“Companies like Zalando are tech companies, not fashion companies.” – Christoph Bornschein on digital change in the fashion industry

The first hc privée talk, held on July 3, was honored to welcome Christoph Bornschein as guest speaker. Bornschein is widely regarded as a guru on the theme of digitalization, with German CEOs, DAX companies, government ministers, industry associations and trade unions lining up to ask his advice for the digital age. Presenter Friedemann Karig asked him about his views on fashion, online shopping, and why Amazon is more effective at selling itself than Edeka.



Friedemann Karig: Christoph, good to have you with us! Let’s imagine that Christoph Bornschein is in his 10th year of a CEO internship. Can you sum up what you do in three sentences?

Christoph Bornschein: I started out by joining up with two colleagues to found a digital agency, “Torben, Lucie und die gelbe Gefahr” [Torben, Lucie and the Yellow Peril]. TLGG is engaged in education for technology-driven industries and, very often, in building evaluation skills. In other words, how to approach and evaluate digitalization. Basically, there are two main areas involved: process optimization and business modeling. For virtually my whole life, I’ve been exploring that interface between implementation of a technology and its commercial feasibility, placing technology in a business context. And since you mentioned it, introducing the position of Minister of Digital Affairs was actually my idea, which I was invited to present to Angela Merkel.

FK: So why fashion? You’ve been busy in all kinds of industries up to now, but what interests you so much about this one?

CB: A former companion left the techno scene because he found it too boring, and went in for music and film––which is incredibly creative, but unprofessional. That’s roughly how I feel about the fashion industry. The fashion world can be really inspiring, but then I find myself standing in front of the company and thinking, “Oh, so that’s how you do it.” It’s very rewarding because you can bring about huge changes with very small improvements. Technology isn’t really a topic that’s put down roots in fashion, either in retail or in branding.

FK: Could you give us a brief overview of the German fashion scene from the perspective of an outsider––while you’re still in that position?

CB: Ultimately, the fashion industry isn’t so different from many others involving retail of goods. Fashion isn’t any different than apples; both of them disappear below the retailers. Fashion is currently falling into the hands of aggregators, and it’s about to lose control over who it’s actually selling its product to. The fashion industry is still dining out on the convenience of generating sales from wholesale, but it’s lost all sight of the customers that are buying its stuff; there are no data about who these customers are. That confidence that Mr Cloppenburg and the like will sell huge volumes could become a real problem in the future. If I were going to set up a fashion label like Zalando’s zLabel today, I’d be really worried about not knowing who my customers are, and about having to test how high I can drive my margins without any backup from robust data. When you look at bricks-and-mortar stores, what they’re doing is basically hoping things will turn out OK.

FK: You mentioned evaluation skills. Could they be defined as a company scrutinizing its own business model to the hilt and looking for problems along the way?

CB: It’s ultimately about priming your own business model. Companies like Zalando aren’t fashion companies at heart; they’re actually tech companies. They come from the hardcore tech sector; they understand it, and do it really well, and they just happen to be dealing in fashion––but it could equally well be eyewear. When you see the cut of a pair of size 10 jeans as the core of your value chain, you realize you’re pretty exposed out there in the forest.

FK: So what’s your silver bullet? Being less blind, seeing more of the market, building better evaluation skills, bringing in people from outside?

CB: Obviously I can’t speak for everyone, but my observation from working with various fashion companies is actually that internal skill levels are not particularly high. The companies that have started along the path of digital transformation (with us) have brought in people from outside. The idea that “we’ll take everyone from inhouse along with us and develop them” can only work to a limited extent when you take a look at the training on offer (in the fashion industry). Where are these skills supposed to come from?

FK: When you say “from outside”, do you mean tech and IT specialists?

CB: Exactly. People that already have practical experience of eCommerce, in whatever aspect. Fashion’s very seductive; on the one hand, you have the creative power that can make unprofessional companies pretty successful, and on the other hand there’s the obsession with detail. At this point it’s interesting to compare the designers’ opinions of what sells best with what the actual sales figures show. It’s always about the core process that defines the company. Volkswagen can’t do mobility because the whole company is built on the waterfall process of building a car, and everything else stems from that. In fashion, the creative process is so deep within the core that other aspects often aren’t even questioned or examined. In the end a ridiculous kind of filter operates by setting up a buyer who then makes decisions on behalf of other people about what those people will be able to buy from a retailer in the future. Incredibly, that’s the way it is today, even though the Internet enables companies to ask customers directly what they want to buy and what they don’t.

FK: From a business perspective, is digitalization primarily about putting an end to average? No longer needing to identify what will please as many people as possible by trial and error, but about knowing in advance what individual customers will like?

CB: Yes it is, and in a way, it’s also the end of premium pricing; margins will shift so dramatically that premium manufacturers will also find themselves having to launch commodity products on the market.

FK: What you’re describing seems to be taking place at incredible speed. How do you see the next two or five years? Can the pace of development get any faster?

CB: Amazon’s solved one of the most difficult problems in food retail. It’s possible to scan the quality of strawberries using a special photographic process, but it’s a really complex problem. Scanning combinations of outfits in a mirror is far easier. Amazon and Co. will quickly find out whether those black pants go with that shirt and whether they can be recommended. We’re drastically underestimating the acceleration of what’s possible––but we’re overestimating it at the same time.

FK: Let’s take a look at the demand side. In the fashion and lifestyle sector, do people really want ‘cold’ recommendations, automated and algorithm-driven? Wouldn’t they prefer to hear a recommendation from their best friends?

CB: Consumers that go shopping have to be divided into two halves. Men want brands to give them the security that they won’t look like shit. That’s why models like Outfittery work. Women are more driven by recommendations, and that’s what algorithms do brilliantly. An algorithm that says to you, “You’ve got XY in your closet, now buy this and that to go with it” is a whole lot simpler than scanning strawberries to find out how ripe they are. In the future we’ll see good algorithms that can sell anything. The problem for traditionalists in the fashion industry is that the algorithm doesn’t belong to them, and they have no say over the decision-making process. But the problem with the right business model in this context is that the decision-making process is transferred to the people that can create the algorithms, and away from the fashion brands and retailers of the industry.

FK: So how does the future look in terms of demand in the fashion industry? Doesn’t the thought of a full closet count for anything any more?

CB: When you see the size of shopping carts these days, you notice that we’re heading for English conditions. English consumers spend an average of 80% more on fashion, around 40% more of it online. That’s a lot of growth potential for us right there. Take a look at digital first brands––basically, digital companies––like Everlane and Warby Parker, and what you see is genuine growth. But these companies are designed completely differently; they were companies that were online and digital first of all, and they’ve done their growing alongside their customers. Once you decide on a retail model, regardless of what you’re selling, you’ve decided that there will be a data disconnect between you and your customers. Regardless of how high your sales are, that’s crap.

FK: So competency is mainly about getting to know your customer better?

CB: Precisely. To put it into figures, 70% of all product searches in Germany, whatever the sector, are made in Amazon. That only leaves around 30% of free market. The best way to compete for a share of that is by trying to understand the direct-to-consumer business: selling directly, without the middleman, and understanding what my customers really need. This is really your only chance. You can’t compete with Amazon and Zalando in terms of data aggregation, because they can already tell me what kind of eyewear I need based on my viewing habits on Amazon Video.

FK: So a fashion SME shouldn’t try to compete with big data and databases, but to carve out something that serves the brand in its own niche?

CB: What I would do would be to beat an orderly retreat on wholesale earnings and go into direct consumer business. Take your margins, invest them in direct customer relations, and go for gold. That’s the only thing that will protect you from the aggregators over the long term. Zalando is the worst way of wholesaling because they know right down to the minute when they can stop selling branded black tops and start selling zLabels black tops.

FK: But that’s only useful if I can respond to the market relatively quickly. If I’m a non-vertical company that can’t launch trends on a daily basis, I haven’t got a hope.

CB: It’s all based on small vertical production, data-driven collection development, and process improvement; and all that is actually far simpler than it looks from the inside. Many companies slashed their collection design cycle from 52 weeks to 12 weeks, then had to go up to 16 weeks again because it was all too fast for them.

“In almost all fashion companies the will is missing to use methods to react faster to change”

FK: What kind of roles do companies need to set up to do that––preferably ones that are affordable for the German market?

CB: Well, definitely everything to do with eCommerce. It’s not about whether a customer has already bought a T-shirt in the past. The complexity of selling a T-shirt is completely overrated, compared to the complexity of selling takeout food or eyewear. You need someone with hands-on experience of direct consumer e-commerce and expertise in related areas like business intelligence, data warehouse, and SEO. That’s what will keep the fashion industry’s heart beating in the future. Once I’ve taken digitalization on board in direct consumer business and I become adept at it, I’m more agile, and I can always invest in data-based collection development later. Responsiveness is what makes the difference, whatever the industry: the ability of companies to act faster and respond to trends. That’s what drives change. Companies have to be prepared to act in shorter cycles in an uncertain world. Responsiveness is far more useful than strings of projects along the lines of “Let’s install CRM.” But this lack of ability or willingness to act, to use methods that allow faster responsiveness to change, is exactly what’s missing in most fashion companies.

FK: Let’s assume for a moment you’re right. We build our responsiveness and learn to be constantly adaptable; set up an early warning system to make sure change doesn’t leave us behind. But corporate change at that level will take more than a workshop or two to put into practice. I have to turn the whole company on its head?

CB: Ultimately, any company that sees itself as a wholesaler with a little bit of retail on top has to take a good hard look at itself. We have to turn that idea of “we’re wholesalers that do a bit of retail” on its head.

FK: Companies would have to start right at the top. Do companies need a CDO?

CB: Oh, it starts further up than that. It’s far more effective if the CEO has understood what’s needed and drives development along. The idea of a CDO is useless unless a few other things have been put into motion beforehand. CDOs are people that flit around a company and have the task of bringing digitalization to completion, but they don’t have any power, they don’t have any P&L, and in terms of corporate culture they’re treated like beings from another planet. CDO isn’t a silver bullet that kills all the bad vampires.

FK: A few years ago there was a constant procession of culturally engaged companies, individuals, and journalists going to Silicon Valley and writing books about it. Now, after stepping back for a couple of years to consider, there’s no feeling of any great fundamental change. How do you see the view over the pond?

CB: There’s a lot to be learnt; but first you need to draw up a strategy of what you want to learn and who you want to meet, and why. What are the problems you’re hoping to solve?

FK: Where is it possible to learn something new on the subject? Apart from , Tiergarten, of course…

CB: Stockholm, Tel Aviv, and China are all great places to learn a lot about eCommerce. The question is always whether you’ve preceded your visit with the right strategic considerations about what you want to learn when you get there. If your strategy isn’t any more advanced than “Let’s go to the Valley and take a look around,” you’ll end up walking through the cafeteria at Google and learning nothing.

FK: Can we hear more from you about which companies are doing things right?

CB: I’m still a huge fan of Einhorn condoms. Einhorn is the perfect example of a company that’s understood exactly how to build a community-based brand that’s connected with its customers and has mastered direct sales. The designer behind it trained with Vivienne Westwood. The main thing is to develop the brand and the community alongside each other, then grow from inside to outside––and only then to bring wholesaling on board.

“I’m more impressed by companies, which start from scratch with ridiculously unprofessional and unprofitable business models.”

FK: Can you think of any examples from the industry represented here that you would describe as worth taking a second look at?

CB: Hard to say right now. Asos has done a lot right. MyTheresa is incredibly slow, but it’s on the right track; it could do a whole lot more in sales-oriented communication, but if the owner isn’t up to it, the company can’t do it. But when I look at it, I see a company with a professional structure that’s doing things in the right way. My all-time favorite is Westwing, a good company that has a digital basis at its core and a commodity on top.

FK: And what about About You?

CB: About You is a cultural car crash; it works on the lines of “Let’s build a new island because we destroyed the last one.” The concept is like “We’re not going to change a single thing about Otto, we’re going to set up About You, and then we’re going to move on.” The company team were told they were useless failures; there was a lot of fallout. I’m more impressed by companies like Outfittery, which start from scratch with ridiculously unprofessional and unprofitable business models.

FK: You once said, “Digitalization basically means new business.” Can you explain in more detail where you see potential in the market and where you would take action?

CB: When I wrote that I was really annoyed by the take on digitalization that was so common in German companies, like “We’re going to make all our processes digital, and then we’ll be super-efficient.” I think the best way to do it is to develop a growth strategy based on digital processes. If you start today, you have a great opportunity to grow a digitally native company. Amazon isn’t better than Edeka because it has better automated processes, but because it thought about its business model in depth. What always gets swept under the carpet is that lean operations, all that 1990s Asia and Japan-style stuff, which try to squeeze the last drop out of existing operations always have a problem with their business model. It might prolong life, but it doesn’t create new life.

FK: Let’s talk briefly about influencers – a huge development in marketing in recent years. You’re not a fan; why is that?

CB: Everyone’s talking about influencer marketing at the moment as if it were something completely new. I don’t want to sound arrogant, but it’s a topic that’s been done. I don’t even know why I’m still reading stuff about it. Like the Internet can turn everyone into a disseminator. I can kind of understand why someone like Caro Daur, who has a million followers, gets paid to hold a product up to the camera; that’s just the way the media has always worked. And I understand why it needs to be more authentic than what Hugo Boss did with Mario Gomez––which, by the way, is complete rubbish; generic, banal crap. The Robbie Williams of our times, and then nothing.

FK: How much of a chance do companies have to reach this audience themselves? Isn’t it hard for them to catch up?

CB: They can reach the audience by structuring the company specifically for, or based on, that purpose. They have to communicate with their target groups in an authentic way; if they can do that, they won’t need Caro Daur and her Mac lipstick. Brands like Einhorn are built specifically for certain target groups. Once you crack that, you won’t need to pour so much effort into influencing.

FK: Can I pin you down on this? In concrete terms, what makes a brand interesting?

CB: Ultimately, it’s about a different understanding of the market, about allowing a brand to be a platform and a community. I can only urge you all to take a close look at Warby Parker and how the brand’s been built up. These are brands that position themselves as the defining element of a community, that showcase themselves in the digital world against this backdrop, and that can exist in that world. All the rest are just riding on the coat-tails of influencers like Caro Daur.

FK: Taking a long-term view, how can a generic brand be kept operational in the future?

CB: There are two critical factors here. As a brand I can be above the algorithm, or below the algorithm. Either I get picked out and pushed into the spotlight at a specific moment, with Amazon and its ilk taking all the decisions about the rules that govern my selection. Or I’m above the API and take myself out of the Amazon circuit; I move into the 30% of the market that’s still free and build my own digital property. Those are the two dimensions. The brands that are above the algorithm will be the new premium brands, and the brands below it are just some old stuff.