Circular business models

Now is the time to explore a new way of doing business in fashion

In recent decades, the amount of clothes the fashion industry produces has grown and grown, while at the same time, profit margins have shrunk and the impact on the environment has increased. Between 2000 and 2015, clothing production doubled, while over the same period utilisation – the number of times an item of clothing is worn before it is thrown away – decreased by 36%.

This trend led to the global fashion industry producing around 2.1 billion tonnes of greenhouse gas (GHG) emissions in 2018 – 4% of the global total. On top of this, due to ever lower prices and lost revenues – from overstock, stockouts, and returns – profit margins of the world’s leading apparel retailers decreased by an average of 40% from 2016 to 2019. This was exacerbated in 2020 by the impacts of the Covid-19 pandemic, which highlighted the fragility of fashion’s supply chains and saw the industry suffer a staggering 90% profit decline compared to 2019.

Circular business models decouple revenue from production and resource use

By decoupling revenues from raw material production – through business models such as resale, rental, repair and remaking – greenhouse gas emissions, pollution, and biodiversity impacts can all be reduced.

Resale, rental, repair and remaking are already worth more than USD 73 billion – and growing. Since 2019, and despite the global Covid-19 pandemic, seven resale and rental platforms – Depop, Rent the Runway, The Real Real, Vinted, Poshmark, Vestiaire Collective, and ThredUP – have reached billion-dollar valuations. These business models have the potential to grow from 3.5% of the global fashion market today to 23% by 2030, becoming a USD 700 billion opportunity, while providing significant environmental savings from increased use and reduced production.

Circular business models can provide better product margins and competitiveness

Circular business models offer both revenue and cost benefits. They provide multiple revenue streams by enabling businesses to offer new services, such as restoration, customisation and tailoring. Revenue benefits include increased loyalty, access to customer and product use data and increased customer base. At the same time, costs can be reduced due to savings from better resource productivity and risk reduction (e.g. improved inventory management).

Currently, booming models like resale and rental do not always result in environmental benefits

To successfully develop circular business models, their revenue must be decoupled from production and resource use. Currently, while they have great potential, these business models do not always achieve this decoupling and the environmental benefits that come with it.

There are many barriers to this decoupling. Firstly, the way the industry measures success is often based on sales volumes. So, for example, a business measuring its success this way might incentivise product take-back for resale, remaking or recycling by offering vouchers for new products, which result s in growth of the linear business. Secondly, products are not always designed to withstand the level of use circular business models require. For example, an occasion dress offered via a rental model that looks faded or out of shape after it is cleaned twice will not provide a viable option, economically or environmentally. Thirdly, current supply chains are optimised for predictable, one-way production and distribution, whereas circular business models require local and global networks that facilitate services such as cleaning, repair and remaking. In addition to these, businesses in the fashion industry miss out on further economic and environmental opportunities by not combining or exploring other, perhaps new, business models that could decouple revenue streams from production and resource use.