Proven by Zara and now Shein: Speed and Versatility Trump Cost | Lever Style | PI Apparel

Today I'm going to talk about speed and versatility and how in today's world that is going to trump cost. And I'm going to do a couple of things. First thing is I want to introduce myself and also the company that I work at. And then second, we'll go into sort of what we do and why we feel that speed and flexibility are so important. So this is, you know, I work at LeverStyle. LeverStyle is a one-stop shop apparel supply chain platform. And what we do is not to help the Walmarts of the world, you know, wring out the last penny from their cost. What we try to do is to provide the most flexibility in terms of lead times, order sizes, and so that we can help our customers, you know, the brands, reduce inventory risk. And we believe there's much more value there than in just trying to, you know, go for the lowest labor cost. So a little bit about Lever Style. I think the easiest way to explain what we do is actually to share with you who we work with. So we work with a lot of premium fashion labels, so Vince Theory, Rag Bone, Paul Smith, Hugo Boss, Coach, James Purse, John Varvatos, the list sort of goes on and on, AllSaints and so forth. We also work a lot with performance and activewear brands, so people like Arc'teryx, J.Lindeberg, Halle Hansen, but also one niche that we have is working with digitally native pioneers, digitally native brands and platforms. So we've been working with Bonobos for about a dozen years, and we are still by far their largest supply partner. We work with people like Stitch Fix with their private label program, and literally dozens of these, of these DTC brands. A little bit sort of history about the company. We were established in 1956 in Hong Kong as a shirt manufacturing company. So pretty basic business. And in '07, we started our horizontal integration into doing different kinds of products. And we acquired a tailoring manufacturer. In 2010, we started expanding beyond China, and we got into Vietnam. In 2011, we started to focus on the quick response, high mix, low volume sector. In 2016, we spun off the remaining factories that we had to make, to transform ourselves into an asset-light supply chain platform. 2019, we listed on the Hong Kong Stock Exchange, and in 2020, during the COVID year, we made 5 acquisitions to further expand our product range. So today, we pretty much make everything inside a wardrobe. So from active to fashion, men's, ladies', knits, wovens, we got it pretty much all covered. We specialize again in high mix, low volume production. So we, we do hundreds of units, actually our median order size is probably like around under 1,000 units. And we have a lot of good, we produce in 5 different countries. We do a lot of virtual sampling, fabric prepositioning. We do a lot of things that enable us to be much faster than the typical supply chain service provider. This is just a snapshot, work with over 100 customers. We produce in about 100 factories. Vietnam is our biggest production base, followed by China. We're also in India, Indonesia, Cambodia, India, and we have people sort of around the world in all the fashion capitals. So I guess we are a, you know, sort of a different kind of apparel company. In 2018, we were very fortunate to be given the Ernst Young Entrepreneur of the Year Award. 2019, we went public on the Hong Kong Stock Exchange. I guess nowadays very few apparel companies, you know, get themselves listed, and yeah, we are well represented in all sorts of media. So this is just some of our, you know, we're a publicly listed company, so this is just some of our recent performance. So in 2022, we just announced 51% growth in top line and more than tripling of profits from 2021. 2021 itself was a pretty strong rebound of 64% from 2020, which of course was a bad year in fashion. And our stock price recently, I guess in the last 3 months, has doubled. So enough about sort of a lever style. So today the main topic is speed and versatility. And, um, you know, I guess there are a few things that, that are important. Uh, first, uh, speed gives you the ability to test and react. Uh, you know, if you have a conventional model, you know, you just, uh, you know, you make things 9— you commit to making things 6, 9 months in advance. If the thing is— if whatever you, decide to, to, you know, to sell, is selling well, you can't really chase. And also, you know, you have to sort of position a pretty large, uh, inventory, uh, because you won't be able to chase in season. Uh, also, uh, having that versatility allows you to, um, have a proliferation in sizing and SKUs. Uh, because if you can do things quickly, you can respond to it. Uh, you can, you can, you know, you, you can then, you know, have a lot of, uh, uh, different, uh, uh, SKUs like in sort of like the Amazon. Long tail effect. And then a third one, it minimizes stockouts. If you, because right now if your product sells well, you know, you can't really chase in season and that's lost sales. And fourth, you know, having the speed minimizes the working capital needs. So just give you a few examples into each of those points. We work closely with Stitch Fix on their private label program. And what they do is, you know, they, let's say they want to order shirts. They don't know what's going to sell, so we help them, you know, come up with the designs and so forth, and then we make a few hundred shirts, but over 10 different styles. So, and then we basically, Stitch Fix then, you know, puts that out into the market. Within a week, they know what's selling well and what's not. For those that sell well, they'll order, okay, let's order 5,000 more of that shirt, and maybe there will be a couple of styles that they do that with. For the other 8 styles that don't really sell well, they just, you know, whatever the 300 units that they ordered, they just let it, you know, let it basically sell through. And that sort of, you know, having the speed allows them to basically react to just one week of sales data, whatever is selling well, they will double down on it and actually, you know, go 10x on it. And that drastically reduces the inventory risk, you know. Imagine if they have 10 styles, they don't know what's going to sell, and they buy, you know, 2,000 units of each of them, then for the 2 styles that sell well, they won't be able to replenish, and for the 8 styles that don't sell well, they're stuck with, you know, 1,000+ units that they have to discount. Yeah, and then I talked about the proliferation of SKUs. When you have the speed and flexibility, you can have, you know, like lots of, lots of sizes. For example, Bonobos, we're their largest supply partner, and we make all the chinos. So their chinos have, they're famous for their chino pants, and their chino pants have something like 200 SKUs per style. The reason being each style has around 5 different fits, so something like a regular fit, slim fit, athletic fit, you know, and so forth, there are 5 fits. And for each fit there are 40 waist and length combinations, so altogether there are about 200 SKUs per style. And because we can replenish so quickly, you know, basically we do turnaround for them about 3 weeks. Then they don't really need to hold that much inventory, and whatever they sell, you know, that sort of odd size, they sell a couple units and then we can replenish that within a few weeks. And so that allows them— this kind of flexibility allows them to have a wide proliferation, a very large proliferation of sizes. Another company that has a similar idea is ThirdLove. They do bras, and they've come up with half bra sizes, like the way that, you know, we have shoe sizes come in half sizes, so I think they range from A to H and also in half cup sizes, and altogether they have 78 bra sizes. Without the speed and flexibility, and they have to hold a lot of inventory in each size, that makes the model just not workable, then the inventory risk is just too much. And so having the flexibility and speed, you know, helps them, allows them to have that kind of number of SKUs. And of course, when they have that many SKUs and that many sizes, you are able to provide a better fit for the consumer. Yeah, out of stock is actually the most expensive cost. There are plenty of studies, it says out of stock could be costing a trillion dollars, I don't know exactly how they measure that. But what's, there are studies that say, actually over here it says, About 25%, a quarter of Amazon's sales are actually coming from consumers who go into a store, can't find that stock, it's not available, then they go on Amazon. And a quarter of Amazon sales are, you know, generated that way. And you can just sort of see, and this cost or lost margin never shows up on a financial statement because it was never recognized as sales to begin with. And, you know, by having the speed and versatility, you can minimize, that stock out. And then just to say, I mean, I'm just going to be a little bit more academic and just to try to demonstrate using very simple numbers. So let's say there is the same, you know, same product, uh, and then just, uh, it's the, the, you know, and you can sell it and basically what you charge is what the market can bear. So let's say it's a $100, uh, item, a jacket, uh, whatever you name it. And, uh, you can, there are two ways to go about it. You know, there are some companies, that will, oh, let's go to, you know, Bangladesh. Let's order in large volumes so that I can drive down the FOB price. And let's say, uh, the landed price in this case is, uh, $30. You know, so let's say 3 times markup, you know, including duty and so forth. That's pretty, uh, normal. Uh, but then there is another way to do it, which is say, you know, we just, we need to speed, we know, maybe preposition some materials. And then, you know, that costs a lot more. Let's say it costs 1/3 more. So that same product, costs $40 landed instead of $30. But when you have that speed and versatility, you don't really need to discount because you're not having excessive inventory. Anything, you just order, testing, reacting, and therefore you're not overordering. And, you know, for a traditional brand, it's very often your average discount is 40% off your sort of suggested retail price. Of course you're gonna sell, let's say, a quarter of your products at full price, and then there will be a bunch that you have to discount, you know, 20, 30% to get it in your main store. And then another 20, 30% you actually have to send it to your outlet and discount that by, let's say, 60%. And then you have a quarter, 10%, whatever it is that you actually, we've heard bad press about some brands burning their inventory, or that ultimately gets given away to Africa or whatnot, and that's basically zero. So the average, take-home for a brand using a traditional model, let's say, you know, 60% of their retail price. Whereas for a brand that basically just tests and reacts, the average discount— like go to Zara, you rarely get any discounts, you know, let's say 5%. So the actual take-home dollars between the two models, one's at 60%, the other one's at 95%. And then if you, you know, let's say if you look at the gross profit dollars from that On the same jacket, a fast brand and retailer can generate $55 of gross margin, whereas a slow one generates only $30. And so in a way, it pays to, you know, that $10 extra because you're getting, you know, $35 more at the bottom, so your gross profit is actually $25 more. And, you know, just, there are a couple companies, you know, and this is nothing new, that exemplify this difference. So Gap, it was during the, I guess, '90s, it was sort of the sort of a fashion company in the US. And, and just look at how their market cap has gone. So they were, let's say, close to $30 billion around 2000 or so. They were hovering around $15, $20, and today they are at $3.5. So, That's been a lot of value destruction there. Compare that with Inditex, of course that's the parent company of Zara. It was at basically 20, this is just, I couldn't find anything that goes back further, but it was at around, let's say this is around $30 billion. So the starting point is not all that drastically different, and then look at where it is today. Today it is at $100 and, $107 billion. So that's 30 times value of Gap. Why is that the case? Just look at their financial statements. The Gap, you look at the cost of goods sold and occupancy expenses, that's basically 65%— I mean, just, yeah, that's 65% of their top-line sales. Whereas for Zara, Inditex, it is the, the gross profit is 57%, so cost of sales is only 43%, right? So there's, you can see there's of course that this in Gap's case it includes occupancy cost, but let's say occupancy cost is around 10%, there's still a 10% difference in gross margin. You have to think that for Inditex, their cost of production is actually more expensive than Gap's because they produce in places like Portugal, they produce in Eastern Europe in order to be to be close to their market, whereas Gap, you know, is going to like Bangladesh. Our company once supplied to Banana Republic, I still remember, they were like, okay, we'll have a short program, and then they put that on, into an online auction, so that different suppliers, you know, qualified suppliers can bid for that program, and basically the lowest price gets the program. And it doesn't, they don't really care about, you know, how long it takes, you know, it can produce in Timbuktu, it takes, takes months to get anywhere. And so the focus is very much on driving down the FOB costs. They use an online auction. They developed that in-house in order to make that happen. And look at what happened to their stock price and look at their margins. So their net income last year, they lost a little bit of money. The year before, they made a little bit of money. But basically, relative to sales, it's just a breakeven company. Whereas for Zara, Inditex, you know, so they sold $32 billion worth of stuff and they made $4 billion, so that's over 10%. So all that gross margin difference translates down to the bottom line, and that's why one company is worth $100 billion and the other one's worth $3 billion. Yeah, so this is just some more details about capital efficiency, you know, and this is the assets. So let's say inventories. Um, so for Inditex, it's about $3 billion, and for Gap, it was actually about $3 billion as well, but, and they dropped a little bit, uh, uh, so over, uh, over here, $3 billion. They dropped a little bit in, in 2023, but let's say, you know, uh, Inditex is a company that's double the size of, uh, Gap in terms of sales, but the inventory level is comparable. So that just shows you how much more efficient Inditex with their capital. This is nothing new, no secrets at all. I mean, there have been plenty of case studies. Harvard Business School wrote a case study, I think this was in 2006. There have been plenty of organizations that have actually given— there is no secret. Zara, Inditex hasn't done anything that's patented and nobody else can— anybody can copy them. But so far, you know, people like Gap and other traditional brands just haven't been able to do that. And, and of course, you know, Shein is the new Zara, is basically Inditex on steroids. We've worked with Shein as well. Their turnaround time is basically 10 to 14 days from basically deciding on a design to delivery. And then we actually truck the things over to their Guangzhou warehouse. And then they, I'm sure that while the thing is being trucked, they're already selling it online. And then the second they sell it online, they're collecting money from the consumer. And then once it reaches the warehouse, it's already on the way to the consumer. And they, even as big as Shein is, and I think that there have been talk of them going IPO, they are a whatever, $26 billion top line company, as big as they are, their order sizes are between 100 to 300 units. If something sells well, they will then replenish on a daily basis. So they give you an order today and it's only based on what sold yesterday. And if this style sells well tomorrow as well, then I'll place you another replenishment order tomorrow. Uh, and, uh, that's, that's how, you know, they basically will have— you can imagine that kind of system, they will never have any excess inventory. Because, you know, if they have just a couple hundred units, even if it doesn't sell well, they will be able to digest 200 units. But if it sells well, they will buy another 200 every single day for as long as there is demand. And that company, they are a private company, so we don't know about their working capital, but you can imagine, I think they pay their suppliers something like 14 days or something. I bet that they actually have a negative working capital, which means they actually receive money from their consumers before they have to pay their suppliers. And that's even, you know, just at just 14 days, whereas a lot of, you know, foreign brands, you know, American brands or so will require at least 30, if not like 60 days of payment terms, and they're still not very capital efficient. So, if we, I mean, of course, Shein is controversial for many, many, many other reasons, you know, ESG, you know, copying designs and so forth, but the idea of speed, and versatility are not sort of, it's not mutually exclusive with Shein's sort of low quality and bad for the environment sort of reputation. You can be a high quality, you know, for the right quality product with the right ESG mindset, but you can do things very quickly. You know, when I first got into this business 20 years ago, I was sort of thinking it takes something like, you know, 30, 25 labor minutes to sew a shirt. Why does it— why is the lead time like, you know, 6 months? And today you're sort of seeing how that lead time is being compressed. There are lots of smart ways to sort of, especially on the material side, how to preposition it. But this actual sewing and putting the garment together, it doesn't take, you know, months. In SHEIN's case, you know, the order lead time is just 7 to 14 days. And there's no reason why other brands can't adopt that kind of supply chain mentality. Of course, you know, we're not— I'm not advocating to copy that kind of, you know, sort of low quality, you know, sort of low price with ESG issues. But, you know, that mentality of how do you drive speed and even at the expense of a higher cost. At the end of the day, as Zara has proven over 20 years, it's more than worth it. Yep, so as promised, you know, try to keep this brief and try to, you know, let you guys go on your way to lunch. But before we go, are there any questions? Yes.

What percentage of the styles you're looking at are on that 14-day model?

100%.

100%?

Yeah.

And how many styles do they run per season?

Well, every day they bring about 3,000 new styles online, every day. So they don't really have a season idea, they just have a day, it's every day 3,000 new styles. Something sticks, then they keep on reordering. Something doesn't sell, you know, it's gone by the next day.

And then what, prior to something going online, do you know how long the development process is?

Very quick, I mean, but for Shein it's more, they're more a, you know, copycat or whatever, or some celebrity, you know, model was wearing this yellow dress and they just copy it, right? So I mean, that's of course got another, business ethics issue, so it's not, the development is very short. Yeah, other questions? Great, lunchtime then. Thank you very much.