The pros and cons of circular business models
A shortened, ‘blog’ version of my MA thesis from Groningen University
I don’t think I need to tell you how wasteful the global fashion industry is.
Experts value the amount of annually discarded clothing at around USD$400 billion. Of the discarded clothing, two-thirds are synthetic textiles, which can take decades to decay. One of the main reasons for the increase in textile production is the rise of “fast fashion”, as the production and consumption rate of clothing has doubled in the last two decades. As clothing has gotten cheaper, it’s also become more disposable, and this doesn’t even touch on the resource intensive production methods and precarious labour conditions in the countries where most of our clothing is manufactured.
Attention has increasingly focused on circular business models as a way to overcome the waste problem. Circular economy models aim to slow or entirely close resource cycles in the lifespan of a product. Apart from designing clothes that last longer, leading companies are also implementing strategies such as using textile waste to make new marketable products, encouraging and offering free repair services to higher quality garments, and leasing or renting.
For my thesis at the University of Groningen in 2019/2020, I sought to understand how companies in the apparel industry can harness the potential of circular business models, and manage the challenges. I interviewed 8 different fashion/apparel companies across Europe and North America that either already had an established circular model or were at the early stage of implementing one. This included established leaders like Patagonia, Eileen Fisher and MUD Jeans, alongside aspiring circular brands like Jack Wolfskin, Reebok and Nike.
Rental or recommerce?
The two most common circular business models are rental and recommerce. Rental models are about facilitating access over ownership, and can also vary. Standard rental is most common in the luxury segment, and involves renting products that are normally expensive at a more accessible price for short periods of time. In this way, they are similar to traditional suit hire companies for weddings or university graduations. The other main version of rental is the subscription model. This model has been growing in popularity, with growth rates of over 100% in the 5 years prior to 2019. This model is similar to rental in that it emphasises access over ownership, yet differs in that it centers on monthly payments and longer use periods.
The other main circular model is the recommerce model, which is about the resale of previously sold products. Generally, clothing goes through some form of upcycling, refurbishment or repair between being sold the first time and resold to a new customer. Think thrift shops, but instead of the salvation army doing it, its the brand itself, often with third party service support. Recommerce models in fashion are gaining popularity too, having grown 21 times faster than traditional retail in the past three years. Technology and ecommerce platforms have also allowed recommerce to grow from primarily being the model of local second-hand retailers to scalable businesses.
The challenge of running a circular model
Internally, the biggest challenge is inventory management. If you have a clothing inventory set for rental, you’d expect to have a few garments of each size and colour that you can rent out. Perhaps a few extra of the most popular styles because you know those are going to be in hot demand. But what happens when a social media campaign results in an unexpected surge of request for the same garment — and you quickly run out. Depending on the structure of the model, you might also not know how long items are going to be rented out for until a customer makes a request, so capacity planning becomes even more difficult.
This difficulty is most pronounced in seasonal brands that aim to swap out large sections of the lease stock throughout the year. For recommerce models, inventory management challenges are more about managing the take-back collection of clothing, as well as the cleaning and repair schemes so that things can be resold. This is an expensive, time-consuming and precise process that often requires large centers dedicated to this upcycling expertise.
Another major logistical challenge for rental business models was managing quality assurance. Designing for circularity means using materials that are as durable as possible. This proved difficult with certain kinds of garments or materials, like fine silks or fine sweaters, which damaged easily. For recommerce, quality standards on items that were returned damaged was also a challenge, as well as how to price varying degrees of wear and tear.
The final major logistical challenge for both rental recommerce companies was how to manage garments once they had passed their use-by date. After enough use or damage, some closing just can’t be sold or rented again. What to do with these used garments was a struggle, with some opting to sell them in bulk to organisations or charities that could still use them, or others working with specialised factories in a downgrading process to grind down the yarn to its most basic form so that it could be upcycled into new garments.
Processes like these can also be costly, yet ultimately ensure that nothing goes to waste. There are also plenty of creative and clever ways that companies downcycle textiles that are not fit for resale, like IKEA using MUD Jeans’ recycled denim to make sofa covers.
Another limitation is the fact that non-durable materials are more difficult to use in design, as they won’t last as long in a circular model. This gives designers less creative control to differentiate private label brands and unfortunately means that many natural fibres cannot be used due to their fragility and lack of durability, forcing designers to opt for more synthetic materials.
Externally, the most common theme across both recommerce and rental brands is the perception that a lot of consumers are still comfortable buying a preowned garment or paying for a lease model. Multiple brands claimed that despite customers increasingly claiming that they are willing to pay more for sustainable clothing, few of those well-intentioned people actually followed through when their shopping behaviour was examined.
The product displacement rate came up in multiple interviews as a major dilemma for circular retailers. Ideally, circular models lead customers into buying less brand new clothes. The rate at which the purchase or rental of a pre-owned garment displaces the purchase of a new garment is the displacement rate. The data is still emerging on how successfully rental and recommerce models actually displace the purchase of new products, but early signs show it isn’t as rosy as previously thought.
“A lot of brands assume a one on one displacement rate, so if I rent one garment, I will buy one garment less, which is a displacement rate of one…the most favorable is likely only half or 0.3 with a recommerce model. So if I buy one secondhand garment, it means that I only buy 0.3 less new garments, which completely shifts the environmental impact” — Industry Expert in interview
Low displacement rates are not standard across the rental industry as a whole, but it is something that companies need to be aware of, as it speaks to how much of an impact they are really having.
But what about the good stuff?
The most obvious benefit of a recommerce or rental model is that it lessens the need for new clothing to be produced, as used garments can be refurbished and re-incorporated into the business model. If done through a streamlined process, this can also be cost-saving.
Design is also an area where circular models have great benefits. Investing in high quality collections that remain in a circular system means that rental and recommerce brands can focus on making ‘timeless’ clothing and not seasonal clothing that needs to follow fashion trends and be routinely swapped out. Better control over design was also done by brands foregoing the competitive price-pressures and negotiations of large resellers and focusing more on direct-to-consumer sales.
Recommerce brands benefit the most from this because they are the ones that tend to sell through department stores and resellers. Brands insisted that a far greater percentage of direct-to-consumer was worth aiming for, giving brands better control over prices, manufacturing, planning, logistics and allows for higher margins.
When it comes to control over design or end-of-life management, one crucial opportunity is collaboration with third party solution providers. There are many third parties in the US and EU that circular companies work with for their product collection, processing, repair and resale, including the Renewal Workshop, Trove and Style Lend.
There are numerous benefits from working with third party solution providers. Firstly, brands appreciate the two-way feedback mechanisms that take place. Brands receive data on damage rates, feedback on different materials in the upcycling process and other design tips. This feedback cycle allows brands to continue to develop and refine their products, getting insight into what works and what doesn’t work.
Finally, a lot of brands — especially those in the mid-market to premium segment — have a lot of their clothing being sold in the second hand market completely out of their control. The used garments of popular brands can be found in vintage stores or on online peer-to-peer resale platforms all over the world, in which the brand itself sees no slice of the revenue. By joining forces, fashion brands can tap into their already existing secondhand market, with the added benefit of being able to authenticate and quality-assure each garment.
The central benefit for customers is that it gives them access to high quality goods at a more accessible price. At least one brand that was interviewed for this research project employed a ‘lifetime guarantee’ of free repairs on its main line of garments. Customers could have their clothing repaired for free in store or even have a free self-repair kit sent to their house. This kind of financial incentive makes the higher initial cost of purchasing the item a lot cheaper in the long term when numerous free repairs are taken into account.
Another opportunity for circular business models is that by investing now, companies may get ahead of potential future regulations and norms. Brands with embedded circular or sustainable business models can spare any negative consequences as well as being able to claim they have already been doing the ‘right thing’ long before it was expected of them. The interviewed brands also said that it is far easier today than ever before to get venture capital and investment if your business is related to sustainability or circular economy.
Finally, collaboration between brands was the final benefit that was mentioned. Brands, especially those in similar segments, tend to have similar innovation and R&D problems that they are trying to solve independently. There is great potential for mutual gain among brands if peer organisations agree on what to prioritise and which problems need solving. By ‘picking a lane’, brands aren’t sharing commercially sensitive information but they are agreeing to invest together in areas that will eventually make the entire industry better off, as well as saving costs and creating a higher quality product for the customer.
The business case for circular fashion has never been clearer, yet more work needs to be done to make these opportunities more salient to the brands that are still hesitant to embrace the circular transition, as well as strengthen the solution provider landscape so brands don’t have to invest and manage the new business model on their own. When done right, its a win-win for the brand and the consumer, not to mention the planet. This thesis was a fascinating look into the world of circularity, please reach out if you want to discuss this more.
Chris
