Fashion’s new buzzword is mass customization. But the reality is more unruly. The transformation from ready-to-wear to mass customization is slow to gain traction, even though the need for it is more evident than ever before. The issues with dead stock are not being resolved, rather, they’re getting worse by the day. First due to the pandemic, then by freight crisis, followed by inflation and topped off by a looming global recession. The Business of Fashion recently reported that a mind blowing 58% of garments online are on sale right now.
Many brands argue that on-demand production is too expensive and therefore not profitable. Which sounds reasonable; unit production costs for one-off production is higher than for bulk production, which would mean higher prices, which would mean lower sales. But is that actually true? As an economist, I was curious about the numbers backing up these claims. It turned out that company specific data on this topic was very hard to find. Probably because brands aren’t too keen on sharing sensitive information on returns and dead stock.
Using industry data, rather than company specific data, Tech Tailors was able to research the profitability of on-demand production. This article will dive into nitty gritty details of margins, returns, and sell through rates for the industry at large. As it turns out, on-demand production is more profitable than bulk production, even with 30% higher production costs and similar price points. What’s more, profitability can be increased even further by moving from on-demand, to made-to-measure production.
Produced vs. Sold
Of the 150 billion garments the fashion industry produces annually, 30% remains unsold, while 45% is sold at a significant discount. That means a mere 25% of what is produced, gets sold at full price. From an economical perspective, this means brands could produce 75% less, seeing as discounts and dead stock only destroy value for the brand.
It’s of course hard for brands to forecast – however many months in advance – how much of what they produce, will actually be sold at full price. This is why more and more brands are switching to on-demand production. With on-demand production, brands only produce what they actually sell,eliminating dead stock and the need for clearance sales. The only pitfall of this model is the high entry barrier for customers. Custom orders often can’t be returned, making both brands and customers weary to switch to made-to-order. Allowing returns would take away this entry barrier, but with an average return rate of 30%, that would be a very costly solution.
The good news is that the return problem is solvable. The main reason for returns is fit: 70% of returns get sent back because the item(s) simply don’t fit the customer. Which isn’t all that surprising when you consider that the industry is trying to fit 8 billion people into a standardised size range of 5 sizes. The solution to minimising returns? Tailor-made garments rather than standard size garments – for fast and high-end fashion alike.
Tailoring was long deemed as something reserved for the elite. However, with today’s technology, it’s possible to offer tailor-made garments online. And not just classical suits, but anything from t-shirts to jeans.
Demystifying the Ready-to-Wear Model
Sceptics for a long time have argued that mass tailoring is not feasible from an economic point of view, since one-off, tailor-made production is much more expensive in terms of unit costs. Which is absolutely true. What they neglect to tell though, are the disastrous economics of the current ready-to-wear model. McKinsey recently revealed that of 500 publicly listed fashion companies, only 30% are profitable. The other 70% are destroying value (and the environment). So let’s compare the economics of ready-to-wear (RTW), made-to-order (MTO) and made-to-measure (MTM).
Economics of RTW, MTO, and MTM
| Lead time | Returns | Unit cost | Deadstock | |||
| RTW | 1-12 months | 30% | 100% (base) | 30% | ||
| MTO | 1-2 weeks | 0-30% | +30% | 0-30% | ||
| MTM | 1-2 weeks | 0-11% | +30% | 0-11% | ||
To compare the economics of these three production methods, Tech Tailors looked into lead times, returns, unit costs and dead stock. We’ll go into these metrics below to discuss the assumptions made by Tech Tailors. Please note that these are conservative estimates, in favour of RTW.
Lead time
RTW – Lead times vary greatly per RTW brand, but range anywhere from 1-12 months. Predicting how much you’ll sell, however many months in advance, is why RTW are left with so much dead stock at the end of the season.
MTO – With MTO we refer to novel micro factories producing on demand, not the classical factories producing suits with a lead time of 6 weeks. Micro factories are able to produce garments on demand in two weeks, and sometimes even days.
MTM – With MTM we refer to mass tailoring, not the classical production of bespoke garments. Mass tailoring takes place in MTO micro factories, but rather than producing on demand in standard sizes, garments are tailor made with fully automated MTM software.
Returns
For RTW, the average amount of e-com orders that get returned is 30%. Returns cost brands 66% of the purchase price of the order. The specific return rate of course varies greatly per brand and per garment (jeans are more likely to be returned than sweatshirts). Of all returns, 70% is returned because the order doesn’t fit the customer.
Usually MTO orders can’t be returned, but if a brand would allow that, returns would likely be similar to RTW since the sizing issue is not resolved with MTO. However, returns could be lower if a MTO brand offers a wider size range. Returns could also be lower due to the fact that a customer is more invested with the customization process. The latter two aspects are not taken into account in this analysis, but would likely lower the return rate for MTO.
MTM orders usually can’t be returned, but some online MTM brands do offer a (free) remake. If returns would be allowed, they would drop from 30% to 11%, and possibly even lower. Returns could also be lower due to the fact that a customer is more committed with the customization and tailoring process. This aspect is not taken into account in this analysis, but would likely lower returns for MTM further. Online MTM brand Son of a Tailor achieved a 95% satisfaction rate, suggesting that returns of 5% would also be possible.
Unit Cost
Bulk production is highly efficient, and thus very attractive in terms of unit cost. Bulk production is typically off-shore, in low labour cost countries. The dark side of this production method, is that less than 2% of garment workers earn a living wage.
MTO production is one-off production, which is ±30% more expensive than bulk production. MTO production is typically near-shored, to ensure smooth shipping to customers. 60% of apparel-procurement executives expect that over 20% of their sourcing volume will be from nearshore by 2025. With more micro factories being built, unit costs for MTO production are expected to go down over time.
MTM production is ±1% more expensive than MTO production due to extra costs from generating MTM patterns in real time.
Dead Stock
With RTW, 30% of the produced collection remains unsold and thus becomes dead stock. These garments for the most part end up in landfills.
MTO dead stock is either zero (no returns allowed) or 30% of what’s manufactured if returns are allowed (returns are custom, not eligible for resale and thus become dead stock).
Dead stock with MTM would be equal to the return rate, 11%. Everything that’s returned, is custom and tailor made and thus not eligible for resale and thus dead stock. If returns are not allowed, dead stock would be 0%.
Analysis
Let’s assume a RTW, MTO and a MTM brand produce 100,000 t-shirts, with unit cost being 30% higher for MTO and MTM. We’ll assume the MTO & MTM brands would allow returns.
If MTM brands would only sell (at the same price point) as what would have been sold at full price under RTW, they would produce 75% less, at a 30% higher unit cost, with 65% fewer returns. Resulting in a gross margin of 41% for MTM, vs. a mere 3% for RTW. Now, the sell through rates, returns rates, and markups of course vary greatly per brand, as will the gross margin. But what becomes evident is that regardless of the exact rates, MTM is the more profitable production method.
Implementation of Mass Tailoring
Direct-to-consumer brands such as Son of Tailor are already offering online MTM items to their customers, with 95% accuracy, for RTW prices. Red Thread does the same for MTM womenswear. Unspun offers tailor made jeans online. Most luxury RTW brands are also offering MTM, be it in-store. Currently 30% of the luxury market is MTM.
If automated MTM software is implemented in micro factories, mass tailoring could become the new standard for fashion forward brands. With mass tailoring, brands could reduce overproduction with 91%. They could reduce returns with 65% and they could increase size inclusion infinitely.
Environmental Impact
The fashion industry is currently responsible for 10% of global carbon emissions and for 20% of wastewater production. Of 150 billion garments produced annually, ±50 billion remain unsold. Of the remaining 100 billion garments, 30% gets returned, of which 50% does not go back into circulation. That’s another 15 billion garments down the drain. These garments end up in landfills in Africa and South America, who pay the price for the effects of garment incineration.
While the industry is busy greenwashing with take-back programmes, recycled (synthetic) fibres and carbon offsets, the real solution is blatantly obvious. The industry needs to produce less. 75% less to be exact, and preferably in natural fibres that survive more than 2 cycles in the washing machine.
If brands were to switch to mass tailoring, they could reduce carbon emissions and wastewater production by, on average, a staggering 75%.
Human Impact
The fallacy of buying ‘fewer, better’ is an elitist approach to the (over)consumption problem. The sustainability responsibility is often placed with the customer, not the brand. ‘If people wouldn’t buy our clothes, we wouldn’t produce them anymore’. The fact of the matter is, buying ‘fewer, better’ is only available to the elite. Most people simply can’t afford sustainable brands. So they’re left with fast fashion, which is worn on average 7 times before it’s discarded. A recent article by Apparel Insider showed that 30% of second hand clothes are unusable due to their deteriorated quality. As long as brands will offer low quality, cheap garments, people will continue to buy them. The only way for the industry to have impact at a significant scale, is to tailor to the masses, not the elite.
In conclusion
Tech Tailor’s research shows that it is possible, even with 30% higher production cost, to offer MTM garments at the same price point as RTW, and make more profit in the process. With mass tailoring, everyone could afford to fit in, whether they’re shopping at H&M or Gucci.
