor’s brand name. In a later stage, by pursuing a forward integration strategy, many fashion designers try to completely manage the manufacturing stage of the pipeline by acquiring shares in partner companies.

Luxury Brands. Luxury is strictly connected to timelessness and exclusivity. In luxury, the timeless and heritage-sensitive values of a brand can be ‘stretched’ to cover a wide range of product categories, including watches, cosmetics and leather products. The value proposition of luxury brands consists of allowing customers to set themselves apart from high-paced trends and fashion fads, by owning iconic pieces of style which will never become old or outdated. Luxury brands represent an attestation of social status, or better yet, they can be considered a social currency.

Luxury brands ideally focus primarily on customers who are sometimes described with the acronym HNWI (High Net Worth Individuals). For this type of customers, the price point is uninfluential in the purchase decision, as they tend to value much more the experiential component of shopping, more than they value money.

Luxury companies revolve around a sense of heritage and tradition which in many cases if more than a century old. This allows them to promote their products with discretion, by avoiding the "buzz factor" that many other fashion firms need to ignite desire into their customers. True luxury firms do not even advertise their products, as much as ‘unveil’ them to a selection of exclusive clients.

Premium Brands.  This category of brands is more heterogeneous, as it relates to brands which are positioned in the medium to high price segment. The value of these brands is delivered through a clear brand vision, capable of connecting the value of the brand to volumes and scales delivered by the manufacturing industry, and a large network of suppliers.   This business model is more associated with a good pricequality ratio which is obtained through product specialisation and production optimisation. Companies in this prices segment need to be aware of their TTM (time to market) in order to strike a balance between a higher quality apparel production and a faster fashion seasonality.

In an inflated and saturated market like the one belonging to premium brands, companies need to develop effective marketing plans to acquire and maintain market share. In this context, where fewer quality or heritage values can be drawn, competition is much more reliant on the cool factor and on celebrity endorsements.

Fast Vertical Retailers. This business model is connected to companies which pursue the development of speciality chains with a wide geographical reach.

Their value innovation can be found in the creation of a flow of fashionable merchandise channelled through an extensive distribution network comprised of stores located in prime locations. Fast retailers create welcoming stores, with very convenient prices, where their vertically integrated organisational structure allows them to effectively manage their value chain and deliver value while achieving a high level of profitability. This typology of a company is, in fact, capable of collecting margins which would normally pertain to both the fashion producer and fashion retailer.

Other relevant characteristics of vertical retailers include:

• The complete control of the value chain
• The creation of a standardised store concept, where all items are sold under the company brand
• The ability to respond in a timely manner to fashion trends
• The minimisation of sales risks due to efficient value chain management.

Fashion Conglomerates. Since the 90s it has become common practice to grow fashion companies by acquiring promising brands and designer ateliers. This growth strategy has allowed larger fashion companies to become fashion conglomerates, managing a wide portfolio of business models and brands. When two companies enter a buyer-seller relationship both the “acquirer” and the “acquired” gain benefits making the conglomerate model of growth a viable business strategy in the fashion industry.

The benefits of this model for an acquired brand entails the opportunity to access:

• • Capital and find long-term financial stability
  • Quality management and high-level managerial consulting
  • Worldwide distribution
  • A stronger contractual position in relation to suppliers

The benefit for the conglomerate ultimately relates to managing a sufficiently diversified brand portfolio allowing it to compete over a variety of markets.

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