Driving circular business models in fashion
Global fashion production has more than doubled in the past 15 years driven by an insatiable consumer appetite for newness and variety that is not sustainable. The model of how we make and purchase fashion has rapidly changed which has a devastating impact on the environment and we are in urgent need of a sustainable solution.
At Fashion for Good, we aim to bring together the entire fashion ecosystem to collaborate together to create good fashion, driving the industry forward towards a circular, sustainable system. In an industry first, Fashion for Good, in collaboration with Accenture Strategy, explored the financial viability of circular business models in the fashion industry. With this report, we show how circular business models can be implemented, that solutions are out there and ready to be adopted by brands.
Looking into three different models, the study assesses their financial viability when adopted in four different market segments, which has been published in a detailed report “The Future of Circular Fashion: Assessing the Viability of Circular Business Models.”The report hopes to help accelerate the transformation by addressing one of the main barriers: understanding the financial viability of these circular models for established retailers.
Consumers are becoming increasingly aware of the environmental impact of the industry — which continues to accelerate due to raw material consumption, pollution and waste –and they expect new solutions. The need for a more circular system, where garments and materials are reused, is urgent. Though some steps have been made, with brands and retailers experimenting with new materials, take-back schemes and policy changes tackling some of the key waste challenges, the scale of this progress is slow and not yet sufficient to offset the growth of consumption and reduce the environmental impact.
“We believe this study can drive the implementation of circular models and trigger much needed in-depth discussions around this topic by presenting businesses with actual quantified opportunities related to the adoption of circularity by fashion brands.” — Katrin Ley, Managing Director; Fashion for Good.
Circular business models can enable brands to continue to grow while moving away from their dependence on scarce and finite resources. However, there are significant barriers to wide scale adoption including the risks and complexity of circular models not to mention a lack of proof on their financial benefits. These barriers are particularly relevant to established retailers with successful linear models who remain uncertain about how best to implement a new circular approach.
Visual representation of the financial viability of circular business models based on our analysis
To properly assess the financial viability of circular models, we conducted interviews with leading fashion retailers and innovators: adidas, C&A, CaaStle, Circos, ForDays, Kering, Patagonia, Renewal Workshop, Stella, Stuffstr, StyleLend, Tommy Hilfiger, VF Corp, Yerdle and Zalando. Further in-depth research was supported by the C&A Foundation and organisations involved in their Bridging the Gap initiative. We developed financial models for three circular business models, namely: Rental; a one-off rental of a garment for a short period, Subscription-Rental; a monthly payment for access to a range of garments and Re-Commerce; buyback and resell schemes of a garment by the original retailer. Each model was explored across four industry segments: The Value Market, Mid-Market, Premium and Luxury, using a bottom up approach to calculate margin on a per garment basis.
We discovered there is a strong case that all three of the models can be financially viable for existing fashion retailers, presenting opportunities that could drive a higher margin per garment compared to the current linear model. Rental appears to be very attractive in higher-value segments (with a potential margin of 61% in the Luxury segment), Subscription-Rental has consistently strong potential (from 9% to 30% above operating margin for Mid-Market, Premium and Luxury), while Re-commerce appears to be the most financially attractive, especially within the Luxury segment where the biggest opportunities and profits (a potential margin of 39%) were observed.
The variation in costs associated with each model proved to be a particular challenge for the Value market where new costs for postage and packaging, garment longevity and rental price for example, may exceed revenue opportunities. These challenges are a call to action for brands to innovate on low-cost channels, to make changes to their products to improve the quality and durability, and to change the perception of low-cost fashion as being disposable.
Each of the models has the potential to fundamentally change the commercial incentives of the fashion industry, shifting them from a focus on volume to an industry that is motivated by quality and durability. The benefits of circular models for retailers are not however a guarantee and new business models and innovations should be designed with a focus on sustainability to strengthen the potential environmental benefits.
What’s Next?
Brands and retailers should use these findings to build a deeper understanding of each model and the key strategic considerations to successfully build and scale new circular services. Circular models can drive value by offering them an opportunity to re-engage with and retain consumers as well as claim environmental leadership. Our hope is that this report supports their journey toward wide scale implementation.
“With consumers increasingly buying from brands that have a strong purpose that aligns to their personal values and beliefs, particularly on environmental and social issues, it is imperative that retailers take action to create a more sustainable industry. Circular business models can deliver tremendous value to retailers, enabling them to eliminate waste, drive positive impact across the fashion value chain and improve their competitiveness.” — Harry Morrison, managing director; Accenture Strategy.
There has never been a better time to commit to the circular economy. Technological advances, infrastructure improvements, the emergence of innovators such as Yerdle, Stuffstr, Reflaunt, Gibbon, The Renewal Workshop, CaaStle and Lizee, shifting consumer preferences, new circular design practices, alongside increasing regulatory pressure, are creating an enabling environmental for established retailers to pursue circular economy initiatives with certainty.
“The Future of Circular Fashion: Assessing the Viability of Circular Business Models” report joins a growing number of open source articles, guides and tools created by Fashion for Good and made available to the entire fashion ecosystem. We are committed to transparency, collaboration and sharing what we learn and invite the entire fashion ecosystem to use these resources to help drive change and the industry forward towards a more circular future.
Download “The Future of Circular Fashion: Assessing the Viability of Circular Business Models” here: fashionforgood.com/circular
