Who’s Influencing Fashion’s Sustainable Future? Apple, Amazon—and Toyota
March.10.2020 Sourcing Journal by John Thorbeck
If you were in business school in the 1980s, you would have studied Japan. “Japan as Number One” was a bestselling book, and Japanese auto companies were the new standard for global excellence. That was all owed to quality, but what made Toyota and others unstoppable was that they inverted the cost/quality equation—they achieved higher quality at a lower cost. The ingrained American car maker mindset embraced the opposite, believing that quality cost more and consumers would pay for it.
By 1990, Toyota’s market value was twice that of GM, and it is now the world’s largest car manufacturer. The U.S. never recovered. Quality at lower cost was the consumer revolution that dethroned Detroit.
And it’s a scenario that’s relevant today, but the new revolution is sustainability.
That is true in autos (Tesla), but applies to all industries—including fashion. Like quality, sustainability is a word with many definitions, but it is the innovation challenge of our times. Will sustainable fashion only be achieved with higher costs and prices? Or, like the Japanese, will someone accelerate and scale sustainability with lower prices, inverting current economics? Toyota’s process is called the greatest innovation of the 20th century.
What will be the 21st century’s greatest innovation when it comes to sustainability?
Referring to the auto industry, Harvard’s John and Natty MacArthur University professor, Rebecca Henderson writes in her upcoming book Reimagining Capitalism in a World on Fire, that one of GM’s executives, flummoxed and frustrated, took to demanding that consultants photograph every corner of Toyota’s premier NUMMI plant.
Did imitation work? GM could duplicate many things, down to the square inch, but not the Toyota culture.
In 2020, what do retailers expect to gain from imitating fast fashion, subscriptions, rental, resale and recycling?
Sustainability is the challenge of our times because consumers demand it. The choice for fashion brands is not a better planet or products; it is to survive at all. Fashion firms are so used to cycles that they always count on the next upturn. But the stakes are higher now and unforgiving, with uncertainties in both supply and demand, which creates a unique vice-like pressure on revenue and costs. Fashion’s bargaining culture always assumes a better bid somewhere, and that partnership means another 10 percent off.
That worn-out approach to cushioning risk doesn’t mitigate it at all.
Consumers are not the only force for change—investors are, too. Their criteria for supply chains are evolving to Environmental, Social and Governmental (ESG) standards. The “do no harm” mantra for corporate social responsibility is over. Henderson illuminates this shift in Reimagining Capitalism by describing work with Hiro Mizuno, chief investment officer of Japan’s GPIF, the largest pension pool in the world. GPIF, alongside California State Teachers’ Retirement System (CalSTRS)(U.S.) and USS (U.K.), published a letter to its investment managers on ESG criteria, with this paragraph:
“Skeptics that continue to question the growing role of sustainability within the global investment community should realize that they are quickly becoming the minority. With a large majority of research in a meta-analysis of over 2,200 studies showing a positive relationship between ESG investment and returns–and around 90% showing at least a non-negative effect–they should also be aware that the evidence is not on their side.”
Why is this important to fashion, an industry that just wants to go green, reinvent the store experience, personalize its data and loyalty programs, and cycle up again?
It’s important because trillions of dollars of investment are in waiting for placement. Retailers must compete for capital, just like any other industry. But how will they attract capital if their transformation to profitability and sustainability isn’t convincing? Attainment is unlikely, save for the few who can overcome fashion’s low-profit, low-growth and low-tech track record. It is high stakes for a famously insular industry that doesn’t hear or heed outside learning or voices.
So what is the way forward? As Anna Wintour put it in a recent New York Times article, “At a time of crisis, we have to think of a radical reset.”
Awareness for change is high, as we know by all the shows and forums and claims for progress. Beyond CEO and celebrity PR, finance and fashion must each envision and achieve a more equitable, profitable and sustainable future. To get there, it will take a focus on five critical measures.
Genuine process innovation
First, like Toyota, companies must focus on genuine process innovation, not technology fixes.
Speed and flexibility are primary drivers of productivity, but connectivity, visibility, digitization and automation are not the same thing. Technology did not differentiate Toyota–it was culture and commitment. The same can be said for Zara today. Process change is what Henderson calls “architectural innovation,” or how pieces of the puzzle are fitted in a new way. In fashion’s alternative ‘AI’, benefit must be end-to-end, shared with upstream partners and measured by market and social value.
Large-scale organizational change
We know our goals and competition, yet we do not succeed when it comes to large-scale organizational change, something Henderson has unique insight into. Why have Marks & Spencer, Gap, L Brands, Macy’s, Kohl’s, J.C. Penney and many more stalled or failed for a decade or more? These brands are all on shrink-to-success trajectories, uncompetitive in a global marketplace. They are the Fords and GMs of the 2020s. For the key to the alternative, to mobilize over strategize, Henderson articulates shared purpose as a motivator more powerful than shared value (advantage) and disruption (innovation). It is a cultural skill set rare among executives who rose to leadership via merchandising or finance. The great names in our trade have left the stage.
Apple, Amazon and Zara
Inspiration, whether the industry likes it or not, begins with Apple, Amazon and Zara.
What do they share in common? Their financial advantage is to mitigate inventory risk and maximize free cash flow by inverting the working capital cycle. Their differing processes for supply flexibility are more enduring and protectable than their products. In application to fashion, that means more than store trends and turns; it means value created across all tiers of the supply chain, from first to last mile.
In other words, a business model based on lowest-cost sourcing and volume buying is no longer competitive. It has been superseded by a model that unlocks internal capital to invest in growth and sustainability. Inventory excess has been a colossal obstacle but these three are not the perpetrators. However, what worked for Toyota’s supply chain must be reinterpreted for fashion. The new narrative for fashion is a proven alternative for postponement drawn from the electronics industry and based on a decade of Stanford-based work. Its time has come.
Collaborate, but carefully
In this overhaul to the new, necessary model, companies should collaborate but choose partners carefully. Europe’s lead in sustainability is real and evident, and Asia has a powerful supply base and rising demand. Focusing on location, with efforts like near-shoring, is a limited response, as Nike and Adidas have demonstrated in abandoned, expensive ventures in manufacturing.
In choosing partners for sustainable practices, look for shared purpose above all; that is, cultural DNA that is more than mission statements. Values scale, and individuals matter. Find both.
What if H&M and Zara join hands to deploy talent and tools? Their family, founder and European values are closer than you think. What if Target and AFM (the $100 billion private family holding company in France)–one U.S. retailer, one non-U.S., but two global networks–join hands across complementary merchandise? These four are $250 billion in fashion goods, more than Amazon and Walmart combined.
Coalitions, and new collectives, will matter to global consumers hungry to embrace brands that represent practices and products that deliver social impact.
Financial and social capital
Finally, do not doubt that the key metrics in fashion’s future are financial and social capital. What is your strategy to generate both? The achievement of work by Warren Hausman of Stanford University was to link supply flexibility to significant capital upside (market value) and to quantify its untapped economics. That capital link and opportunity gap are what ESG measures will illuminate as the essential engine for sustainability and profitability.
In the quest for sustainability, investors and consumers are forces for change. Fashion, as the most globalized, complex and inefficient supply chain, must reverse its fortune by inverting its formula for success. How will it reimagine a business model for a better future? As Henderson says in her new book, “Welcome to the world’s most important conversation.”