Introduction
For years now, the fashion retail industry has been under pressure by consumers, investors, and regulators for its environmental and social impact. Of its many negative impacts, a few key highlights include [1]:
- Carbon emissions: The fashion industry is responsible for 10% of global carbon emissions – more than all international flights and maritime shipping combined.
- Water use: A single pair of jeans uses almost 4,000 liters of water to produce. In aggregate, the industry uses 93 trillion liters of water every year.
- Waste: Annually, almost 100 billion articles of clothing are produced. Two-thirds of those end up in a landfill or are incinerated within a year. [2]
Despite this, surveys and studies by the Global Fashion Agenda found the sustainability pulse in the industry to be weak, and, in fact, not growing fast enough to counteract the industry’s growing environment and social impacts. Today, there still exist massive opportunities for disruption in fashion retail to enable sustainability. In general, the themes can be summarized as follows [3]:
- Supply Chain Traceability
- Reversing Climate Change and Carbon Emissions
- Efficient Use of Water, Energy, and Chemicals
- Respectful and Secure Work Environments
- Sustainable Materials Mix
- Circular Fashion
The following report analyses macro level trends driving the sustainability technology in retail. Furthermore, we will highlight three segments of particular interest to investors (i) sourcing for good with traceability, (ii) sustainable logistics to the customer, and (iii) the circular fashion economy. Within each of these segments exist unique micro trends and characteristics that open different opportunities for investment, both visible through past successes and new challengers entering the market.
While this report characterizes and introspects the fashion retail industry in particular, its trends, themes, and recommendations can be further extrapolated into other retail segments and their potential opportunities for sustainability technology.
Market Landscape
As sustainable continues to drive conversation, fashion brands and retailers around the world are seeing macro industry trends shape their plans. The push for sustainability, in particular in European markets, is driving rethinking and reimagining of the current processes, businesses, and relationships traditional retailers have with their suppliers and customers. The following trends represent a highlight of both the tailwinds and headwinds, for and against, new sustainability initiatives and technologies in the industry.
Macro trends (i): Growth tailwinds
Consumers demand for more sustainable goods
Consumers are not only growing increasingly aware and concerned with their own environmental impact but also the collective immediacy of climate change. General consumer surveys have illustrated this clearly: 50% of consumers are willing to pay more for a product that was designed to be reused or recycled. 36% are willing to pay more for a product that is made from recycled materials. Only 30% of consumers surveyed are not willing to pay more; however, they would choose the more environmentally friendly option if it was at par. [4]
Additionally, as the environmental and social impacts of the fashion industry become increasingly well-known, customers are beginning to factor in a brand’s sustainability into their decision making. Recent survey data [5] suggests that 75% of consumers view sustainability as extremely or very important. To put that into action, over a third of consumers reported switching from their preferred brand to another due to better stances in environmental and/or social practices; 50% planned on switching in the future.
Beyond just survey data, digital data further supports this theme. Internet searches for “sustainable fashion” tripled between 2016 and 2019. Hits on the Instagram hashtag #sustainablefashion quintupled between 2016 and 2019 in both the US and Europe. Sustainable fashion is becoming part of a broader movement, driven, in part, by the concern, activism, and rising spending power of Generation Z consumers. [6]
Efficiencies can consequently lead to sustainability
Sustainability often has another side effect, or rather, driving efficiencies often lead to improved sustainability for brands. Even though more consumers prefer sustainable brands and are willing to pay premiums, value-based shopping still remains one of the highest purchasing criteria. While for 7% of consumers, sustainability is the key purchasing criterion, 16% indicated receiving good value for the money. [7]
In addition, increased volatility on material pricing and the resulting gross margin losses from markdowns are pushing apparel companies to shift from a focus on minimizing the price of supply to a focus on customer-centric, agile product development to meet customer demand. This is important to highlight – while cost efficiencies are important to protect margins, more and more retailers are focused on product development efficiencies to better design, source, manufacture, and sell products to consumers. These new efficiencies will drive more tailored and desired products to consumers while reducing waste.
Environmental regulations and textiles
Global regulation is increasingly reviewing the textile industry as part of climate related agendas. For example, a number of leading global bodies have drafted various initiatives to curb environmental impact. The UN Sustainable Development Goals adopted in 2015, is now the core framework guiding the implementation of sustainability strategies. The 2015 G7 Leaders Declaration agreed to “promulgate industry-wide due diligence standards in the textile and readymade garment sector,” which drove the 2017 OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector. Most recently, the 2019 G7 summit ushered in the Fashion Pact, with 32 major apparel companies agreeing to a set of shared environmental-sustainability objectives. [8]
Additionally, individual countries are also taking steps to regulate textile climate impact. For example, China continues to tighten its environmental policies as part of the 13th Five Year Plan 2016–2020. In France, a circular economy law is expected to come into force as early as 2021; it will prohibit clothing companies from destroying overstock. And in Turkey, the Zero Waste Campaign was extended to textile products in 2019. [9]
Macro trends (ii): Potential headwinds and risks
Fast fashion & our redefined buying habits
Fast fashion companies have redefined our perception of the traditional fashion model. Instead of regular, seasonal pieces, they offer low-cost, trend-based goods with new pieces coming out as fast as weekly. For example, H&M, a market-leader in fast fashion, grew its topline by +9% annually from 2007 – ’15 through this approach.
However, at the same time, fast fashion is a leading contributor to our increased purchasing and discarding of items. Compared to 2000, the average person buys 60% more clothing today, driving the nearly 2x increase in garment production from 50 billion in 2000 to 100 billion pieces today. [10]
Often this creates a disconnect between consumers’ both attractiveness and familiarity towards low-cost and trendy fashion and their increasing concern with sustainability. Even so, leading fast fashion companies are often driving many of the sustainability initiatives. For the entry-price segment, large players scored nearly twice as high as smaller players in Global Fashion Agenda’s annual pulse score. This difference can be attributed to both their larger scale and access to resources, but also their incentives to have better media coverage, e.g. through associations like the Sustainable Apparel Coalition. H&M, for example, has committed to use only recycled or sustainably sourced materials by 2030.
Cost reductions remain a top priority
While driving efficiencies and cost reductions may lead to new practices that reduce waste and environmental impact, often, especially within the fashion industry, many of the tools rely on continuing or expanding today’s unsustainable practices. For example, retailers have historically moved production to lower cost countries (e.g. Bangladesh or Vietnam) or sourced cheaper textiles, e.g. petroleum based polyester fibers or unsustainably sourced cotton. Despite recent trends, 42% of surveyed retail managers indicate finding cost-savings initiatives are important for growth next year vs. 30% improving innovation or improving the products they serve to customers. [11]
Additionally, the impact of unsustainable practices for cost reductions is a further concern in an economic downturn. If retailer margins are continuously pressed, they may forego sustainability promises and initiatives in favor or short-term relief. As we review technologies that enable sustainability, it is clear that expecting the industry to absorb additional costs will be challenging and difficult in the long run.
Recommendation for focus
A simplified value chain for traditional retail can be divided into three segments:
- Sourcing & manufacturing of raw materials into finished products
- Logistics and sales to the customer
- And, more recently, the post-sale customer journey
To be both successful and impactful, new sustainability technologies need to (i) mitigate environmental and/or social problems within one or more of these segments, (ii) reduce or at least not increase cost burden on retailers, and/or (iii) bring the retail experience closer in line with customer sustainability desires.
With these frames, we’ve chosen three opportunities (one for each segment) to deep dive for new growth opportunity: (i) new sourcing technologies to bring sustainable materials to the clothes you wear, (ii) environmentally friendly logistics to the customer, and (iii) a circular economy creating a closed loop from a straight line.
Deep dive: Sourcing for good via traceability
Sustainable textiles have a variety of definitions, some of which can be:
- New textile materials produced with significantly less environmental waste
- Recycled and or reused textile materials (e.g. polyester fibers)
- Ethically sourced textiles (e.g. fair-trade cotton)
Regardless of the definition, sustainable sourcing is at the crux of the environmental and social impact of the fashion industry. By implementing one or many of these levers, fashion brands can dramatically improve their sustainability initiatives at the source. However, despite the intentions, long and fragmented supply chains have made this historically difficult. New traceability solutions will be key to enable transparency, action, and communication with suppliers and end-customers.
While the gap is closing, European retailers are often further ahead and more concerned with sustainable sourcing. In Europe, 70 percent of companies fully agreed that responsible and sustainable sourcing was on the CEO agenda—compared to just 35 percent of North American companies. [12]
“Sustainability issues are complex … and they are hard to simplify… We have work to do in understanding all the elements and collaborating with many different stakeholders… to meaningfully engage with these issues.” [13]
Sustainably sourced textiles
The market continues to grow for sustainably sourced textiles. In fact, 55% of surveyed companies aim to source at least half of their products with sustainable materials by 2025. To demonstrate the effect, in 2019 H&M announced 57% of all materials sourced are sustainable (an increase from 35% a year ago) and it is headed towards its goal of 100% by 2030. To do so, they are expanding their supply chains to include textiles that are recycled, organic, or farmed with sustainable practices. An additional analysis of online shops found 3.3 more products were tagged as made with some recycled materials vs 2017. While absolute volumes are still low in the industry, the trend is ticking upwards across the industry. [14]
Traceability will be essential
More than 50 percent of industry representatives placed sustainability and transparency in the top three initiatives under sourcing along with more than 40 percent in digitization of sourcing and end-to-end process efficiency. While different goals, they coalesce into a similar theme: how can we more sustainably source and enable transparency across the value chain via new technologies.
Apparel industry survey [15]
Global fashion supply chains are incredibly complex with several intermediates between the farmer and the retailer.
“We don’t yet have the vocabulary or language to explain what we are doing at the consumer level.” [16]
There is an increasing need for new technologies to provide transparency not only to the retailer, but also to the end-customer. Distributed ledgers and blockchain provide an attractive solution to the chaos and a clear, verifiable outcome to the stakeholders. To prove the point, 50% of apparel retail executives plan on using blockchain technology in the future to digitize their supply chains. [17] Blockchain enables a variety of use from verifying the authenticity of a luxury bag to the fair-trade practices of cotton. Traceability technology can include a variety of benefits, e.g. anti-counterfeiting, storytelling, tracking, customer engagement, and supply chain analytics.
Traceability competitive landscape
The traceability market, and in general blockchain, is a relatively burgeoning space. IBM Food Trust represents the largest incumbent in the space of blockchain traceability – largely focused on agriculture. Everledger, on the other hand, is one of the most well-funded startups in the space focused on luxury goods. A variety of challengers exist in the space focused on everything from food to apparel.
In the fashion space, large brands such as H&M have invested in startups dedicated to sourcing sustainable materials either from recycling or fair-trade practices. The food industry, on the other hand, is looking for closely at traceability. Starbucks, for example, has trialed blockchain traceability in its supply chain in partnership with Microsoft.
Startups we are watching
Deep dive: Sustainable logistics to the consumer
There are a number of ways to rethink the logistics of the supply chain including better planning of transport routes, cleaner shipping methods, rethinking conventual packaging. The latter is especially interesting as more and more retail moves to D2C and eCommerce. Specifically, how can we reengineer product packaging and shipping packaging for reuse (vs disposal) or recycling.
The trend of reusability and recycling of packaging is increasing considerably. In cosmetics, for example, brands are selling refills at a lower cost than the primary product to incentive behavior, e.g. Alima Pure or The Body Shop. Allbirds, in the shoe industry, uses a self-imposed carbon tax to offset the emissions that come from producing their shoes. Their single-box solution is made with 90 percent post-consumer cardboard and entirely recycled. Regulations are further driving this trend, e.g. the EU Circular Economy Action Plan aims to recycle 75% of packaging waste by 2030.
There is a similar trend to rethink the packaging that items are shipped in, especially for eCommerce. In the US alone, the cardboard used in shipping equates to more than one billion trees. [18] It’s essential that brands not only use reusable packaging, but also convince customers to do so. For example, a reusable PET grocery bag needs to be used at least 50 times to make it more sustainable than a single use alternative. Additionally, the cost implications and low margins in last mile make it especially important that the packaging is economical in the long run.
Startups we are watching
Deep dive: Circular fashion
The reimagining of the post-sale consumer journey has brought about a new circular economy where goods are resold, returned, recycled, or refurbished. Industry experts expect preowned goods (secondhand) and rental goods to be increasingly important, fueled by consumer appetite.
Industry survey on new apparel ownership models [19]
Secondhand market
Today, the traditional thrift and donation segments still dominate the secondhand fashion business. However, market estimates see the dynamic shifting. Driven by a growing resale market, the secondhand market is expected to grow at +39% CAGR from 2019 – ’24.
Secondhand market projections [20]
The huge growth in resale comes from the largely untapped market. For example, in the United States, 82% of people have never resold clothing before despite the growing comfort in doing so. To this illustrate this shift, 70% of women are open to shopping secondhand in 2019 vs only 45% in 2016. Additionally, younger shoppers are adopting secondhand fashion faster. Nearly 40% of Gen Z shoppers have bought secondhand compared to only 20% of Boomers (30% of Millennials, 20% of Gen X) in 2019. For those that do, resale opens opportunity to not only reduce their own environmental impact but also to create extra cash or clear out unused clothing.
At the estimated pace, the secondhand market will be larger than the total fast fashion market, almost twice the size by 2029. In consumer surveys, consumers associate positive feelings from purchasing secondhand (akin to adopting a puppy) vs. negative feelings from purchasing fast fashion (akin to buying fast food).
Secondhand vs. fast fashion market size [21]
Secondhand competitive landscape
Additionally, several startups have established large userbases, e.g. ThredUp and Poshmark. While there are other smaller startups in the space, a number of challengers are developing a platform solution for existing retailers to capture a portion of this growing market.
Startups we are watching
Rental market
The U.S. rental apparel market is estimated to grow at +20% annually from $1 billion in 2018 to $2.5 billion only five years later in 2023. [22] The growth is expected to come from a growing consumer appetite, especially for younger patrons. Over 30% of consumers aged 18-34 indicate previous experience or interest in rental apparel online.
Additionally, most services are geared towards women. A study conducted at UPenn on subscription boxes [23] found that men are generally less interested than women in these experiences. Particularly women found it as an exploratory experience, finding variety and learning new things, while men preferred more control over the purchase – when you own something, you have more control over it.
Rental competitive landscape
Rent the Runway brought rental into the spotlight with high-end women’s fashion. Since then, a number of startups have attempted to break into the market. But also, traditional fashion retailers have created their own rental, subscription-based model. For example, Express launched Express Style Trial which allows consumers to rent up to 3 items every month for a set fee. Startups situated to best enable existing retail platforms could be an attractive opportunity in the near term.
Startups we are watching
Recommendation
Sustainability has been a growing theme in the venture market for years. This has established several incumbent ventures (e.g. in circular fashion) but also proves out the possibility for more investment in the future. VCs should invest in ventures that are targeting a new niche beachhead or enabling today’s brands to become more sustainable in the future.
Sourcing for good: Supply chain traceability, esp. through blockchain, has been a growing trend in the industry. While a number of startups have attempted to grow here, there are many untapped beachheads with their own unique supply chains to establish. VCs should invest in a particular untapped business model, e.g. cannabis, for an entry to this market.
Sustainable logistics: Here, new innovative packaging will help the industry in its transition from on the shelf retail to ecommerce delivery. VCs should invest in companies that are creating reusable packaging specifically for their niche industry. EBBI and Returnity are two accelerator backed companies in this space for fashion. However, other industries such as food could also benefit from more sustainable logistics.
Circular fashion: In both second and rental fashion, a number of competing platforms have grown over the last few years to become the new incumbents. However, they often struggle with either the asset-heavy inventory or the low barrier platform models. For VCs, turn-key solutions, built to enable existing retailers, are much more interesting. Specifically, identifying business models that can let existing brands gain an additional source of revenue at little cost to them.
References
[1] UNEP and Ellen MacArthur Foundation
[2] Social Venture Circle
[3] Global Fashion Agenda
[4] Accenture
[5] Boston Consulting Group
[6] McKinsey
[7] Boston Consulting Group
[8] McKinsey
[9] McKinsey
[10] UNEP and Ellen MacArthur Foundation
[11] GlobalWebIndex
[12] McKinsey
[13] David Savman, General Manager Global Production at the H&M Group
[14] McKinsey
[15] McKinsey
[16] Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel
[17] McKinsey
[18] Forbes
[19] McKinsey
[20] ThredUp, sourced from GlobalData
[21] ThredUp via GlobalData
[22] Bloomberg
[23] Aleksandra Kovacheva