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It’s hard to escape the reality that bigger businesses have an edge over small ones. Odds are stacked against even the craftiest of start-ups in sectors such as supermarkets, logistics or carmaking. But fashion retail might be different. Reformation, a brand preparing to list in New York, is a test of the theory that there’s more to life, and profitability, than scale.
Reformation, the maker of eco-friendly clothes oft-worn by celebrities, made about $500mn in net revenue — total sales after returns and promotions — last year. That’s 80 times less than that of Zara-owner Inditex.
Yet Reformation can hold its own against the Spanish giant on several metrics. Its gross margin, a rough measure of pricing power, averaged about 62 per cent over the past five years, higher than Inditex’s 55 per cent.
More expensive clothes are part of this. But so, too, is the adoption of some of the Spanish group’s nimble habits. Inditex takes new trends and turns them into cheap products in as little as two weeks, partly through manufacturing almost half of its products close to home.
While Reformation isn’t “fast fashion” in the throwaway sense, it too is speedy. It works with a narrow range of fabrics and simple trims that help avoid delays. About a third of production is based in North America, including a factory in Los Angeles, allowing it to replenish successful products quickly, and only 4 per cent of its products arrive by sea.
That helps it avoid the common retail pitfall of ordering too much of the wrong thing and having to discount it. Reformation makes 80 per cent of its direct-to-consumer sales at full price, close to Inditex’s estimated 85 per cent, reckons Berenberg.
What remains inescapably true is that big companies can spread company-level costs more thinly. Inditex’s 20 per cent operating profit margin still dwarfs Reformation’s 6 per cent.
In that context, it should be of some comfort that, in the digital age, small companies are finding it easier to grow. Bernstein estimates that over the past decade, apparel brands with more than $2.5bn in sales have lost roughly a tenth of market share in North America, while smaller brands under $1bn have gained it.
Small brands can fall far and fast if they put a foot wrong. Think of ethical shoemaker Allbirds, which went public in 2021 and flopped horribly. It now sells cloud computing services. There are other unhelpful comparisons. Selling shareholder Permira was also the sponsor firm behind the IPO of Dr Martens; the shares have since fallen by more than 80 per cent after it stumbled through a series of operational snafus.
But fashion is an industry that can host many winners at the same time. Reformation is no Inditex, but if it plays its hand wisely, the gap between the two should narrow.
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