Are fashion companies shifting toward vertical integration?

France

What common trends, such as outsourcing and verticalization, are emerging in the supply chain of fashion and apparel companies? What are the reasons behind these strategic decisions? What core steps – R&D and design, material supply, manufacturing, distribution, offline and online retailing – are most likely to be integrated or outsourced? To what extent do supply chain strategies vary by industry segment? An analysis of 108 brands worldwide carried out by ESCP Europe students provides a series of answers.

The first conclusion is that supply chain strategies are widely varied from one industry segment to another. In lingerie, luxury and sports & lifestyle, where entry barriers are higher, vertical integration is a stronger trend than in fast fashion and affordable luxury. However, looking at each of the core supply chain steps allows identifying common trends.

The analysis highlights in particular the importance for all companies to integrate the first stage along the value chain as well as downstream steps. These are closer to the final customer, where it is possible to create the greatest added value. Upstream, R&D and design are carried out mainly in-house for a variety of reasons. In the sports & lifestyle and lingerie segments, the triggers are fit and technology improvement. In fast fashion, companies want more responsiveness to create quickly new items. In luxury, R&D and design are what defines the brand, while the affordable luxury’s business model needs them to combine responsiveness and brand image. Downstream, brands are investing more and more in direct-to-customer channels, both online and offline.

The middle steps of the value chain, supply and manufacturing, are still generally outsourced. However, several of the analyzed brands are seeking a higher degree of control over their subcontractors. Vertical integration of material suppliers and manufacturers in the process is now becoming part most companies’ strategies. The alternative to acquiring all subcontractors, which is not possible, is to reduce their number so as to control them more easily. Luxury houses tend to acquire and control the highest number of subcontractors, because it is key for them to secure the high quality of the materials that go into their end-products, and to justify the price tag of their products.

As for logistics functions, they are mainly carried out in-house in domestic markets and outsourced in foreign countries. Distribution strategies also depend on whether the brand relies more on wholesale or retail channels: in the first case, brands are more likely to outsource distribution, while retail-orientated companies generally prefer to control distribution in order to be more responsive.

 

Ricardo Alves, Chiara Alzona, Inès Cazaux and Lucia Vivalda worked on this project in 2016 within the Lectra – ESCP Europe Fashion & Technology Chair established in 2014. As part of the collaboration, every year Lectra invites a group of students to work on various projects related to the evolution of the industry, its challenges, innovation, emerging strategies and business models, the approaches to creation and the development of supply chain in the face of new technologies.