The changing face of the high street and the retail supply chain

The retail supply chain, and how it is affected by challenges on the high street

The retail supply chain is changing beyond recognition. Changes in consumer demand, coupled with consistent increases in business rates, have completely altered the face of the UK’s high streets and city centres over the past twenty years.

Traditional retailers such as BHS, Woolworths, and even the 170-year-old Thomas Cook, have failed to adapt – and have simply gone out of business.

If we look specifically at the world of fashion, platforms such as Farfetch, boohoo and Zalando have changed the nature of how many of us shop, forcing established businesses to adapt quickly,  and changing the retail supply chain beyond recognition.

 

Adapting to change

Retail supply chain | Challenges on the high streetTo adapt to uncertainty around consumer demand, many high street retailers have attempted to change the way they manage their supply chain.

Businesses that used to shop for seasons (spring/summer, or autumn/winter), may now order new stock in monthly, if not more often.

This potentially more costly model, can bring a competitive advantage – with new styles on the shelves (online and on the high street) bringing customers in store more frequently.

 

Inditex vs. Farfetch – two very different business models

Balancing the needs of a complex fashion and retail supply chain can be hard.

Inditex and Farfetch have developed very different models to support this – but each with end-to-end management of the supply chain at its heart.

In this article, we’ll look at how these two successful fashion brands have successfully turned the supply chain to their advantage.

 

We’ve worked in partnership with Grant Thornton to produce a simple guide to supply chain finance for the retail sector.

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The Farfetch retail supply chain model

FarFetch E-commerce platform for boutiques and brands - reinventing the retail supply chainThe last five years has seen the meteoric rise of online fashion platforms such as Farfetch, Garmentory and Seezona, that allow boutiques to sell branded goods on their platform, offering them a new and relatively low risk route to market.

Boutique owners are keen to sell stock at full price, but with frequent sale periods and reductions, it’s important they balance their working capital requirements to allow them to buy in new stock quickly in line with demand.

Farfetch offers both loans and an early payment programme to eligible boutiques on their platform, enabling them to grow as the platform grows too.

This gives these businesses, which are typically too small to benefit from invoice discounting from their banks, increased flexibility to adjust their buying in line with shifting trends and customer demand.

 

“Farfetch had to be built as a platform, curating and controlling every single step of the seller and consumer experience with a deep sense of love for fashion. Every aspect of our platform was built from day one for the love of fashion and deep knowledge of technology. That’s, in short, our “secret sauce.”

Today, Farfetch is the only at-scale, global technology platform for luxury.

For brands and boutiques, we are an innovation partner, as well as a plug-and-play global amplifier, making them available to more than 2 million customers all around the globe, in a direct-to-consumer business model. For our consumers, we allow them to find the specific item they love from anywhere in the world, that they couldn’t find in their own city or anywhere else online.”

– José Neves, Farfetch founder and chief executive (source: Drapers Record, July 2018)

 

The Zara story

If we turn to the Inditex Group, who own Zara and other high street fashion chains, we see a totally different model.

They have designed a retail supply chain model that allows them first-mover advantage as new trends emerge, giving them the opportunity to thrive on uncertainty and fluctuations in consumer demand worldwide. Inditex are setting the standard for inventory management, ordering new styles in twice a week since 2012.

Amancio Ortega founded Zara in 1975 in an attempt to better understand world markets for his fashion merchandise. From his first store in Spain, Zara has since expanded to more than 2,200 stores in 96 countries around the world.

In 2012, Inditex, Ortega’s parent company (made up of Zara and other retailers), reported global sales of US$20.7 billion, with Zara representing 66 percent (US$13.6 billion), of that total.

With ever-changing consumer demands and increasing uncertainty in the retail market, the “old” model of fashion buying, with two seasons, and the same stock on shelves for three months or more, is no longer fit for purpose.Zara' retail supply chain is based on a just-in-time production model

Ortega was quick to spot this trend and has adapted his business to work on a flexible supply chain model.

Zara produces around 450 million items a year. The business remains efficient by making regular, small-batch deliveries twice a week to all of their stores around the world.

Ensuring all this runs smoothly is what Zara does best. They control more of their manufacturing and supply chain than most of their competitive counterparts and manage their working capital toolkit carefully to fund the supply chain with unfailing precision.

 

Just in Time production

Zara caters for different tastes as well as a very diverse and ever-changing retail environment through a controlled and integrated process – just in time production.

Zara’s success relies on keeping a significant amount of its production in-house and making sure that its own factories reserve 85 percent of their capacity for in-season adjustments. Balancing outsourcing with in-house production in this way gives them flexibility in the amount, frequency, and variety of new products to be launched.

The company depends heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain. They use a range of working capital tools to allow these producers to grow with them. The wages of these European workers are higher than those of their developing-world counterparts, but the turnaround time is phenomenal.

Read more at https://www.forbes.com/

 

Snapshot: Urban retail regeneration, Aussie style

In Australia, recent years have seen the re-emergence of vibrant city centres. These are filled with boutiques, independent stores and places to eat, drink, socialise and shop at the same time, making shopping an experience rather than a necessity.

This has been achieved in large part by the cities’ investment in regeneration and the creation of accessible retail real estate without crippling businesses rates.

Younger, more creative entrepreneurs and independent chains have been quick to take advantage of these changes.

We are yet to see whether this trend will emerge in the UK – but predicting consumer demand remains a challenge, especially for smaller retailers.

 

A responsible approach to the fashion retail supply chain

Retailers are increasingly demanding that their suppliers operate in a responsible, sustainable way, in line with concerns about worker welfare and the environment.

“Predicting consumer demand can be hard. But harder still is the management of a diverse supplier base worldwide. Continued innovation in the supply chain – and the way that it is financed – will be vital to allow producers to remain current, and to keep up with consumer demand.

We’re increasingly seeing both retailers and consumers are demanding that we keep a close eye on the sustainability of our suppliers, and their environmental credentials”.

– UK Head of Supply Chain for a multinational fashion supplier

 

The move towards sustainable fashion concerns more than addressing fashion textiles or products. It comprises addressing the whole system of fashion and the supply chain in particular. This means dealing with interdependent social, cultural, ecological and financial systems.

It also means considering fashion from the perspective of many stakeholders, users and producers, the environment, and end consumers.

However, sometimes the benefits of product-level initiatives, such as replacing one fibre type for a less environmentally harmful option, are eaten up by increasing volumes of fashion products.

It is therefore extremely difficult for retailers and their suppliers within the fashion ecosystem, to create a responsible and sustainable approach to production and supply chain management.

 

Conclusions and final thoughts on the retail supply chain

Retailers and their suppliers have a clear and present requirement to adapt to changes in consumer demand, regulation, competitive challenges and the need to move towards a more sustainable and responsible mode of production.

As we’ve explored briefly in this article, by contrasting Inditex with Farfetch, there are different ways to do this.

Building a supply chain model that works both for the business, and is flexible enough to deal with uncertainty, is vital.

However, this is only part of the picture.

By putting in place a supply chain financing toolkit that looks up and down the supply chain, retailers and their suppliers can neither predict nor prevent uncertainty – but they can at least prepare for it.

See our recent article on strategies for dealing with supply chain challenges in an uncertain world – and look out for more articles around uncertainty and the impact on the supply chain over the weeks to come.

 

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