One of my favorite topics to teach is the newsvendor problem, an inventory model for very short-lived products like newspapers and fashion goods. One of the points that gets made in that class is that variability is costly. Having to commit resources before knowing what will sell means risk and risk may be a reason not to be in the business. But that risk also suggests an opportunity: If one can find a way to reverse the order of things and commit resources only after knowing what will be demanded, then an otherwise unprofitable business can be a profitable one.
That is essentially the idea behind Gustin, a maker of high-end jeans. It initially sold its jeans trough boutiques, which bought jeans at a wholesale price near $80 but then marked them up to around $200. Gustin had to front all the cost of production and then wait for stuff to sell. Now, they have reversed the order of things and take orders directly from customers ahead of production. As the founders tell it on Marketplace, they have positioned themselves as a totally crowdsourced fashion company (Burning down the house that Levi’s built, Apr 8). You can hear the story here:[audio http://download.publicradio.org/podcast/marketplace/segments/2014/04/08/marketplace_segment18_20140408_64.mp3]
There are some obvious benefits to this model beyond inventory management. Simply cutting out the middleman allows for a lower price. Combine that with lower inventory risk, and this can be a nice business. The founders claim that it has been profitable since they moved to this model.
But how is Gustin using its operational flexibility? For one, it claims that it is offering more variety:
“Since we don’t have to take big risk on a particular type of fabric, we can offer a lot more variety. So we’ve probably used over a hundred different denims in less than a year. That’s probably what another fashion brand would use in a decade. We line up supply and demand every single time, and this is something fashion never does.”
The implication of that statement is that actually sourcing the material is a big cost of producing the goods and that labor is in some sense secondary. That may be true but it also follows from some other choices Gustin is making. Looking at their website, you can order jeans in two styles (straight and slim) and within each style nine waist sizes. But each waist corresponds to only one inseam. That is, it sounds like someone has to hit a minimum order size for each SKU and it becomes efficient to force the customer to get their jeans altered. Still that may be a small price to pay for customers to have a unique, hip pair of pants.
Finally there is the issue of how easy it would be to copy this model. To date, existing brands have not.
“We benefit a little bit from how old this industry is. A lot of fashion companies are used to working a certain way, and either they’re too wedded to the traditional retail model – they can’t walk away from hundreds and hundreds of stores, that’s too scary – or they just don’t get it. They say, ‘No, we’ve always done business this way, why would we change?’”
That may be a little too dismissive of other brands. An established brand that has built a broad distribution network could be doing quite well in that model and may be at a scale that cannot be easily reached with Gustin’s model. Selling only on-line is going to dissuade some customers from buying. If customers find testing the fit of jeans important, being in stores is helpful and may point to a limit to how much Gustin can grow.