Small designers don’t need big retailers to find a market by John Hagel III and John Seely Brown @FortuneMagazine September 2, 2015, 11:13 AM EDT E-mail Tweet Facebook Linkedin Share icons In January 2015, San Francisco-based custom clothing company JAKE debuted its capsule, ready-to-wear collection ROYGBIV, not in a boutique or in Bloomingdale’s, but on crowdfunding site Indiegogo. Backers could preorder from 10 essential clothing pieces, and production began after the campaign closed, beginning with the company reaching out to each backer for sizing and color preferences as well as demographic and psychographic data. Although JAKE had already had some success—it was chosen to work with Macy’s Fashion Incubator San Francisco (FiSF)—the crowdfunding campaign helped the small designer to generate demand, avoiding the need for costly guesswork in sourcing the high-end textiles, and also to build relationships and a better understanding of its customers. JAKE’s story is a great example of how new digital platforms are reshaping the retail industry: First, with the help of digital tools, the already volatile retail sector is facing significant competition from new entrants offering more personalized or customized niche products and services. As mentioned in our report, “The Retail Transformation: Cultivating choice, experience, and trust,” digital platforms and social media make non-mass market offerings viable by helping to aggregate niche demand, connecting buyers and sellers across regional and even national boundaries. Online, a seller’s addressable market is effectively the world—the collective global demand for an esoteric product looks a lot more attractive to a seller than what would have previously been the small demand in physical proximity. At the same time, online “shelf-space” is near infinite, making it easy to provide customers with a broad array. By revealing little-known options to customers, e-commerce can shape demand for new alternatives among consumers once satisfied with mass-market options. Second, many of the new entrants are using on-demand fulfillment strategies to be more responsive to customer preferences and get around the prohibitive costs of investing in and holding inventory. Smaller retailers can wait until consumers order to buy product from drop-shippers who then fulfill consumer orders with white-label delivery service. Small makers and manufacturers are also using drop-shipping, combined with digital platforms, to generate demand, acquire capital, take orders, and then produce to order. Suddenly, makers and manufacturers don’t necessarily need bricks and mortar in order to have a market. And if they do need a brick-and-mortar outlet, they have a choice of retail partners and models beyond just the traditional large resellers. In the luxury apparel market, New York-based online retailer Moda Operandi is enabling the producers (the designers) to bypass most of the fashion retail value chain that typically distances them from the consumer. Customers can pre-order an item as soon as it appears on the runway (typically receiving it a few months later). Both designer and consumer are liberated from the traditional constraint of a retail buyer’s decision to select a piece from items showcased on the runway and sell it through a store the consumer has access to. As a further, and significant, signpost for this shift, in July Amazon AMZN announced a partnership with Indiegogo, Y Combinator, and Andreessen Horowitz to provide a marketplace for select startups to showcase their companies and take pre-orders for their products. How this move will be perceived by the independent producers remains to be seen. But the story doesn’t end there. While upstart designers and bespoke apparel are nothing new, JAKE’s story highlights how lowered barriers to entry and the ability to connect directly with consumers are changing the role of producers in the rapidly changing retail industry. Now that producers can reach consumers more directly, they don’t necessarily need traditional resellers at all. In 2014, 52% of U.S. online shoppers visited brand and manufacturer websites with the intent to buy. Direct consumer contact eliminates intermediate steps in the value chain, boosting profitability and giving producers the opportunity for rich and timely feedback they might never get through traditional reseller channels. It isn’t just small makers and manufacturers who are taking advantage of tools for going directly to the consumer. Large manufacturers can reclaim margin and potentially strengthen customer loyalty by using the digital infrastructure to connect directly with consumers. Consider the way Apple AAPL connects directly with its consumers, in this case using the trappings of brick-and-mortar retail in a nontraditional way. The direct connection maximizes touchpoints with the customer to build an ongoing relationship and generates insights that help the producer better serve the consumer’s needs. In this rapidly changing retail environment, intermediaries have to rethink the value that they can deliver beyond holding, distributing, and financing inventory or risk being perceived as inhibitors that slow speed to market and interfere with the relationship between brand and consumer. Why do these models work? New, small entrants—retailers, producers—can be viable because of the network of entities, offering parts of the traditional value chain “as a service,” emerging to support them. Vibrant, robust digital marketplaces facilitate discovery and transactions. Cloud services help manage retail operations. Crowdfunding sites substitute for financial markets. Social media serves as marketing. White-label shippers stand in for inventory management and warehousing. New payment and mobile payment solutions even the payment playing field for small entities. Other local organizations focused on specific sectors or regions (e.g., SFMade and Macy’s Fashion Incubator) connect resources and accelerate learning. As traditional retailers and mass-market producers continue to evolve to compete with low-cost operators catering to ever-more specific tastes, they may find their highest value in deploying their hefty infrastructure to facilitate this increasingly fragmented ecosystem of producers. The clear winners, here, are undoubtedly the consumers. John Hagel III, Deloitte Services LLP, is the co-chairman of the Deloitte Center for the Edge based in Silicon Valley. John Seely Brown is the independent co-chairman of the Deloitte Center for the Edge.