Fashion's 2% Problem

February 22, 2021

The “2% problem” occurs when the biggest player in the market controls less than 2% share of the market. Usually this phenomenon occurs hand-in-hand with rapid commoditization, leading to the players differentiating themselves purely on price. While the super fragmented markets that result from this “problem” is a good defense strategy against rogue players manipulating the market for their own gain, they also make driving wide-spread change in sustainability, safety or tech adoption challenging.

At SILQ, our diagnosis of this problem in the fashion space stems from our experience in an adjacent industry that struggles with the same problem - freight forwarding. (Disclaimer: COVID is an exception, driving up demand for shipping on a severely constrained supply capacity, that has sent the market into a tizzy.)

For the better part of the last decade, international shipping has been rapidly commoditized to the point where almost all sales conversations begin with, “Send me your rate for a container from X to Y.” Many forwarders have turned to reducing their cost to serve as a means of improving their margins. The challenges they face in seeking cost reduction can also be attributed in part to industry fragmentation:

Our team at SILQ has been intimately privy to freight forwarding’s attempt to tackle these problems through technology given our extensive stint at the flag bearer of this change - Flexport. Now moving into the fashion space with SILQ, we’ve found many of the same challenges resulting from fragmentation. In an industry estimated to be worth approximately $2.5 trillion, the largest player in the market - INDITEX (the parent company of brands like Zara) controls less than 2% market share.

As with shipping, the fragmentation in the fashion space results in a lack of standardization in manufacturing and quality assurance processes, data, communication and general expectations of both the brand and their suppliers. As a result, transparency often suffers. According to a report by McKinsey, “transparency remains a major challenge for the global fashion industry… [relying] on very fragmented supply chains often spread across multiple countries.”

As previously mentioned, large scale initiatives for sustainability also suffer. The points Brett Matthews refers to in his article about the success of the Bangladesh Accord are in a way connected to the “2% problem.” When the top 10 fashion buyers chose to prioritize safety and sustainability heading into the new decade, they controlled too little of the market to drive meaningful adoption given how fragmented their supplier base is.

What allowed the Bangladesh Accord to actually drive notable change, was that disparate interests across the country from labor to exporters to brands stood united to refurbish the image of Bangladesh as a safe and sustainable garment producer - thus overcoming the fragmentation with a unified approach.

Looking more closely (and pegging to our theme of “2%”) the top 5 garment exporters in Bangladesh account for approximately a 4% share of the market. All five of those vendors stood in unity behind this accord and this also contributed to its success, vaulting compliance beyond the critical 2% threshold.

The global trend in apparel sourcing, driving procurement to even lower labor cost economies is a sign that things are headed from bad to worse for sustainability. While reversing the fragmented nature of the fashion industry is simply not a possibility to help remediate this issue, adopting technology that can drive the standardization of performance metrics across the supply chain, can be a worthy alternative for brands. As our team saw at Flexport, this is also how brands unlock value in their supply chain beyond simply reducing COGS.

When brands start calculating performance metrics such as on-time performance or carbon emissions the same way across countries, commodities and consumer types, vendors will begin to adapt and change can occur.

This is the journey we have embarked on at SILQ. This isn’t a sales pitch to try us out, but rather an invite to a healthy debate towards a positive outcome.