This is the 2nd part of a 3-part series on our creative industries. Part 1 talked about the inadequacies of the prevalent strategies to grow our $1.5 billion in creative exports. This part talks about how technology can play a role in the competitiveness of our local designers, brands and retailers. It’s related to a broader conversation on the Philippine innovation economy.
Local brands whisper “H&M is coming” in the same way as the Starks of Winterfell do: they know it will be unstoppable, it will last long, and many will perish.
And then, there’s the Japanese. We all know about Fast Retailing’s very public intention to create the biggest fashion company on the planet by 2020. Japan is our biggest trading partner, so you can count on the Philippines to be a major part of this strategy.
Finally, there’s the broader conversation on ASEAN 2015. The big step in creating a single market in Southeast Asia will inevitably lead to several new brands from around the region entering the local market. And our local champions are seriously outgunned. I couldn’t find data for fashion, but take banking: BDO is the biggest local bank, but is only #19 in Southeast Asia.
Does the increased competition mean the end of Philippine fashion? What will happen to designers, manufacturers, and retailers when the market is flooded with cheap products and more recognized brands? We’re seeing it happen in real time in Brazil. The competition won’t just come from offline players. Even China’s Alibaba is investing in department stores.
The three segments of the market will be affected in different ways:
Independent designers & small businesses will be hit the worst. Brands who rely on bazaars and consigning in department stores will find it harder to compete. The best designers will have a stable clientele for couture, but will find it difficult to scale with ready-to-wear. The rest will be more inclined to work with the bigger houses than start their own label. Contract manufacturers who rely on wholesale orders will see customers move to Vietnam and Indonesia, who are both employing even more aggressive textile export strategies. Cambodia is fast catching up. Just look at the ever dwindling traffic of foreign buyers in Manila FAME each year and the number of closures in the 2nd floor of Greenbelt 5.
The Sub-Billion Players (those with more P100 million in sales, but less than P1 billion) will find it harder to grow. Brands like Folded & Hung and Gingersnaps will slug it out over retail space. Mall operators will prefer leasing to anchor brands, or allocate the prime space to their own franchises (like SM’s Forever 21 and Uniqlo). Because the sub-billion brands don’t have the scale of the bigger players, they will have a harder time competing on price. They will source cheaper merchandise in China, further deteriorating product quality, which will turn off even more consumers. It’ll be a vicious spiral. There will be some consolidation in this space.
The Billion Peso Club (P1 billion+ in sales) will handle the onslaught, but they know the era of easy growth (by simply opening new stores and slapping celebrities on billboards) is over. For them, the smart bet is to pursue an international presence as fast as possible by bringing their brands abroad or by positioning themselves as local partners for foreign brands. Golden ABC (the parent company of Penshoppe) is implementing an Inditex-like strategy: open overseas stores and build a portfolio of brands. Bench is bringing in foreign brands (Aldo, Pedro, etc) while extending its iconic brand to new categories (skin care, salons, etc). This strategy, of course, makes sense given the small size of the local market and resources controlled by these companies.
Online retail will empower all these players. My humble thesis is that e-commerce holds the key to exporting Philippine design. An online strategy can help our local brands 1) remain competitive locally and 2) pursue breakout opportunities internationally
How do we think about this new normal for Philippine fashion?
1. Think Stories, not Stores. The primary unit of analysis in retail used to be the physical store. Today, it’s the customer story. How do we create a seamless brand experience for consumers regardless of the touchpoint – whether it’s in the mall, on laptops, or on mobile phones? For example, Warby Parker started as an online eyewear brand. Last year, it opened its first set of brick-and-mortar showrooms where customers can try out different frames and order on an iPad.
With the ability of the internet to distribute content all over the world, local brands can tap an international market. At AVA, we’ve gotten a few customers from the United States, Germany, Belgium, Australia, Singapore, Malaysia and Japan. And we haven’t even done any marketing in those countries.
Unfortunately, there’s so much misguided thinking in the Philippines. At a recent public forum, the head of one of the biggest malls in the country said that “online is the biggest threat to our business“. This is alarmist and exaggerated drivel. It’s misguided because it creates a false distinction between online and offline. Alarmist because the shopping mall will obviously not go away (US e-commerce is still less than 10% of total retail, but a large majority use online to guide purchase decisions).
It ignores how new retail technology can be integrated in the store. It’s no longer “online vs offline”, but a choice on how to communicate the brand story in both worlds. For instance, brands like Marc Jacobs (who is using social media as a form of in-store currency) and American Eagle (who is piloting iBeacon technology) are showing innovative new ways of embedding retail tech in their traditional offerings.
It’s not just about opening an “online store”, but integrating tech into sensible parts of the retail value chain. Walmart’s latest experiment? Using ad tech to cut waste in its media budget.
2. Build Omni-Channel Capability. Omni-channel retail is an infrastructure decision. And thus requires completely new thinking on organization design, marketing, logistics and inventory management. Another fashion brand was hesitant to launch its own online store because management didn’t want to “divert part of the marketing budget from print and outdoor“. And that’s the problem: an e-commerce strategy isn’t a marketing mix decision, but a business unit-level decision that requires its own set of resources.
When I met the chairman of another retailer, his first question was, “can going online be profitable in the first year?”. (Dear Mr Chairman: Please do not ask Jeff Bezos this question). Yes, if you’re thinking of “going online” as simply putting up a website. It would obviously not be if you view it as an infrastructure decision.
The good news is that the technology is getting cheaper. I can build a shopping app that costs way less than a billboard on EDSA or a print campaign in Preview. Getting educated about e-commerce is free (it’s called Google). The payments and delivery network have been built and getting better each year. And with companies like Rocket Internet and Naspers operating in the country, talent is more widely available.
Brands without a clear e-commerce strategy aren’t being cautious, they’re being lazy.
3. Leverage on Platforms. Think of a platform as a business that empowers other businesses. The iPhone, for instance, is a platform. Apple provides the centralized eco-system, while independent app developers around the world provide the content. Global marketplaces like Etsy and retailers like AHAlife have allowed independent producers from around the world to access consumers far beyond their home country. Etsy for instance did $1.35 billion of gross sales last year. On Amazon, up to 1/3 of products are sold by third party merchants who host their products on Amazon’s distribution centers. Crowdfunding platforms like Kickstarter allow designers to generate pre-orders even before their products hit the market.
With these platforms, Filipino producers can immediately access a global market on day one. The bazaar in Rockwell only gives you a spike during Christmas? No problem. A presence in Etsy helps expand your footprint. What to customize the look of your store, but don’t have the budget? There’s Shopify for that.
4. Slow Down Fast Fashion. Fashion’s deep, dark secret is that sweatshop labor all over the world subsidizes the thirst for fast fashion in the developed world. Sites like Maiyet, Uncommon Goods, and Everlane are all signals of consumers’ desire for a different way of thinking about fashion. The tragedy in Bangladesh helped cast a wider spotlight on this sorry state of affairs. People are now looking beyond the rack and seeing how their purchases are collectively affecting a global supply chain. Brands are looking for authenticity to break through the cynicism. This is good news for our creative industries. We can’t compete with China on price, but we can certainly compete on design and an authentic brand story that explores our rich cultural heritage, our traditional textiles and materials, and our local craftsmanship.
In my next post, I’ll share what we’re doing at AVA to help create a bridge between our local products and the global market.