www.made-by.org

Evaluating the case for new business models in the clothing sector

Dr Martin Buttle

Senior Supply Chain Consultant, MADE-BY

08/05/13

Introduction

A study of alternative business models in the fashion industry, with an aim to:

•Assess their commercial viability for take up by a large scale retailer

•Assess their potential to reduce resource impacts, particularly waste, water and carbon

UK Waste Footprint

Resource Price Index

The Business Models

Model 1 – Retailers providing repair and upgrading services and repair workshops for their own garments

Model 2 - Retailers providing large-scale leasing services (e.g. for baby clothes)

Model 3 - Retailers providing large-scale services for one-off hire

Model 4 – Retailers offering a reuse section for own-brand garments within their store

Model 5 – Peer to peer exchange

Model 1: Retailers offering in-store repair services

Model 2: Baby Clothes Leasing

Model 3: large-scale online hire services

Model 4: Buy-back & resale

Model 5: peer to peer exchange

Methodology: Scope

What was included in the study:

•IPSOS-Mori data used to gauge consumer demand

• Desk based research and interviews

• Scenario analysis

• Erred on the side of caution in building the conservative scenarios

• Where possible, validation of assumptions applied

What was excluded from the study:

• Impact on existing small scale business providers

• Net impact on sales of products under retailers existing models

• Industry wide implications

Methodology: Financial Analysis

• A financial model created for each business model

•Commercial viability measured against the following key performance indicators:

- 2 year payback on capital invested

- a return on capital of 15%

- a positive Net Present Value of cash flow

• Scenarios created for each model (except Model 3)

- a conservative (or realistic) scenario

- a tipping point scenario

Methodology: Resource Impacts

Calculations:

• Cotton t-shirt used as basis to calculate resource savings

• Resource saving of a garment saved or displaced based on weight. 0.33 kg/adult garment & 0.07kg / baby garment

Carbon and water saving based on displacement effect applied to each model:

• Carbon - 21 tonnes of CO2e saved per garment displaced

• Water - 4695 litres of water saved per garment displaced

Waste savings is a combination of garments displaced and saved from going to landfill

Displacement effect varied across models

Scenario 1

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No No Maybe Yes Yes Yes Yes No No

Payback time (Target 2Y) n/a n/a 4.9 years 4.9 years 2.9 years 2.9 years 2.3 years 2.3 years n/a n/aROC (target:>15%) n/a n/a n/a 140.82% 36% 224.02% 259% 1158% n/a n/aNPV, £K (target:>0) n/a (-1071) n/a £314k £149 £624k £556 £1763k n/a (£1,411k)Gross Profit Margin 10.13% 15.66% 55.11% 54.66% 67.04% 68.19% 58% 60% n/a -19%Operating Profit Margin -38.74% -9.88% 0.63% 11.63% 10.69% 16.00% 28% 39% n/a n/aEBITDA -6.95% 5.46% 20.08% 28.55% 45.34% 49.19% 28% 39% n/a n/a

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5

Scenario 2

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No Maybe Yes Yes Yes Yes Yes No MaybePayback time (Target 2Y) n/a 5.8 years 2.7 years 2.7 years 2.9 years 2.9 years 2.2 years 2.2 years n/a 7ROC (target:>15%) 2.20% 194.29% 131% 515% 36% 224.02% 281% 1278% n/a 232%NPV, £K (target:>0) n/a (£1,062K) £501 £1,634k £149 £624k £630 £1,922k £661 £803kGross Profit Margin 43.79% 46.99% 64% 64% 67% 68% 23% 25% 26% 34% Operating Profit Margin 2.25% 24.49% 20% 29% 11% 16% 12% 17% -69% 19%EBITDA 20.65% 33.37% 32% 40% 45% 49% 12% 17% -69% 19%

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5 (Scenario 3)

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Financial Performance

Scenario 1

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No No Maybe Yes Yes Yes Yes No No

Payback time (Target 2Y) n/a n/a 4.9 years 4.9 years 2.9 years 2.9 years 2.3 years 2.3 years n/a n/aROC (target:>15%) n/a n/a n/a 140.82% 36% 224.02% 259% 1158% n/a n/aNPV, £K (target:>0) n/a (-1071) n/a £314k £149 £624k £556 £1763k n/a (£1,411k)Gross Profit Margin 10.13% 15.66% 55.11% 54.66% 67.04% 68.19% 58% 60% n/a -19%Operating Profit Margin -38.74% -9.88% 0.63% 11.63% 10.69% 16.00% 28% 39% n/a n/aEBITDA -6.95% 5.46% 20.08% 28.55% 45.34% 49.19% 28% 39% n/a n/a

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5

Scenario 2

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No Maybe Yes Yes Yes Yes Yes No MaybePayback time (Target 2Y) n/a 5.8 years 2.7 years 2.7 years 2.9 years 2.9 years 2.2 years 2.2 years n/a 7ROC (target:>15%) 2.20% 194.29% 131% 515% 36% 224.02% 281% 1278% n/a 232%NPV, £K (target:>0) n/a (£1,062K) £501 £1,634k £149 £624k £630 £1,922k £661 £803kGross Profit Margin 43.79% 46.99% 64% 64% 67% 68% 23% 25% 26% 34% Operating Profit Margin 2.25% 24.49% 20% 29% 11% 16% 12% 17% -69% 19%EBITDA 20.65% 33.37% 32% 40% 45% 49% 12% 17% -69% 19%

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5 (Scenario 3)

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Financial Performance

Scenario 1

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No No Maybe Yes Yes Yes Yes No No

Payback time (Target 2Y) n/a n/a 4.9 years 4.9 years 2.9 years 2.9 years 2.3 years 2.3 years n/a n/aROC (target:>15%) n/a n/a n/a 140.82% 36% 224.02% 259% 1158% n/a n/aNPV, £K (target:>0) n/a (-1071) n/a £314k £149 £624k £556 £1763k n/a (£1,411k)Gross Profit Margin 10.13% 15.66% 55.11% 54.66% 67.04% 68.19% 58% 60% n/a -19%Operating Profit Margin -38.74% -9.88% 0.63% 11.63% 10.69% 16.00% 28% 39% n/a n/aEBITDA -6.95% 5.46% 20.08% 28.55% 45.34% 49.19% 28% 39% n/a n/a

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5

Scenario 2

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No Maybe Yes Yes Yes Yes Yes No MaybePayback time (Target 2Y) n/a 5.8 years 2.7 years 2.7 years 2.9 years 2.9 years 2.2 years 2.2 years n/a 7ROC (target:>15%) 2.20% 194.29% 131% 515% 36% 224.02% 281% 1278% n/a 232%NPV, £K (target:>0) n/a (£1,062K) £501 £1,634k £149 £624k £630 £1,922k £661 £803kGross Profit Margin 43.79% 46.99% 64% 64% 67% 68% 23% 25% 26% 34% Operating Profit Margin 2.25% 24.49% 20% 29% 11% 16% 12% 17% -69% 19%EBITDA 20.65% 33.37% 32% 40% 45% 49% 12% 17% -69% 19%

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5 (Scenario 3)

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Financial Performance

Scenario 1

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No No Maybe Yes Yes Yes Yes No No

Payback time (Target 2Y) n/a n/a 4.9 years 4.9 years 2.9 years 2.9 years 2.3 years 2.3 years n/a n/aROC (target:>15%) n/a n/a n/a 140.82% 36% 224.02% 259% 1158% n/a n/aNPV, £K (target:>0) n/a (-1071) n/a £314k £149 £624k £556 £1763k n/a (£1,411k)Gross Profit Margin 10.13% 15.66% 55.11% 54.66% 67.04% 68.19% 58% 60% n/a -19%Operating Profit Margin -38.74% -9.88% 0.63% 11.63% 10.69% 16.00% 28% 39% n/a n/aEBITDA -6.95% 5.46% 20.08% 28.55% 45.34% 49.19% 28% 39% n/a n/a

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5

Scenario 2

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No Maybe Yes Yes Yes Yes Yes No MaybePayback time (Target 2Y) n/a 5.8 years 2.7 years 2.7 years 2.9 years 2.9 years 2.2 years 2.2 years n/a 7ROC (target:>15%) 2.20% 194.29% 131% 515% 36% 224.02% 281% 1278% n/a 232%NPV, £K (target:>0) n/a (£1,062K) £501 £1,634k £149 £624k £630 £1,922k £661 £803kGross Profit Margin 43.79% 46.99% 64% 64% 67% 68% 23% 25% 26% 34% Operating Profit Margin 2.25% 24.49% 20% 29% 11% 16% 12% 17% -69% 19%EBITDA 20.65% 33.37% 32% 40% 45% 49% 12% 17% -69% 19%

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5 (Scenario 3)

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Financial Performance

Scenario 1

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No No Maybe Yes Yes Yes Yes No No

Payback time (Target 2Y) n/a n/a 4.9 years 4.9 years 2.9 years 2.9 years 2.3 years 2.3 years n/a n/aROC (target:>15%) n/a n/a n/a 140.82% 36% 224.02% 259% 1158% n/a n/aNPV, £K (target:>0) n/a (-1071) n/a £314k £149 £624k £556 £1763k n/a (£1,411k)Gross Profit Margin 10.13% 15.66% 55.11% 54.66% 67.04% 68.19% 58% 60% n/a -19%Operating Profit Margin -38.74% -9.88% 0.63% 11.63% 10.69% 16.00% 28% 39% n/a n/aEBITDA -6.95% 5.46% 20.08% 28.55% 45.34% 49.19% 28% 39% n/a n/a

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5

Scenario 2

Years 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Financially viable No No Maybe Yes Yes Yes Yes Yes No MaybePayback time (Target 2Y) n/a 5.8 years 2.7 years 2.7 years 2.9 years 2.9 years 2.2 years 2.2 years n/a 7ROC (target:>15%) 2.20% 194.29% 131% 515% 36% 224.02% 281% 1278% n/a 232%NPV, £K (target:>0) n/a (£1,062K) £501 £1,634k £149 £624k £630 £1,922k £661 £803kGross Profit Margin 43.79% 46.99% 64% 64% 67% 68% 23% 25% 26% 34% Operating Profit Margin 2.25% 24.49% 20% 29% 11% 16% 12% 17% -69% 19%EBITDA 20.65% 33.37% 32% 40% 45% 49% 12% 17% -69% 19%

Repair Workshop Baby Clothes Leasing Formal Clothing hire Buy-back & resale Peer to peer

Model 1 Model 2 Model 3 Model 4 Model 5 (Scenario 3)

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Financial Performance

Summary: Resource Impacts

Scenario 1 Model 1 Model 2 Model 3 Model 4 Model 5

  Repair WorkshopBaby Clothes

Leasing Formal Clothing hire Buy-back & resale Peer to peer  5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Good GoodNot

Acceptable Acceptable Acceptable GoodNot

AcceptableNot

AcceptableNo of Garments 419,787 1,534,630 3,455,318 8,829,023 153,635 327,245 570,910 1,643,471 22,601 106,973Garments saved in weight* 137 502 242 618 38 82 188 542 7 35Carbon saved* 778 2,844 3,211 8,243 316 681 476 1,386 78 371Water Saved** 174 636 718 1,843 71 152 106 310 18 83

Scenario 2

5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Acceptable GoodNot

acceptableNot

acceptable Acceptable Good Acceptable GoodNo of Garments 684,283 2,501,558 3,673,771 9,252,277 153,635 327,245 1,427,276 4,108,677 303,180 3,212,150

Garments saved in weight 224 817 257 648 38 82 470 1,354 100 1,060Carbon saved 1,290 4,716 3,371 8,554 316 681 1,189 3,466 1,051 11,130Water Saved 288 1,054 754 1,912 71 152 266 775 235 2,488

Model 5 (Scenario 3)Model 4Model 3Model 2Model 1

Peer to peerBuy-back & resaleFormal Clothing hireBaby Clothes LeasingRepair Workshop

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Resource Impacts

Scenario 1 Model 1 Model 2 Model 3 Model 4 Model 5

  Repair WorkshopBaby Clothes

Leasing Formal Clothing hire Buy-back & resale Peer to peer  5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Good GoodNot

Acceptable Acceptable Acceptable GoodNot

AcceptableNot

AcceptableNo of Garments 419,787 1,534,630 3,455,318 8,829,023 153,635 327,245 570,910 1,643,471 22,601 106,973Garments saved in weight* 137 502 242 618 38 82 188 542 7 35Carbon saved* 778 2,844 3,211 8,243 316 681 476 1,386 78 371Water Saved** 174 636 718 1,843 71 152 106 310 18 83

Scenario 2

5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Acceptable GoodNot

acceptableNot

acceptable Acceptable Good Acceptable GoodNo of Garments 684,283 2,501,558 3,673,771 9,252,277 153,635 327,245 1,427,276 4,108,677 303,180 3,212,150

Garments saved in weight 224 817 257 648 38 82 470 1,354 100 1,060Carbon saved 1,290 4,716 3,371 8,554 316 681 1,189 3,466 1,051 11,130Water Saved 288 1,054 754 1,912 71 152 266 775 235 2,488

Model 5 (Scenario 3)Model 4Model 3Model 2Model 1

Peer to peerBuy-back & resaleFormal Clothing hireBaby Clothes LeasingRepair Workshop

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Resource Impacts

Scenario 1 Model 1 Model 2 Model 3 Model 4 Model 5

  Repair WorkshopBaby Clothes

Leasing Formal Clothing hire Buy-back & resale Peer to peer  5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Good GoodNot

Acceptable Acceptable Acceptable GoodNot

AcceptableNot

AcceptableNo of Garments 419,787 1,534,630 3,455,318 8,829,023 153,635 327,245 570,910 1,643,471 22,601 106,973Garments saved in weight* 137 502 242 618 38 82 188 542 7 35Carbon saved* 778 2,844 3,211 8,243 316 681 476 1,386 78 371Water Saved** 174 636 718 1,843 71 152 106 310 18 83

Scenario 2

5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Acceptable GoodNot

acceptableNot

acceptable Acceptable Good Acceptable GoodNo of Garments 684,283 2,501,558 3,673,771 9,252,277 153,635 327,245 1,427,276 4,108,677 303,180 3,212,150

Garments saved in weight 224 817 257 648 38 82 470 1,354 100 1,060Carbon saved 1,290 4,716 3,371 8,554 316 681 1,189 3,466 1,051 11,130Water Saved 288 1,054 754 1,912 71 152 266 775 235 2,488

Model 5 (Scenario 3)Model 4Model 3Model 2Model 1

Peer to peerBuy-back & resaleFormal Clothing hireBaby Clothes LeasingRepair Workshop

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Summary: Resource Impacts

Scenario 1 Model 1 Model 2 Model 3 Model 4 Model 5

  Repair WorkshopBaby Clothes

Leasing Formal Clothing hire Buy-back & resale Peer to peer  5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Good GoodNot

Acceptable Acceptable Acceptable GoodNot

AcceptableNot

AcceptableNo of Garments 419,787 1,534,630 3,455,318 8,829,023 153,635 327,245 570,910 1,643,471 22,601 106,973Garments saved in weight* 137 502 242 618 38 82 188 542 7 35Carbon saved* 778 2,844 3,211 8,243 316 681 476 1,386 78 371Water Saved** 174 636 718 1,843 71 152 106 310 18 83

Scenario 2

5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y 5Y 10Y

Resource Impact overall Acceptable Good Acceptable GoodNot

acceptableNot

acceptable Acceptable Good Acceptable GoodNo of Garments 684,283 2,501,558 3,673,771 9,252,277 153,635 327,245 1,427,276 4,108,677 303,180 3,212,150

Garments saved in weight 224 817 257 648 38 82 470 1,354 100 1,060Carbon saved 1,290 4,716 3,371 8,554 316 681 1,189 3,466 1,051 11,130Water Saved 288 1,054 754 1,912 71 152 266 775 235 2,488

Model 5 (Scenario 3)Model 4Model 3Model 2Model 1

Peer to peerBuy-back & resaleFormal Clothing hireBaby Clothes LeasingRepair Workshop

Scenario 1: Conservative Assumptions

Scenario 2: Tipping Point

Model 4 – reuse & restyling

The business model: • A retailer provides an incentive for consumers to return used garments • A roll out of stores acting as collection points • A select number flagship stores carry a ‘pre-used’ collection, consisting of reused and restyled garments.

Income generation: dependent on number & quality of garments collected, falling into three categories• Recycle (85%) – not sufficient quality for reuse. Income of £0.6 per kilogram• Resale (15%)– highest quality. Retail sales price of £30 • Restyle (2.5%) – repair required before reuse. Retail sales price of £30

Key Cost base:• Discount voucher• Logistics • Staff costs – picking & packing, restyling • Warehousing/retail space cost

Model 4 – reuse & restyling

Two scenarios created

Scenario 1 Scenario 2Number of garments collected per collection point 1,000/year 2,500/year

Number of retail outlets: By end of year 5 5 11

By end of year 10 6 14

15% discount voucher issued re-sold & restyled garments only

all garments

Staff training cost £500 per collection point None

(£1,000's) TimeframeFunds

needed NPV PaybackReturn on

CapitalScenario 1 5 years £312 £556 2.3 years 259%

10 years £312 £1763k 2.3 years 1158%Scenario 2 5 years £302 £630 2.2 years 281%

10 years £302 £1,922k 2.2 years 1278%

Model 4: Project Financial Appraisal

TimeframeGross profit

margin Operating

Profit MarginEBITDA

Gross profit

Operating profit*

Scenario 1 5 years 58% 28% 28% £250 £11910 years 60% 39% 39% £312 £202

Scenario 2 5 years 23% 12% 12% £108 £5610 years 25% 17% 17% £136 £91

Model 4: Profitability Performance Summary

Per £ of revenue Per sq footage

Factors that contribute to the viability of this model:• low set up and running costs • low initial funding required

Model 4: Financial Outcome

Garments saved: for every garment collected, 0.7 of a garment is saved from going to waste Garments displaced: for every garment re-sold, including re-styled garments, 0.6 of a garment is displaced

Timeframe# of

garments saved***

Garments saved in weight*

Carbon Saved*

Water saved**

# of garments saved***

Garments saved in weight*

Carbon Saved*

Water saved**

5 years 570,910 188 476 106 1,427,276 470 1,189 26610 years 1,643,471 542 1,386 310 4,108,677 1,354 3,466 775

Model 4 Appraisal - Resource Impact

Scenario 1 Scenario 2

• Scenario 1 - generates acceptable level of resource savings •Scenario 2 - higher volume of clothing collection/sale leads to a good level of resource savings

*weight in tonnes** in cubic metres***includes garments displaced

Model 4: Resource Impacts

Thank You

MADE BY BeneluxPrins Hendrikkade 25 1012 TM Amsterdam The Netherlands 

tel: +31 (0)20 5230666 fax: +31 (0)20 6266132info@made-by.org

MADE BY GermanyKönigsallee 6140215 Düsseldorf Germany 

tel: +49 (0)211 3878 9054 infogermany@made-by.org

MADE BY UK3-4 Bywell PlaceLondon. W1T 3DNUnited Kingdom

tel: +44 (0)20 7636 3910fax: +44 (0)20 7323 0337infouk@made-by.org