The economics of building a fashion empire have broken down.
This story first appeared in the January 11, 2017 issue of WWD. See More.
No longer can a young designer with vision and plenty of stick-to-itiveness get a favorable nod from a few key retailers and rave editorial reviews and parlay that into a business with bigger wholesale accounts, lucrative licenses for fragrances and handbags, flagships in major fashion capitals and a sustainable, multibillion-dollar growing empire.
The biggies from fashion’s last age — Giorgio, Ralph, Calvin, Tommy, Donna, et al — all took some version of that path to fashion superstardom. And their success was a beacon, a bright light followed by hordes of other designers, dreamers and, importantly, investors.
That Ralph Lauren or Giorgio Armani managed to become Ralph Lauren and Giorgio Armani and get rich doing it helped nearly everybody who aspired to great commercial heights in fashion. Designers pushing vastly different aesthetics could look to them or any of the other big names and plot their path ahead.
They could also sell others on that future.
It was — on the business side, at least — a matter of finding a few retail supporters, a little bit of free marketing love from a magazine and then explaining to any one of a number of investors looking to get into fashion how one was going to be the “next Ralph Lauren.”
It was never easy to pull off, but it was an easy story to understand and get behind.
Now, not so much.
There are established successes in fashion, but no one who gives the impression of really killing it in the age of Amazon, social media and retail apathy. Plenty are trying and making headway — the likes of Alexander Wang, Proenza Schouler or Derek Lam and, at the more recent end, Cushnie et Ochs, Jonathan Simkhai, casual L.A. brand Rails or outdoor specialist Cotopaxi — but no one’s made it far enough to sketch out a clear roadmap. And the companies that have garnered the most attention, like Warby Parker, Bonobos, Rent the Runway and Bauble Bar, aren’t designer labels.
There are glimmers of hope, though. One contender in the accessories area is Kendra Scott, which recently sold a minority stake to private equity firm Berkshire Partners that reportedly valued the firm at around $1 billion. The Austin, Tex.-based brand is savvy online with more than 50 doors and a core base of strength in Texas and Oklahoma — far away from the fashion capitals.
But Scott is an outlier.
“There hasn’t been a ton of validation around the new types of fashion companies,” said Tracy Dubb, partner at M3 Ventures, which has investments in Cotopaxi, Rhone and others.
Dubb said investors are forced to “choose what the new way forward is going to be” and that there would eventually be companies that succeed on the strength of their marketing, or their supply chain or some other attribute.
“The truth is that they’re just all going to look a little bit different than Michael Kors did,” she said, noting the rush to invest in fashion brands after the company’s 2011 initial public offering.
For now, the moneyed crowd is largely on the sidelines, waiting, looking for something that is, if not a sure thing, than at least a decent bet.
Fashion needs a winner to rally behind.
“Back in the day, it was a template that might have worked for a generation,” said Jeffry Aronsson, who worked as chief executive officer of Oscar de la Renta, Marc Jacobs, Donna Karan and others and is now scouting for developing brands. “[Now] whatever the template might be might work for [only] that moment and that instant because of the speed of change and the convergence of new ideas, new technologies, new methods of selling.”
Department stores used to be the lifeblood of the designer business. Not so much any longer.
“You know you’re on a slippery slope and you get to the point where you can’t live with [department stores] and you can’t live without them,” Aronsson said. “What’s the new template? I think maybe that there is no new template. It demands creativity, it demands innovation, it demands focus and wise allocations of very limited resources, no matter how much they have.”
While the path is not clear, there is something of a consensus about what the winners of the future will look like:
• They’ll have good product.
• They’ll have social-media savvy, be adept at telling their own stories to customers and able to convert followers into buyers.
• And they’ll be quick to adapt and tight with their purse strings.
“My analysis of it is, the new model is magazines don’t matter,” said Gary Wassner, fashion financier and cofounder and chairman of InterLuxe, which has investments in Jason Wu and ALC. “What they have to say doesn’t matter to Millennials.”
He said the designer brands that are growing, such as Cushnie et Ochs (in which he has a personal stake), Alexander Wang and Jonathan Simkhai, are all good digital communicators.
And that’s perhaps the most important new skill in fashion since the once-mediated conversation between brand and consumer has moved to Instagram and become unfiltered (or, in the case of the president-elect, Twitter).
“You have to have a very strong digital marketing concept,” Wassner said. “It can’t be fake. You have to dig deep into what your brand is about and you have to tell your story. We’re not creating a marketing budget any longer for print. We’re looking at really targeted marketing.”
It’s not just the fashion press — stores are also in large part losing their role as decider, of both what a brand is best at and what customers want.
“Institutions that have worked on a business model for so long, they never thought it would change and they never envisioned this kind of change,” said Wassner, who is also head of Hildun, a factor that extends financing to brands selling to department stores that are now being threatened.
But with e-commerce still making up just 8.4 percent of total retail sales, according to government figures, digital is just part of the picture.
Investment banker Janki Lalani Gandhi, managing director at Lincoln International, said there are plenty of concepts rooted in the web, but that they still haven’t proven they are lasting brands or clearly shown how click-and-bricks can best work together.
“I don’t think it’s clear what that combination is,” Gandhi said. “We really do need omnichannel, but what’s that mean? What’s the right formula? I really do think that varies. Most concepts are so young they’ve only been around 10 years max, but in their current form, it’s been three to five years.”
The first wave of fashion-tech hybrids, including eyewear disruptor Warby Parker or fashion rental player Rent the Runway, drummed up a lot of attention and money on the tech side of the equation, but it’s not clear that those companies are profitable yet.
Broadly speaking, the fashion-digital disconnect is that social media followers stay followers and don’t become buyers. “On the beauty side, we’re seeing winners left and right,” Gandhi said. “That’s really because…you truly have the conversion from social medial into actual dollar purchases. Apparel and accessories [companies] still need to figure out how to truly leverage digital advertising and marketing.”
There is also a more vibrant wholesale base to play to in the hot beauty sector.
“Even if [as a fashion brand] you’re selling through most Nordstrom doors, Anthropologie, Saks, Neiman [Marcus], you maybe get to a few hundred doors,” Gandhi said.
The case is different in beauty, where vendors that break into Ulta’s 949 stores and Sephora’s 2,300 doors are linked into a thriving retail network that provides sizable distribution and a safe haven for their brands. That doesn’t even account for department stores or, at the mass level, the thousands of drugstores.
Apparel enjoys no such refuge and the pressure, financial and otherwise, is on.
“There’s this evolution that’s been occurring for 20, 30 years, but the snapshot of today is, we’re clearly in the early part of this changeover and I think Amazon in a weird way, not so much with high fashion, but with fashion and other consumer products, has really pushed people,” said Joseph Lamastra, founding managing partner of Sandbridge Capital, which counts Thom Browne, Derek Lam and Rossignol among its investments.
“The winners of the future, whatever they are…the key is going to be strict expense control,” Lamastra said. “What the online presence has done, it has eliminated any ability for you to have any fat in your company. If you’re fat in your company, you’re going to get killed. Someone will disrupt you. It’s not the sexiest thing to talk about, but it’s the reality. We are really on top of our cfo’s [chief financial officers] to make sure that they’re on top of their expenses.”
Many fashion companies are extremely wary of doing business with Amazon and but still worry that, if the web giant wants their brand and can’t get it directly, the sales dollars will instead go to a competitor.
“It’s a little scary, they almost have too much power,” Lamastra said. “It hasn’t really reached the luxury level yet, but what if it’s coming?”
That’s the question that a lot of people have.
Amazon could be the great threat or the great opportunity, the secret weapon of the next big brand.
Bloomreach research found that 55 percent of online shoppers turn first to Amazon to search for products. In part, that’s because the web giant has a vibrant marketplace, with its own fulfillment service that delivered more than two billion items last year.
Amazon’s fashion business is mostly in basics now (an area it’s building out with its own private-label offering). But higher-end fashion is clearly in the crosshairs. The company has tapped influencer Olivia Palermo to hawk fashion in online-only videos, it’s sponsored fashion events in India, launched a streaming style show and more.
The desire is there, but hot brands are still playing coy, likely being cautious for good reason.
In the end, the path to the future might lead inevitably to or at least through Amazon. And the next big name might be not just socially slick and operationally efficient with compelling product, but also good at meeting consumers where they are — on Amazon.