Disrupt your business model before it becomes extinct

Young women and teens are ruthless customers, shifting from one on-trend store to another as quickly as they shift love interests.

The retail clothing industry is therefore a great place to learn this vital leadership lesson: In today’s information-age economy, business model innovators emerge as winners, while those delaying business model innovation steadily lose market share.

Business Week’s "Benetton: A Must-Have Becomes a Has-Been" tells a sad story of a retail chain I first encountered and fell in love with in the late 1980s.

Founded in 1985, this Italian clothing maker brought consumers the look and feel of European clothing at an affordable price, accompanied by its bold United Colors of Benetton advertising that paralleled the bold colors of its clothing lines.

By 1993, the company was 7,000 stores strong, with locations in high-end shopping malls in major U.S. and European cities. While Benetton was one of the few stores I could enter and always find something that I loved, my 21-year old daughter would see the brand as passé, if she knew the brand at all. Shops like JC Crew, H&M and Zara win her brand loyalty.

Benetton, a $2.8 billion company, has seen revenue increases of less than 2 percent per year since 2000, whereas H&M (Sweden’s Hennes & Mauritz) revenue quadrupled to $15 billion and Spain’s Inditex revenue (parent of Zara stores) increased six-fold to about $17.5 billion.

Differences in business models largely explain differences in revenue growth rates. Benetton, unlike its competitors, does not own retail outlets.

Benetton sells “80 percent of its merchandise through franchisees and partners at wholesale prices, less than half the retail value.”

Add in flat U.S. sales (12 percent of Benetton’s sales in 2000, now only 4 percent), and a slow Italian economy where Benetton derives about half of its revenue, and you have a company whose operating profits are less than half that of Europe’s leading mass-market retail clothing companies.

Markets are never kind to those who fall behind. Benetton’s market cap fell from $5.8 billion in 2000 to $1.2 billion.

Franchise business models work if the parent is not constantly tweaking the offering – think McDonald’s or an Anderson Window Design Center. But in retail, a market in which the clothing color of Paris Hilton can set off a new trend within a day among on-line social media savvy young buyers, the franchise model fails to work.

Vertical integration into owned retail stores enables clothing companies to track demand, get to know customers better, and tweak their mix mid-season. Indeed, Zara’s success relative to H&M comes from constantly redesigning its offerings to be the most “on-trend” of all the retailers. Benetton’s franchise owners are unlikely to collaborate as closely with the headquarters.

Why did Benetton fail to change? Your guess is as good as mine. But the company’s leaders are not alone in their failure to change.

Too many owners, CEOs and leadership teams assume you can win tomorrow’s business with today’s business model. But just as a product or service must evolve to keep up with the times, so too must your business model. What was unique yesterday becomes a requirement to compete tomorrow. Indeed, the speed with which differentiators turn into requirements adopted by the market gets faster every day.

What should Benetton do? Early on, it might have used its high stock price to acquire its franchises. Today, that strategy would be too expensive. Benetton must turn the partner model into an advantage. Adding locally sourced clothing additions to the Benetton line is one potential strategy, a strategy that would be hard for H&M and Zara to copy.

Alternatively, Benetton might want to go counter-trend with an idea that is likely to become on-trend in the decade ahead. Encourage audiences to acquire fewer, nicer things in styles that never go out of style in order to be kinder to the environment. I can envision a merchandise mix of really cool but classic basics (suits, pants, dresses, jackets, coats, skirts) coupled with fashion-forward accessories, stockings, tops, etc. that allow a woman to easily update prior years’ basic purchases. Joseph A Banks has been successful with this business model for men.

If you were an investor entering your industry, how would you disrupt existing business models to bring more value to customers and more profits to the bottom line? It’s best to disrupt your own business models before you fall behind the times in your industry.

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. She served as chief economist for former Wisconsin Republican Gov. Lee Dreyfus. Plantes provides expertise in business model innovation, strategic leadership and smart economic policies. She resides in Madison.

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