Business Model Innovations and Sustainability Transitions

DEGREE PROJECT IN INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS STOCKHOLM, SWEDEN 2020

The Case of Circular Business Models in the Fashion Industry

RIKU SALMI

KTH ROYAL INSTITUTE OF TECHNOLOGY SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT

Business Model Innovations and Sustainability Transitions: The Case of Circular Business Models in the Fashion Industry

Riku Salmi

Master of Science Thesis TRITA-ITM-EX 2020:232 KTH Industrial Engineering and Management Industrial Management SE-100 44 STOCKHOLM

Affärsmodellsutveckling och Hållbara Övergångar: En Fallstudie av Cirkulära Affarsmodeller inom Modeindustrin

Riku Salmi

Examensarbete TRITA-ITM-EX 2020:232 KTH Industriell teknik och management Industriell ekonomi och organisation SE-100 44 STOCKHOLM

Master of Science Thesis TRITA-ITM-EX 2020:232

Business Model Innovations and Sustainability Transitions: The Case of Circular Business Models in the Fashion Industry

Riku Salmi

Approved Examiner Supervisor 2020-06-08 Cali Nuur Emrah Karakaya Commissioner Contact person

Abstract The concept of circular economy has gained a lot of interest among both researchers and practitioners. Moving from the traditional linear “take, make, disposal” resource management approach towards circular economy principles that aim to keep resources in a loop of usage is considered to be a possible way for material-intensive industries to decouple economic growth from environmental constraints. This could enable increased value creation while maintaining a decreased environmental footprint. The transition towards circular economy has stimulated companies across industries to introduce varying types of circular business model innovations. By using the case of clothing resale in the fashion industry, this thesis aims to explore how companies innovate their business models in the context of circular economy. The study uses the Multi-Level Perspective framework to analyze the emerging business model innovations within the clothing resale markets, incumbent fashion retailers’ reactions towards them, and the role of innovating business models in possible future stages of the fashion industry’s transition towards circular economy. The findings show that the main types of business model innovations emerging in the highly growing clothing resale markets are born-circular fashion retailers, online resale platforms, B2B back-end services for clothing resale and clothing as a service. Most incumbent fashion retailers have been actively monitoring the development of the clothing resale market, but only a small part of them have introduced resale-related business models themselves. Some fashion retailers that have taken a more active approach towards clothing resale have followed a business model diversification strategy where the existing business model stays in place and a secondary resale business model is established parallel with the core business model. Although the clothing resale business model innovations can entail some short-term economic and brand benefits especially with specific product types and price segments, the largest benefits are likely to be related to preparing for future changes. Fashion retailers that are currently reacting early to the circular economy transition by diversifying their business model with novel resale business model innovations strengthen their future position if changes in regulatory frameworks, consumer mindsets and technologies further accelerate the importance of circular economy in the industry.

Keywords: Circular Economy, Business Model, Innovation, Fashion, Multi-Level Perspective, Clothing Resale

Examensarbete TRITA-ITM-EX 2020:232

Affärsmodellsutveckling och Hållbara Övergångar: En Fallstudie av Cirkulära Affarsmodeller inom Modeindustrin

Riku Salmi

Godkänt Examinator Handledare 2020-06-08 Cali Nuur Emrah Karakaya Uppdragsgivare Kontaktperson

Sammanfattning Begreppet cirkulär ekonomi har fått ett stort intresse bland både forskare och utövare. Genom att förflytta ifrån den traditionella linjära resurshanteringsstrategin: "ta, göra, bortskaffa", till principerna för cirkulär ekonomi. Principerna syftar till att istället hålla resurserna i en slinga av användning och anses vara ett möjligt sätt för materialintensiva industrier att koppla från den ekonomiska tillväxten från miljöbegränsningar, där en cirkulär ekonomi kan möjliggöra ökad värdeskapande samtidigt som ett minskat miljöavtryck bibehålls. Övergången till en cirkulär ekonomi har stimulerat företag över en mängd olika branscher att införa olika typer av cirkuläraffärsmodellsutveckling. Genom att studera det nya fenomenet av återförsäljning av kläder inom modebranschen, syftar examensarbetet att undersöka hur företag utvecklar sina affärsmodeller i samband med cirkulär ekonomi. Studien använder ett multi-perspektivramverk för att analysera de nya affärsmodellinnovationerna inom klädåterförsäljningsmarknaderna. Utöver det studeras även de nuvarande modeförsäljares reaktioner gentemot dessa samt rollen som innovativa affärsmodeller kan ha i framtida stadier av modebranschens övergång till cirkulär ekonomi. Resultaten visar att de viktigaste typerna av affärsmodellinnovationer på de signifikant växande marknaderna för återförsäljning av kläder är de `föddes-cirkulära´ modeförsäljarna, återförsäljningsplattformar på nätet, samt B2B-tjänster för återförsäljning av kläder och kläder som en tjänst. De flesta nuvarande modeförsäljare har aktivt övervakat utvecklingen av marknaden för klädåterförsäljning, men bara en liten del av dem har själva infört återförsäljningsrelaterade affärsmodeller. Vissa modeförsäljare som har tagit ett mer aktivt förhållningssätt till återförsäljning av kläder har följt en strategi för diversifiering av affärsmodeller där den befintliga affärsmodellen förblir på plats och en sekundär affärsmodell för återförsäljning upprättas parallellt med den huvudsakliga affärsmodellen. Trots att utveckling av affärsmodellens klädesåterförsäljning kan medföra ekonomiska fördelar och varumärken på kort sikt, särskilt med specifika produkttyper och prissegment. Förutses de största fördelarna troligen vara relaterat till förberedelser för framtida förändringar. Modeaktörer som reagerar tidigt på övergången till cirkulär ekonomi genom att diversifiera den befintliga affärsmodellen med nya innovationer eller kompletterar med en ny affärsmodell, stärker sin framtida position om förändringar i regelverk, konsumentens tankesätt och teknik ytterligare påskyndar vikten av cirkulär ekonomi i branschen.

TABLE OF CONTENTS

1. INTRODUCTION ...... 1

1.1 BACKGROUND ...... 1 1.2 PROBLEM FORMULATION ...... 2 1.3 AIM AND RESEARCH QUESTIONS ...... 3 1.4 CONTRIBUTION ...... 3 1.5 DESCRIPTION OF CASE AND DELIMITATIONS ...... 4 2. LITERATURE REVIEW ...... 5

2.1 INDUSTRIAL TRANSITIONS ...... 5 2.2 BUSINESS MODEL PERSPECTIVE ...... 18 2.3 SUMMARY AND THEORETICAL FRAMEWORK ...... 31 3. METHODOLOGY ...... 34

3.1 RESEARCH DESIGN ...... 34 3.2 DATA COLLECTION ...... 35 3.3 DATA ANALYSIS ...... 38 3.4 METHODOLOGICAL RIGOR ...... 38 4. FINDINGS ...... 40

4.1 LANDSCAPE CHANGES CREATING WINDOWS OF OPPORTUNITIES FOR NICHE INNOVATIONS ...... 40 4.2 BUSINESS MODEL INNOVATIONS IN THE HIGHLY GROWING CLOTHING RESALE MARKETS DRIVEN BY EMERGING ACTORS ...... 43 4.3 REGIME BEGINNING TO REACT TO EMERGING INNOVATIONS ...... 48 4.4 POSSIBLE FUTURE CHANGES IN REGIME DYNAMICS CREATING INCENTIVES TO REACT EARLY ...... 52 5. DISCUSSION ...... 54

5.1 INNOVATIONS EMERGING IN THE FASHION INDUSTRY ...... 54 5.2 REGIME REACTION TOWARDS CLOTHING RESALE BUSINESS MODEL INNOVATIONS ...... 57 5.3 PATHWAYS FOR CLOTHING RESALE BUSINESS MODEL INNOVATIONS IN THE INDUSTRY’S CIRCULAR ECONOMY TRANSITION .... 62 6. CONCLUSION ...... 64

6.1 PRACTICAL IMPLICATIONS ...... 65 6.2 THEORETICAL IMPLICATIONS ...... 65 6.3 LIMITATIONS AND FUTURE RESEARCH ...... 65 REFERENCES ...... 66 APPENDIX A: EMERGING ACTORS ...... 79 APPENDIX B: INCUMBENT FASHION RETAILERS ...... 81

LIST OF FIGURES

FIGURE 1. THE MULTI-LEVEL PERSPECTIVE FRAMEWORK ...... 6

FIGURE 2. TRANSITION PATHWAYS ...... 8

FIGURE 3. AN EXAMPLE CLASSIFICATION OF FASHION RECYCLE AND REUSE ...... 17

FIGURE 4. INTEGRATED BUSINESS MODEL’S COMPONENTS AND PARTIAL MODELS ...... 20

FIGURE 5. TYPES OF BUSINESS MODEL INNOVATIONS...... 21

FIGURE 6. COMPARISON OF TRADITIONAL, SUSTAINABLE AND CIRCULAR BUSINESS MODELS...... 23

FIGURE 7. TYPES OF CIRCULAR BUSINESS MODEL INNOVATIONS...... 24

FIGURE 8. CONSUMER ENGAGEMENT IN CLOTHING RESALE ...... 28

FIGURE 9. STRUCTURING THE MEANINGS OF LUXURY FASHION RESALE PURCHASES ...... 29

FIGURE 10. TYPICAL FASHION RETAIL FORWARD AND REVERSE SUPPLY CHAINS ...... 31

FIGURE 11. BUSINESS MODEL INNOVATIONS AS PART OF THE MLP ...... 33

FIGURE 12. THE FOCUS OF EACH SUB-CHAPTER IN THE FINDINGS SECTION ...... 40

FIGURE 13. TIME-TO-MARKET OF CIRCULAR BUSINESS MODEL INNOVATIONS VERSUS TECHNOLOGY-FOCUSED INNOVATIONS BASED ON THE ANALYSIS OF FASHION FOR GOOD AND BCG ...... 42

FIGURE 14. TOTAL SECOND-HAND APPAREL MARKET (IN BILLION USD) ACCORDING TO THREDUP ...... 44

FIGURE 15. WOMEN WHO HAVE BOUGHT OR ARE OPEN TO BUY SECOND-HAND PRODUCTS IN THE FUTURE ...... 45

FIGURE 16. PURCHASERS OF SECOND-HAND APPAREL, FOOTWEAR OR ACCESSORIES PER AGE GROUP ...... 45

FIGURE 17. FINANCIAL VIABILITY OF RESALE BUSINESS MODELS BASED ON THE ANALYSIS OF FASHION FOR GOOD AND ACCENTURE STRATEGY ...... 47

FIGURE 18. AMOUNTS OF INCUMBENT FASHION RETAILER SIGNATORIES PER ACTION POINT IN GLOBAL FASHION AGENDA’S ”2020 CIRCULAR FASHION SYSTEM COMMITMENT” ...... 49

FIGURE 19. FOUR MAIN TYPES OF RESALE-RELATED BUSINESS INNOVATIONS BASED ON SCOPE AND NOVELTY ...... 57

FIGURE 20. AMOUNT OF CLOTHING RESALE BUSINESS MODEL INNOVATIONS INTRODUCED BY INCUMBENT FASHION RETAILERS ...... 60

LIST OF TABLES

TABLE 1. INCUMBENT ACTORS’ REACTIONS TO SUSTAINABILITY TRANSITIONS ...... 11

TABLE 2. MAIN PROCESSES OF CE AND EXAMPLE SECTORS THEY CAN BE APPLIED TO ...... 13

TABLE 3. CHARACTERISTICS OF SUSTAINABLE BUSINESS MODEL INNOVATIONS...... 22

TABLE 4. INTERVIEWS CONDUCTED DURING THIS STUDY ...... 36

TABLE 5. COMPANIES WHOSE WEBSITES WERE ANALYZED IN THIS STUDY ...... 37

TABLE 6. INDUSTRY REPORTS ANALYZED IN THIS STUDY ...... 38

TABLE 7. DIFFERENCES BETWEEN CLOTHING SECOND-HAND SALES, RENTAL AND RECYCLING SOLUTIONS FROM THE PERSPECTIVE OF A FASHION RETAILER ...... 43

TABLE 8. DESCRIPTIONS OF THE RESALE MODELS MOST COMMONLY ADOPTED BY INCUMBENTS ...... 51

TABLE 9. CATEGORIZATION OF EMERGING ACTORS IDENTIFIED IN THIS STUDY ...... 55

TABLE 10. TYPES OF RESALE BUSINESS MODELS INCUMBENT FASHION RETAILERS ARE PURSUING AS A REACTION TO CLOTHING RESALE .... 60

TABLE 11. BUSINESS MODELS OF EMERGING ACTORS IDENTIFIED IN THIS STUDY (PART 1/2) ...... 79

TABLE 12. BUSINESS MODELS OF EMERGING ACTORS IDENTIFIED IN THIS STUDY (PART 2/2) ...... 80

TABLE 13. INCUMBENT FASHION RETAILERS’ RESALE BUSINESS MODELS (PART 1/2) ...... 81

TABLE 14. INCUMBENT FASHION RETAILERS’ RESALE BUSINESS MODELS (PART 2/2) ...... 82

FOREWORD

I would like to extend my sincerest gratitude to everyone who has helped me during the whole thesis journey. The thesis has been an interesting and educational process during which I have met exceptional professionals and learned a lot about circular economy and the fashion industry. A large thank you goes to the industry experts I met and interviewed during the process; I received a lot of valuable insights on the topic from them. Secondly, I would like to thank my thesis supervisor, examiner and classmates for their priceless comments and feedback during the whole process. Finally, I would like to thank my family and friends who supported me during this journey.

Riku Salmi

Stockholm, Sweden, May 2020

1. INTRODUCTION

This chapter presents an introduction to the thesis. Chapter 1.1 presents a contextual background to circular economy and the fashion industry. Chapter 1.2 formulates a problem that acts as the basis for the aim of this thesis, which is presented in chapter 1.3 along with the research questions of the study. Finally, the study’s contribution (Chapter 1.4), case and limitations (Chapter 1.5) are presented.

1.1 Background Climate change, socio-political concerns and shifting consumer behavior have pressured companies across different industries to incorporate environmental sustainability in their business models (Geissdoerfer et al., 2018a). There is an increasing need to find more resource-efficient ways for companies to deliver value for their customers. Addressing this need, researchers’ and practitioners’ interest towards circular economy (CE) has largely accelerated during the past decade (Ghisellini et al., 2016).

CE can be defined in various ways. One of the definitions, that is popularized by the Ellen MacArthur Foundation (2013), describes CE as “an industrial system that is restorative or regenerative by intention and design. It replaces the ‘end-of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and within this, business models”.

There is an ongoing transition towards CE that is shifting the traditional linear “take, make, disposal” resource management approaches towards a paradigm that uses material cycles to keep resources in a loop of production and usage (Korhonen et al. 2017). This ultimately can lead to more value for a longer period (Urbinati et al., 2017). The increasing importance of this transition can be seen across various industries; a growing number of companies are implementing new ways of design, maintenance, repair, reuse, remanufacturing, refurbishing or recycling to shift their linear value chains towards more circular ones (Geissdoerfer et al., 2017).

A field where the transition towards CE is important is the fashion industry. Due to high energy consumption, water use, carbon emissions and the usage of chemicals, dyes and finishes, the fashion industry has one of the most polluting end-to-end supply chains out of all industries (Nagurney & Yu, 2012; Aiama et al., 2016). The industry’s environmental issues are also growing due to fast-changing cheap fashion that is increasing consumption and resulting in larger amounts of textile waste (Vehmas et al., 2018). Especially fashion retailers, companies operating in the downstream of the fashion supply chain, are responding to these environmental challenges with CE-focused initiatives. These retailers, facing large external pressures to decrease their environmental footprint, are emphasizing circularity in their sustainability strategies. They claim that transitioning towards circular operations will decrease the overall amount of materials needed throughout their supply chain which will inevitably reduce the negative environmental effects associated with the fashion industry. Some of the fashion retailers have even communicated their dedication towards becoming fully circular in the future (Ellen MacArthur Foundation, 2017).

1 The incentives behind fashion retailers’ ambitions to transit towards CE are not purely environmental, however. One of the key reasons why these companies are interested in implementing new circular operations is because they enable decoupling economic growth from environmental constraints (Ghisellini et al., 2016). Fashion retailers see CE as a potential way for them to increase the economic value they create while maintaining a decreased environmental footprint (Leal Filho et al., 2019). This economic potential can be realized for example through increased transactions per product or material, or through cost savings derived from decreased resource losses (Stewart & Niero, 2018). CE can also be a way for companies to find completely new revenue streams out of the existing residual value of their products (Romero & Rossi, 2017).

As an effort to understand and capture some of the environmental and economic potential of CE, some companies have started innovating their business models (Ellen MacArthur Foundation, 2017). The phenomenon of introducing new business models in order to achieve circularity has spurred growing research interest in the concept of circular business model innovations. As Nußholz (2017, p. 12) state it, a circular business model innovation is “how a company creates, captures, and delivers value with the value creation logic designed to improve resource efficiency through contributing to extending useful life of products and parts (e.g., through long-life design, repair and remanufacturing) and closing material loops”. Circular business model innovations that have been piloted in the fashion industry can be categorized into reselling, recycling, upcycling, sharing or remanufacturing. The characteristics and challenges related to individual circular business model innovations can differ largely depending on which category they are a variation of; those companies that are for example recycling used textiles into entirely new clothing have to consider different types of aspects in their business model than companies reselling finished clothing items from one consumer to another (Ghisellini et al., 2015; Linder & Williander, 2017; Murray et al., 2017; Pedersen et al., 2019; Stahel, 2019). To transit towards CE in an economically viable way, fashion retailers must have a good understanding of the specific characteristics of the type of circular business model they are pursuing (Holtström et al., 2019).

The potential adoption of CE principles in the fashion industry is a multi-dimensional socio- technical transition that is affected by the actions of different types of actors such as incumbent fashion retailers, emerging start-ups, consumers and regulators. The Multi-Level Perspective (MLP) by Geels (2002) can be seen as an appropriate framework to understand such transitions as it incorporates the inter-linkages between the development in a higher macroeconomic socio- technical landscape, the existing socio-technical regime dominated by established actors and different niche innovations introduced outside the incumbent market. In this thesis, the MLP is used to analyze these inter-linkages in the context of the fashion industry’s transition towards CE.

1.2 Problem Formulation As stated in the previous section, CE has inherent economic potential. However, companies are struggling to capture this potential. There is still a lack of comprehensive knowledge on how fashion retailers can make the shift towards CE economically viable (Rizos et al., 2016). One reason for this is that the specific cost and revenue structures are relatively unclear (Linder & Williander, 2017). Another key reason is that introducing CE requires a change in how fashion retailers do business. New emerging circular business model innovations can be complex and inherently different than the companies’ core linear models. In some cases, they can require shifts

2 in the ways of delivering customer value, which can be very challenging and thus increases the risk of successful implementation (Lewandowski, 2016).

Although the fashion industry has witnessed several pilot projects on implementing CE, and the academic community has published case studies on the circular solutions used, there is still a lack of sufficient framework supporting companies in innovating around circular business models (Bocken et al., 2017). The lack of industry best practices and granular analyses on the business model components proves to be challenging since existing circular business models have limited transferability to other companies. This, combined with the dissimilarity of circular operations with the traditional linear operating model, creates strategic challenges for the companies desiring to take part in the transition towards CE. To foster a clothing company’s successful implementation of circular economy, a deeper understanding of specific types of circular business models and how to design them is needed (Lewandowski, 2016).

1.3 Aim and Research Questions The aim of this thesis is to explore how fashion retailers innovate their business models in the context of clothing resale. To do so, CE is taken as a basis and the following main research question is formulated:

• Main Question: How and under which conditions do fashion retailers innovate their business models to navigate the transition towards circular economy?

This question is addressed in the empirical context of clothing resale. Thus, this main question is translated into following sub-questions:

• Sub-question 1: What are the main types of circular business model innovations emerging in the clothing resale market? • Sub-question 2: How are incumbent fashion retailers responding to emerging business model innovations in clothing resale? • Sub-question 3: What are the potential pathways for clothing resale in the fashion industry’s circular economy transition?

Sub-questions 1 and 2 focuses on the present-day interaction between the niche innovation and regime levels of the MLP. Sub-question 3 on the other hand expands this view into possible future stages of the fashion industry’s transition.

1.4 Contribution Several studies have aimed to better understand the transition towards CE by studying circular business models. To date, researchers have focused mainly on definitions, taxonomies, components and conceptual models of CE in relation to business model theory (Barquet et al., 2013; De Jong et al., 2015; Lewandowski, 2016; Mentink, 2014; Urbinati et al., 2017). Despite a few exceptions (Guldmann & Huulgaard, 2020; Hofmann, 2019), there has still been limited interaction between the research areas of CE, industrial transitions and business model innovations. This thesis sheds more light on the interplay between these concepts by exploring

3 clothing resale business model innovations and using the MLP to discuss their role in a socio- technical transition towards CE.

Furthermore, some past literature has also examined specifically the fashion industry when studying circular business models (Bocken et al., 2017; Holtström et al., 2019; Hvass & Pedersen, 2019; Stål & Corvellec, 2018). These studies have focused on a broader sense of the phenomenon; they have included all categories of circular business models into the same study scope. This thesis contributes to this growing literature by bringing in-depth empirical insights on the case of clothing resale.

1.5 Description of case and delimitations The case focused on in this study is clothing resale in the fashion industry. Clothing resale refers to reselling or redistributing used garments to a second or later end-user, as well as clothing rental. The case is chosen due to its relevance given that clothing resale is an area within CE where a large part of the fashion industry’s business model innovations occur (Todeschini et al., 2017). The case of clothing resale is studied from the context of business model innovations of both emerging start-up companies and incumbent fashion retailers. As the study is delimited to only investigating clothing resale business models in the fashion industry, other aspects of CE, such as circular design or recycling, are not focused on in the study.

From Blomkvist & Hallin’s (2015) system perspective, this study focuses on the industrial level; clothing resale business model innovations are studied by analyzing the processes of firms across the industry. The studied business model innovations’ effects on the transition in a higher-level socio-technical landscape will also be analyzed. Implications on the individual level will not be focused deeply on this study.

4 2. LITERATURE REVIEW

This chapter presents a review of previous literature relevant to this thesis. It focuses on two different types of literature: Transition literature (Chapter 2.1) and business model literature (Chapter 2.2). Both fields of literature are reviewed in a top-down manner; the higher-level concepts are first presented, after which each sub-chapter focuses on narrower research spaces that are more specifically related to this study. After the literature on transitions and business models is presented, Chapter 2.3 combines these two fields in form of a summary and concludes with a theoretical framework considered suitable to be used in this study.

2.1 Industrial Transitions Industrial transitions are complex occurrences that do not happen easily due to lock-in effects that make shifting from one industry paradigm to another extremely difficult (Arthur, 1989). Past literature has studied multiple transitions using different theoretical frameworks in different types of industrial contexts. This section reviews a part of the transition literature space by going in a top-down manner from a general theory towards literature specifically applicable for this thesis. The section starts by presenting the MLP by Geels (2002), one of the most common frameworks in the transition literature. Followed by this, the industrial transition research specifically focused on CE transitions is reviewed. Finally, the transition towards CE in the fashion industry and its centric role in the industry’s sustainability efforts is presented.

2.1.1 Multi-Level Perspective on Sustainability Transitions A widely used framework to understand systematic transitions within industries is the Multi-Level Perspective (MLP) by Geels (2002). The MLP offers to address the complexities of socio-technical transitions by presenting the inter-linkages between different forces that are involved in the transition. It has been used to analyze technological transitions as well as sustainability transitions (Geels, 2011; McMeekin & Southerton, 2012; Bolton & Hannon, 2016). Geels (2010) further points out that, in addition to changes in technology, socio-technical transitions are changes in consumer behavior, regulations, culture and business models. The MLP conceptualizes socio- technical transitions with three heuristic levels: niche innovations, socio-technical regime and socio-technical landscape. The interplay between these three levels in a socio-technical transition is visualized in Figure 1.

Figure 1. The Multi-Level Perspective framework (adapted from Geels, 2002, p. 1263).

Niche Innovations The first level of the MLP consists of niche innovations. This is an area where innovation activities pursuing to enter the current socio-technical system occur. These innovation activities are often pursued by smaller players operating in niches that are separated from the incumbent market. These niches are typically protected from the existing market forces that are prohibiting incumbent actors (Smith et al., 2010; Geels, 2011). Although operating rather separately from the incumbent market dynamics, the solutions developed in the niches are usually geared towards solving an underlying problem in the regime-level (Geels, 2005). Niches and socio-technical regimes form an evolutionary system; innovators operating in niches provide new potential solutions for the regime-level and the dynamics between regime actors determine whether these solutions are suitable enough for them to be injected into the regime (Genus & Coles, 2008; Geels et al., 2016). Some niche innovations break through into the regime-level and initiate a diffusion and competition with the incumbent regime. These breakthroughs are driven by internal factors such as the innovation’s performance improvements and external factors such as windows of opportunities caused by changes in the landscape-level (Geels 2005). The interactions between niches and socio-technical regimes occur in many dimensions (for example market, regulations, culture and technologies), and are driven by individual actors that search, learn, compete, negotiate and collaborate as the transitions move forward (Köhler et al., 2017).

Socio-Technical Regime The regime-level describes the dominant socio-technical system where incumbent actors have established. It is described by a set of networks, practices, technologies, and rules that are dynamically stable. Components within the regime level can include industries, markets, companies, policymakers, users, technologies and cultures (Geels, 2002; Smith et al., 2010; Geels; 2011). These regimes are locked in and stabilized in many ways, which makes it harder to change

6 the dynamics within them (Geels, 2010). Due to this, most regimes tend to resist radical transformations and undergo changes only through incremental steps along predicted trajectories (Lachman, 2013) while only some are able to proactively enter or follow into niches (Bergreen et al., 2015; van Mossel et al., 2018). The MLP describes industrial transitions as the shifts in the regime-level. These shifts are caused by pressures both from the other levels and from inside the regime. Especially macro-level socio-technical forces can create transformation pressures for the regime that, if grown large enough, can cause a crack in the existing regime which can lead to a creation of a new regime with new dynamics, actors or rules (Geels, 2010).

Socio-Technical Landscape The socio-technical landscape is a set of macro-level drivers influencing the current state of socio- technical regimes. It includes high-level economic, political, social and environmental pressures that shape both the regimes and niche innovations (Geels, 2005). Actors in the socio-technical systems are not able to control landscapes since they cannot be changed at will. The changes in the landscape-level occur slowly through events such as changes in demographics, macroeconomic trends, regulatory changes and crises, deep cultural and societal values and climate change. These changes create transformation pressures to the existing socio-technical regimes, thus opening up opportunity windows for niche innovations (Smith et al., 2005; Geels; 2010; Köhler, 2019).

By dividing the transitions into these three levels, the MLP enables understanding of the interplay between industrial and societal ecosystems, incumbent market actors and innovations. Industrial transitions are a result of a dialectic interaction processes between the three levels; the landscape- level dynamics are destabilizing regimes and pressuring them to change, which in terms creates opportunities for niche innovations to foster this change (Smith et al., 2005; Geels & Schot, 2007; Genus & Coles, 2008).

The MLP stresses that the processes of the three levels should be aligned for a transition to happen (Köhler, 2019). Timing is therefore a crucial factor in MLP. When the change pressures caused by landscape-level shifts are large enough, the niche innovations have to seize this opportunity with a sufficient solution. If the innovations are not fulfilling these change pressures, due to for example technological prematurity or economic unviability, existing regime actors can prevent them from diffusing into the regime.

Sustainability Transitions and their Pathways Within industrial transitions, sustainability transitions are a highly emerging field of research. Sustainability transitions can be defined as “long-term, multi-dimensional and fundamental transformation processes through which established socio-technical systems shift to more sustainable modes of production and consumption” (Markard et al., 2012, p. 956). As stated by Köhler et al. (2017), these transitions have a special role within sustainability research due to their multi-dimensionality, multi-actor process, dialectic relationship between stability and change, long-term timespan, uncertainty, values contestation, and the central role of public policy. The topic of sustainability transition has gained interest among scholars and it has been studied in various empirical contexts and geographical locations. During the past decade, sustainability transitions as a research topic has reached an extremely large output of published articles per year (Markard et al., 2012; Köhler et al., 2019).

7 Among the frameworks that have been used to display, understand and promote transitions towards sustainability, the MLP has been one of the common ones (Markard et al., 2012; Lachman, 2013). Smith et al. (2010) argue that MLP is a suitable framework to capture sustainability transitions since it is a straightforward way to order and simplify the analysis of complex, large-scale shifts in broad systems.

There are multiple types of transitions pathways through which a socio-technical regime can shift from one stage to another (Geels & Schot, 2007). The type of transition pathways is ultimately depending on the magnitude of change pressures the landscape-level is causing, the nature of multi-level interactions (symbiotic or competitive) and the timing of the niche innovation disrupting the regime (Genus & Coles, 2008). Geels and Schot (2007) present four different types of transition pathways: Substitution, Reconfiguration, Transformation and De-alignment and re- alignment. In substitution, the new entrants may replace the incumbent actors of the regime with the niche innovations they are driving forward. Reconfiguration on the other hand includes a combination of new and existing technologies; regime actors are in search of alternative regimes and may create alliances with new entrants. Transformation occurs when regime actors aim to keep the existing regime through incremental innovative improvements to existing technologies and business models. They might also incorporate symbiotic niche innovations into these incremental innovative efforts. Finally, de-alignment and re-alignment is when the regime is disrupted by shocks and the incumbent actors either search for alternative regimes or collapse. Figure 2 visualizes the transition pathways.

Figure 2. Transition pathways (adapted from Geels et al., 2016; Karakaya et al., 2018)1.

1 Original framework’s technological innovation system is changed to business model innovation.

Some specific differences of sustainability transitions compared to other types of industrial transitions are noticed in the past literature. Geels (2010) summarizes three main complexities that should be considered when studying sustainability transitions through MLP. Firstly, sustainability is a normative goal and a collective problem. This leads inevitably to prisoner’s dilemma and free- rider problems; private actors do not have clear incentives to transition towards sustainability. Therefore, public authorities and civil societies have a much larger role in sustainability transitions; the rules and economic conditions of sustainability actions as well as changes in consumer behavior act as motivators for private actors to ‘make the transition’. Secondly, the author emphasizes that unlike many historical transitions that were often focused around one or two innovations, sustainability transition in many industries include multiple different types of ‘green’ niche innovations. This makes the transition more complex since it raises questions such as: Through what kind of metrics should these innovations be evaluated and compared? Should the choice between ‘green’ innovations be made by public authorities and experts that base their decisions on environmental calculations, or by consumers and industries? The third problem emphasized in the study is the fact that current environmental problems such as climate change, biodiversity and resource scarcity are global and not directly visible or tangible. Geels argues that mobilization of these problems is highly dependent on a large extent of social movements and public opinion.

Incumbents’ Strategies in Sustainability Transitions Another trait of sustainability transitions that has spurred a lot of discussion in the academic community is the role of corporate strategists in questions regarding environmental sustainability. The studies in the field of environmental management have often been too naïve and lacking the perspective of strategists; they have lacked attention on the trade-offs between profits, people and environmental impacts, which are essential when companies are deciding on their sustainability strategies (Hahn et al., 2010; Pinkse & Kolk, 2010; Winn et al., 2012). This has been an essential source of criticism in sustainability transition literature. The studies of sustainability transitions using MLP have lacked focus in the micro-level; strategies of regime-level actors have been insufficiently included in the analysis of the transition (Smith et al., 2005; Markard and Truffer, 2008; Stenzel & Frenzel, 2008). Due to this, some researchers state that more emphasis on companies and competitive dynamics between them is needed. Farla et al. (2012, p. 996) state that “If we understand the struggles of actors with competing interests […] we will better be able to assess the conditions for sustainability transitions to materialize”. They suggest that further research should try to understand how much leeway regime-level actors have when pursuing sustainability transitions, how do different companies collaborate in the transitions, and how do competitive dynamics affect the transition.

Some literature on sustainability transitions has studied the topic in relation to business models and incumbent reactions. Bidmon and Knab (2018) argue that incumbent business models are a part of the socio-technical regime because they enforce this dynamic stability by creating rules and structures between regime actors. This view of placing existing business models into the regime is aligned also with the views business model scholars since the literature on business models often describes the existing dominant mode of doing business creates significant cognitive and structural barriers to renewing business models (Chesbrough, 2007; Doz & Kosonen, 2010). Bolton & Hannon (2016) studies the business model innovations in the context of sustainability transitions.

9 They argue that although business model innovations have a role in sustainability transitions, the relationship between business models, regulatory frameworks and infrastructure systems is of much greater importance.

Since sustainability transitions are complex systemic changes, business model innovation in itself is insufficient in causing it (Bidmon & Knab, 2018). Emergent business models need to be well aligned and have synergies with political, regulatory and market structures for them to drive the transitions (Bolton & Hannon, 2016). Both Smink et al. (2015a) and Fuenfschilling and Trugger (2014) on the other hand focuses on the strategies of powerful incumbent regime actors that are threatened by sustainability transitions. Their findings suggest that incumbent actors deploy multiple types of strategies to defend their position from new sustainable innovations; they try to influence policymakers by providing information and arguments and try to persuade the general public and other companies on their stable position by communicating new strategies and setting new technical standards. Van Mossel et al. (2018) argue that incumbents have four different behavior types during transitions: First to enter the niche; Follow into niches; Delay the transition and Remain inert. They explain common incumbent characteristics for each of these behavior types (Table 1). Multiple researchers also agree that the role of intermediary actors and boundary spanners have an important role in aligning niche and regime development (Diaz et al., 2013; Kivimaa, 2014; Smink et al., 2015b)

10 Table 1. Incumbent actors’ reactions to sustainability transitions (adapted from van Mossel et al. 2018).

Theory First to enter niches Follow into niches Delay the transition Remain inert

• Incumbents not meeting their aspirations, in the • Incumbents not meeting Behavioral Theory of the absence of a niche perceived their aspirations, in the • Incumbents meeting their firm to be successful. presence of a niche perceived aspirations. • Incumbents with a high to be successful. amont of slack.

• Incumbents that have internal conflicts. • Incumbents that have • Incumbents with dynamic enough slack. • Incumbents with dynamic capabilities and resources • Incumbents able raise Resource-Based View • Incumbents that have well capabilities. fitting niches better than the isolating mechanisms. developed routines. regime. • Incumbents that dont have dynamic capabilites or excess resources.

• Incumbents that possess resources that can be used in a niche. • Incumbents that depend on • Powerful incumbents • Incumbents dependent on Resource Dependence • Incumbents controlling powerful companies supporting the incumbent powerful firms supporting the Theory resources that enables supporting a niche. regime. incumbent regime. increased control over their environment within a niche.

• Incumbents that are only exposed to institutions within • Incumbents exposed to • Incumbents are more • Incumbents whose the incumbent regime. Institutional Theory different conflicting legitimate in niches than in priviledge and position are • Incumbents are more institutions. the regime. threatened. legitimate in the regime than in niches.

• Incumbents with technically efficient practices that deviate from institutional • Generalist incumbent. • Specialist incumbents. Organizational Ecology demands. • Small incumbents. • Large incumbents. • Incumbents that have been able to innovatively change their organization in the past.

2.1.2 Transitions Towards Circular Economy Based on numerous researchers (Perman, 2003; Andersen, 2007; Preston, 2012; Su et al., 2013; Heshmati, 2015; Ghisellini et al., 2016), the concept of CE was first introduced in 1989 by Pearce and Turner in their book “Economics of Natural Resources and the Environment”. The authors criticized the environmental harm caused by the traditional linear economic system and concluded with a new economic model, CE. Although the authors were first to introduce the concept as such, some aspects of CE can be traced back to even earlier decades. Their publication of Pearce and Turner was influenced by the work of Boulding (1966) which describes the earth as a closed and circular system. Boulding envisioned a closed economy that would be less reliant on first-use material inputs and more utilizing the reproduction of recycling waste outputs. Other researchers also introduced some aspects of CE before the concept was introduced. Stahel and Reday (1976) conceptualized a type of loop economy to describe company strategies for prevent waste and use

11 resources more efficiently. Their concept pursued four main goals: product life-cycle extension, long-life goods, reconditioning activities and waste prevention. In addition to this, Stahel (1982) emphasized selling utilization over ownership of products as a relevant sustainable business model.

Over the past decades, several research disciplines have emerged that have influenced the present understanding and interpretation of CE and its applicability to economic systems and industrial processes. Lyle (1994) started developing ideas of regenerative design in contexts beyond agriculture, where the concept had been used earlier. Graedel & Allenby (1995) studied industrial ecology in the context of creating closed-loop processes in which waste serves an input. Benyus (1997) created the concept of biomimicry, a practice to mimic nature’s best processes, such as circularity, to create innovations that solve human problems. McDonough and Braungart (2002) developed the concept and certification process cradle-to-cradle. It is a design philosophy that aims at transforming the industrial material flows towards a circular one where waste from one process is used as input for another process.

Definitions There have been numerous attempts to define the concept of CE in the literature. Many scholars have emphasized the circular material and resource flow in their definitions. Geng and Doberstein (2008, p. 232) use this angle to define CE as the “realization of closed loop material flow in the whole economic system”. Preston (2012, p.1) goes further by stating that “Circular economy is an approach that would transform the function of resources in the economy. Waste from factories would become a valuable input to another process – and products could be repaired, reused or upgraded instead of thrown away”. Morgan and Mitchell (2015) are aligned with the emphasis on resource management in the definition of CE. They define CE as an alternative to the traditional linear ‘make, use, dispose’ economy model where resources are kept in use longer, extracting maximum value from them by extending their lifecycles as well as recovering and reusing them.

Some scholars have attempted to go beyond material flows and resource management by adding other aspects into the definition of CE. Bastein et al. (2013) focus on the economic side of CE by defining it as a facilitator of new kinds of economic activity that strengthens competitiveness and generates employment. Ghisellini et al. (2016) also agree that the benefits of CE improve the entire living economic model. They emphasize that the CE efforts require radical changes in all processes during a product's lifecycle and are therefore conducted especially by innovative actors. Bocken et al. (2016) add a design and business model perspective to the concept by defining CE as a design and business model strategy that slows, closes, and narrows resource loops.

One of the more exhaustive definitions is conducted by The Ellen MacArthur Foundation (2013), which is arguably the most essential institution in the work of CE. They define CE as “an industrial system that is restorative or regenerative by intention and design. It replaces the ‘end- of-life’ concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and within this, business models”. This definition is one of the most used ones and it includes aspects of various disciplines (Geissdoerfer et al., 2017; Rizos et al., 2017). Therefore, this definition is considered to define what is CE in this thesis. Circular Processes

12 Different types of processes can be considered circular. By combining definitions and interpretations from different publications, Rizos et al. (2017) categorize CE into three categories: Use of less primary resources, maintain the highest value of materials & products, and change utilization patterns. Within these categories, they define that the main processes of CE are recycling, efficient use of resources, utilization of renewable energy sources, remanufacturing, refurbishment and reuse of products and components, product life-extension, sharing models, and shift in consumption patterns (Rizos et al., 2017).

The authors also conclude a few examples of industries where each of the main CE processes are applied. These examples are stated in Table 2. The listing of applicable sectors is meant to provide a view of the wide spectrum of use cases of CE through examples and thus is not exhaustive (Rizos et al., 2017).

Table 2. Main processes of CE and example sectors they can be applied to (Rizos et al. 2017).

Examples of sectors where circular processes Category Circular process can be applied

Automobile, textile, building, packaging, Recycling critial raw materials, forest, chemical USE OF LESS PRIMARY Building, plactics, mining and metals, food RESOURCES Efficient use of resources sector

Utilisation of renewable energy sources Chemical, food, forest Remanufacturing, Automobile, manufacture of computer, MAINTAIN THE refurbishment and re-use of electronic and optical products, building, HIGHEST products and components furniture, transport VALUE OF MATERIALS Manufacture of computer, electronic and AND PRODUCTS optical products, automobile, household Product life extension appliances, building, food, textile, defence

Household appliacnes, transport, building, Prodct as service printing CHANGE UTILISATION automobule, transport, accomodation, PATTERNS Sharing models clothing

Shift in consumpton patterns Food, publishing, E-commerce

Current Literature Directions The literature on CE transitions is still emerging; researchers’ interest in the topic has increased largely during the past decade (Geissdoerfer et al., 2017). Scholars such as Andersen (2007), Su

13 et al. (2013), Ghisellini et al. (2016) and Rizos et al. (2017) have conducted literature reviews aiming to achieve clarity on the definition, interpretation, dynamics and applicability of the concept. One popular direction in CE research is to study the supply chain effects of moving towards circularity (Wells and Seitz, 2005; Guide and Van Wassenhove, 2009; Stindt and Sahamie, 2014; Govindan et al., 2015). Other researchers have focused on the business model (Lewandowski, 2016; Bocken et al., 2016; Urbinati et al., 2017; Heyes et al., 2018; Oghazi & Mostaghel, 2018), policy implication (Gregson et al., 2015; Kirchherr et al. 2018) or product design (Bakker et al., 2014) perspectives in their studies of CE.

Criticism Although the academic community, in general, has been largely interested in CE during the past decades, the concept has also received criticism from some scholars. Preston (2012) argues that the term CE is applied inconsistently by researchers, companies and governments. There have been varying interpretations and applications of CE which has led to reduced international cooperation as well as the challenge of assessing the impact of the overall transition towards CE. Some scholars have also questioned the actual environmental benefits and economic viability of CE. Demailly & Novel (2014) and Murray et al. (2017) state that, in some cases, the net environmental benefits of a closed-loop supply chain can be ambiguous, and recycling or reusing products may require more energy than products with a short lifecycle. Robert (2000), Mentik (2014) and Berndtsson (2015) on the other hand criticize the viability of CE; they state that closed- loop supply chains can be difficult to achieve, expensive to implement or they may lead to undesired lock-in effects.

2.1.3 The Fashion Industry’s Transition Towards Circular Economy One of the key industries focusing on CE currently is the material-intensive fashion industry. CE has become an important aspect in both the literature focusing on the fashion industry as well as the industry practitioners’ sustainability efforts. (Stål & Corvellec, 2018) As a background to the industry’s CE transition, this section first presents the challenges and efforts made regarding environmental sustainability in the fashion industry. Followed by this, the state of the art of the CE literature in the context of the fashion industry is presented.

Environmental Sustainability in the Fashion Industry The high population growth and increased living standards have increased the amount of clothing consumed around the globe tremendously during the past decades. According to an analysis by the Global Fashion Agenda, the industry size for apparel and footwear in 2019 reached 1.9 Trillion US dollars, and it is expected to grow to 3.3 Trillion US dollars by the year 2030 (Global Fashion Agenda, 2019b). The industry’s high growth is increasing the environmental problems associated with fashion. Wasted resources are a big part of the underlying problem; it has been evaluated that approximately 400 Billion US dollars’ worth of clothing is wasted every year (Shirvanimoghaddam et al., 2020). In addition to clothing waste, the industry causes other types of damage to the environment. The high energy consumption and CO2 emissions as well as the usage of chemicals, dyes and finishes, the fashion industry has one of the most polluting end-to- end supply chains out of all industries (Vehmas et al. 2018). Approximately 8000 synthetic chemicals are used to turn raw materials into textiles (Aiama et al., 2016). Textile manufacturing also pollutes 200 tons of water with every ton of fabric produced (Nagurney & Yu, 2012).

14 The increasingly growing issue of the industry’s negative effects on the environment has spurred practitioners’ and scholars’ interest in environmental sustainability in fashion operations. One of the most studied topics within the fashion industry’s transition towards environmental sustainability is fashion supply chains. This is a key area because managing the industry’s long and complex supply chains, which are often characterized by focusing their upstream operations in developing countries and downstream operations in developed counties, are one of the main ways to influence the environmental effects of fashion (Resta et al., 2014). This importance can also be seen from a practical viewpoint; supply chain’s sustainability is the most reported aspect in fashion companies' CSR reporting (Edgeman et al., 2015)

Past literature studying the industry actors’ attitudes towards increasing sustainability in their supply chains have found differing views among fashion retailers. Some companies are reluctant to react to the growing environmental pressures, try to survive with an existing supply chain management model and are even prone to blame others. Some companies, on the other hand, have a more active view on the topic and strive to include the sustainability supply chain improvements into their strategy (De Brito et al., 2008; Nagurney & Yu). Caniato et al. (2012) study the drivers that push fashion retailers to make these supply chain improvements. The authors determine that currently, the most relevant drivers come from within the company. These internal drivers include for example corporate values and inspiration of the top management. Regulatory or legislative drivers did not have major relevance. The authors also state that the importance of market drivers such as consumers’ environmental consciousness is growing rapidly in the industry.

Other researchers have focused on the actions that have taken to improve supply chain sustainability in their studies. De Brito et al. (2008) state that these improvements are often done through ‘green’ standardization, environmental audits, partnering, communities of practice and clean transport modes. Turker & Altuntas (2014) agrees with this by stating that fashion retailers’ sustainable supply chain management focuses significantly on supplier compliance, which is done through setting sustainability criteria for their suppliers as well as establishing monitoring and auditing activities to prevent production problems in the upstream of their supply chains and improve overall supply chain performance. Other publications overlapping with the supply chain research have studied the topic with a focus on product design (Curwen, 2013; Resta et al., 2014), production processes (Jørgensen & Jensen, 2012; Curwen, 2013) and environmental KPIs measured by fashion retailers (Caniato et al., 2012)

In addition to the studies focused on the supply chains in entirety, the fashion retailer’s transition towards environmental sustainability has also been studied from the downstream perspective of fashion retailing. This part of the industry, where the products are sold to the consumers, is a key area in the research of the industry’s transition since it drives the companies’ sales development. (Ying et al. 2017). Nagurney & Yu (2012) found out that consumers have a major influence on the profitability of sustainable efforts through their environmental consciousness (Nagurney & Yu 2012) Choi and Wong (2012) continue this discussion by arguing that sustainability actions in product design and supply chain management have limited driving effect in the company’s sales. They recommend that fashion retailers need to increase the store-related sustainability attributes to satisfy the customers’ needs and be cautious when determining price-premium levels of ecofashion.

15 Studies focused on consumer behavior and demand have seen a distinction between consumer perception towards the sustainability efforts of fast fashion retailers and slow fashion retailers. Fast fashion retailers, companies producing and selling clothes with low prices and fast-paced changes in clothing lines, are often affiliated with unsustainable operations and environmental efforts done by these brands receive skepticism (Thomas 2008; Bly et al., 2015). As a countermovement to this, slow fashion actors, companies creating higher-quality products with a value proposition more focused on a clean environment, have received increased attention (Clark, 2008; Fletcher, 2010; Cline, 2012).

Among both fast and slow fashion companies, there has been an increasing shift towards using environmental efforts as a brand-building method. The increasing environmental awareness of consumers has made a large number of fashion retailers to strive towards building a more environmentally conscious brand identity (Hartmann et al., 2005; Brown, 2010). A widely used strategy for this has been introducing environment-focused labels such as “eco-friendly”, “organic”, “natural” or “eco-fashion” into their assortments (Beard, 2008). Multiple studies have shown that different types of consumer-facing green branding and eco-labeling initiatives can attract more environmentally conscious consumers as customers (Husvedt, 2009; Gam, 2011; Yoo et al., 2013).

Some studies have focused on the interplay between consumers’ and retailers’ behaviors. Joung (2014) states that as a response to consumers’ environmental consciousness, companies have engaged consumers to recycle their old clothing. The study paradoxically showed that although many consumers are interested in the environment, they did not participate in recycling efforts. Goworek et al. (2012) focus on this type of difference between consumers’ environmental preferences and buying habits. Their study shows that sustainable clothing buying habits are largely dependent on the consumers’ existing habits and routines, rather than their awareness of the company’s environmental practices. To some extent, fashion retailers can have the power to influence the consumption patterns of consumers by providing information and initiating consumer-facing ‘green’ initiatives. This together with their leverage to influence upstream manufacturers’ production processes make fashion retailers in many ways able to decrease their environmental footprint (Durieu, 2003; Erol et al., 2009).

Circular Economy in the Fashion Industry One aspect that has become a truly key part of the fashion industry’s environmental sustainability efforts is CE. The industry’s large environmental issues and the promising idea that CE could be a way to decouple the economic growth from these issues has emerged a vastly growing interest towards CE by both practitioners in fashion companies and researchers studying the industry (Stål & Corvellec, 2018). Especially fashion retailers, companies operating in the downstream of the fashion supply chain, are increasingly focusing on CE when reacting to the pressures from both consumers and institutions to decrease their environmental footprint (Franco, 2016). The fashion industry is considered likely to be the industry that will transition to totally new types of circular product service systems first (Stål & Jansson, 2017). This emerging interest towards CE has also spread to the academic community; CE is perhaps the fastest-growing research direction within sustainable fashion (Jia et al., 2020). The research on CE in the fashion industry is still emerging and is therefore rather fragmented both in study topics and geographical focus. A significant amount of new research on the topic has been conducted especially in the Nordic countries (Kjaer

16 et al., 2019; Sandin & Peters, 2018; Stål & Corvellec. 2018; Stål & Jansson, 2017¸ Vehmas et al., 2018)

The CE models used in the fashion industry are repair, reuse, refurbishment, remanufacture, sharing and recycling (Stål & Corvellec, 2018). A large part of previous research has been focused on recycling and reusing (Sandin & Peters, 2018). Different types of reusing and recycling are presented in Figure 3. By including newer business model innovations that have occurred in the industry, Todeschini et al. (2017) categorize CE in the fashion industry into recycling, upcycling, vegan (reducing overall energy consumption by moving away from animal-based materials), fashion library, second hand and collaborations. Hu et al. (2014) also include clothing renting within the scope of CE.

Figure 3. An example classification of fashion recycle and reuse (adapted from Sandin & Peters, 2018).

The previous literature states that fashion retailers’ CE adoption is still very slow and there is a lack of integration between newer circular activities and the traditional linear activities (Stål & Corvellec, 2018). The variety of different circular business models implemented is also narrow. Stewart & Niero (2018) argue that the focus of most companies is on product packaging, end-of- life management and sourcing, while aspects like circular product design and business model strategies have received lesser focus.

Stål & Corvellec (2018) agree with the narrow scope of CE implementation; they state that a clothing take-back system is the only CE activity many fashion retailers have implemented. Some researchers acknowledge that take-back systems are merely the first step towards CE and that other circular efforts can prove to be more beneficial in an environmental and commercial sense (Stål & Jansson 2017; Kjaer et al., 2019). For example, Han et al. (2017) identify that lesser used methods

17 such as upcycling, turning used clothing into other (often more valuable) products, can be commercially successful. Sandin & Peters (2018) suggest that companies need to carefully analyze both the financial gains and environmental benefits of CE efforts since they can vary largely depending on the case. They state that in some cases circular fashion might even prove to be harmful to the environment due to a combination of environment-damaging factors such as shipping, packaging and energy usage. Although sometimes the environmental benefits of CE can be ambiguous, Vita et al. (2019) identify that extending the lifetime of clothes is one of the most efficient ways for fashion retailers to reduce their carbon footprint, and therefore CE efforts aiming for clothing lifetime extension provide clear environmental benefits.

Some literature has studied the topic from the perspective of the consumers. Vehmas et al. (2018) state that consumer interest in recycling and sustainable solutions has increased significantly which can lead them to become “the new normal”. The study was conducted only in the Nordics however, and cultural differences can be significant when it comes to circular fashion (Xu et al., 2014). The study of Vehmas et al. (2018) also finds out that the end-customers are asking for more visible and concrete information on circular clothing, and that this should be done by using all of the company’s communication channels. Lastly, they suggest that new circular services can also be accompanied by digital services. Niinimäki (2017) argues that creating suitable circular services is far from being an easy task. The study shows that this is an area where fashion retailers aiming to increase circularity are struggling since the services should be aligned with the company’s product design and business model.

2.2 Business Model Perspective To better understand how clothing resale business model innovations are related to the fashion industry’s CE transition, a review of business model literature on the topic is conducted in this section. The section reviews the literature in a top-down manner, moving from broader business model literature towards a narrower research space of clothing resale business model innovations in the fashion industry. First, the previous literature focusing on business models and business model innovations in general is described. After this, the state of the art of circular business model innovations is presented both in general and in the context of the fashion industry. Finally, previous literature conducted specifically on clothing resale business models is reviewed.

2.2.1 Business Model Innovations Research on business models has been developed already for over half a century (Wirtz et al. 2016). The number of articles published has been especially high in the past two decades (Ghaziani & Venresca, 2005). A key reason why business models have gained such a tremendous amount of interest is that there is a common consensus in the academic community that business models have an essential role in describing how companies can find competitive advantages (Zott et al. 2011).

The Concept of Business Models There are varying views among academics on what specifically is a business model. Timmers (1998) describes a business model as an architecture for flows of products, services and information. Chesbrough & Rosenbloom (2002) state that a business model is a way to define a company’s value proposition, market segment, value chain, cost and revenue structure, partnerships and customers. Magretta (2002) and Teece (2010) are aligned with this definition;

18 they state that business models are hypotheses on who a company’s customer is, what do the customers need and how does the company creates revenue by fulfilling this need. Chesbrough (2007) adds to this that business models should describe the value each actor, including the company as well as its partners and customers, receives through the company’s operations. There is no consensus among scholars of a precise definition of a business model (Zott et al. 2011). Acknowledging this, Massa et al. (2017, p. 73) avoid going into a more detailed level and describe business models in a general way to be “a description of an organization and how that organization functions in achieving its goals (e.g., profitability, growth, social impact, ...)”.

A key part of business models is value creation; a business model is a way for a company to create, deliver and capture value (Shafer et al., 2005; Baden-Fuller & Morgan, 2010; Osterwalder & Pignuer, 2010) This value is created by exploiting a company’s internal competencies and external business opportunities, and it can be considered to mean both customer value and the economic value eventually captured in a company’s revenue model (Zott & Amit, 2010). Tongur and Engwall (2014) state that a well-articulated business model has typically three interrelated activities. First, the company’s value proposition shapes what kind of value is offered and to whom. Second, value creation is a continuous operation that determines the logic of the value is created. Third, value capturing defines how the value is retained and converted to profits. These can mean economic profits as well as social and environmental profits (Karakaya et al. 2016). The literature describes different components of a business model, through which a company can create, deliver and capture value (Fielt, 2014). Morris et al. (2005) categorize the components as follows: • Factors related to the offering: How do we create value? • Market factors: Who do we create value for? • Internal capability factors: What is our source of competence? • Competitive strategy factors: How do we competitively position ourselves? • Economic factors: How do we make money? • Personal & investor factors: What are our time, scope and size ambitions? (Morris et al., 2005)

Multiple scholars have studied the relationship between a company’s business model and strategy. Osterwalder (2003) states that a company has three business layers: Strategic layer, business model layer and process layer. They structure the layers in a hierarchical manner where business models are placed in between strategy and operations. Casadeus-Masanell & Ricart (2010) are aligned with this interplay between strategy and business model; they argue that a company’s strategy determines what kind of a business model is developed, and this business model subsequently determines what kind of tactics the company deploys. Wirtz et al. (2016) extend the discussion on the relationship between business models and strategies by presenting an integrated business model (Figure 4). They describe business models as combinations of very much interrelated components that can be divided into strategic components, customer and market components and value creation components.

Figure 4. Integrated business model’s components and partial models (adapted from Writz et al., 2016)

Innovating Business Models Instead of viewing business models as a description of a company’s current state, some researchers describe them as tools that can be used to facilitate change. Demil & Lecocq (2010) state that there are two types of business models: Static business models and transformational business models. Static ones can be seen as fixed descriptions of how the company is structured to generate revenue. Transformational business models on the other hand can be used as a plan for the future; they are a structural tool used to make both internal and external change happen (Demil & Lecocq, 2010). The idea of changing business models is largely behind the growing research field of business model innovations (Zott et al., 2011). Business model innovations consider business models instead of products and processes as subjects of innovation (Baden-Fuller & Haefliger, 2013). They are innovations made around a company’s value proposition, value creation and value capturing (Clauss, 2017). Business model innovations have vastly different characteristics than product and process innovations which makes them an interesting topic of study (Markides, 2006; Snihur & Wiklund, 2019).

Through an extensive literature review on the emerged field of business model innovation studies, Foss and Saebi (2017) categorize four types of business model innovations: Evolutionary, adaptive, focused and complex (Figure 5). They state that the type of business model innovation depends on the degree of novelty (new to the firm or new to the entire industry) and the degree of scope (modular or architectural) of the innovation. When the business model innovation’s degree of novelty is new for the firm, the business model is pivoted in response to changes in external environments. This is done through evolutionary and adaptive business model innovations (Foss & Saebi, 2017). Evolutionary business model innovations are “a fine-tuning process involving

20 voluntary and emergent changes” that happens gradually over time and affect only individual components of the company’s business model (Demil & Lecocq, 2010). Adaptive business model innovations are not new to the industry, but they involve more radical changes in the entire business model of an individual company (Saebi et al., 2016). In contrast, in focused and complex business model innovations the company seeks to disrupt market conditions. Focused business model innovations are when companies innovate on individual components of their business model by creating a new market by for example targeting a segment ignored by competitors. Complex business model innovations occur when a company shifts its entire business model to deliver value in a way that is new in the entire industry (Foss & Saebi, 2017).

Scope

Modular Architectual

Evolutionary business Adaptive business New on a firm-level model innovation model innovation Novelty New on an industry- Focused business model Complex business model level innovation innovation

Figure 5. Types of business model innovations (adapted from Foss & Saebi, 2017).

Previous studies have focused a lot on the management of business model innovations. This is because company management has a key role in making the organization able to innovate its business model and make the needed changes to fit the new business model (Sosna et al., 2010). Chesbrough (2010) argues that this can be a pitfall for companies; companies often invest heavily in developing new ideas but do not succeed in shifting their underlying business model accordingly. To succeed in business model innovations, companies require dynamic capabilities as well as the ability to build and shift internal and external competencies to achieve a change (Teece, 2018). Some researchers emphasize the importance of experimental learning; studies show that successful business model innovations often occur through a trial-and-error method where companies are experimenting new business model innovations while allowing some of them to fail (Chesbrough, 2010; Sosna et al., 2010) Snihur and Wiklund (2019) also emphasize the importance of cross-organizational collaboration in business model innovations; they argue that a broad external search for ideas and capabilities is important in business model innovations.

Business model innovation research has also discussed the topic of parallel business models. Hacklin et al. (2018) argue that especially during times when value is migrating rapidly between companies, substituting the key elements of an existing business model with an entirely new business model innovation is more suitable than launching a secondary business model in parallel with the old one. This is often the case in sustainability-related business model innovations; multiple authors state that companies can utilize business model innovations to address environmental disruptions (Mitchell & Coles, 2003; Teece, 2010; Sandström, 2010; Baden-Fuller

21 & Haefliger, 2013). Geissdoerfer et al. (2018a) build upon this by stating that organization’s capability to move into new business models is a key success factor in creating a competitive advantage through sustainability.

Many researchers have also studied business model innovations that are related specifically to sustainability. By collecting findings from previous literature, Holtström et al. (2019) found out that business models with a sustainable orientation use the same building blocks as a generic business model. They identified specific characteristics of including sustainability in business model innovation (Table 3).

Table 3. Characteristics of sustainable business model innovations (adapted from Holtström et al., 2019). Key characteristics including sustainability in business Concept model innovation Business model needs to continously develop in oder to create value Contiunous development better than competitors. It must understand how the business itself develops over time and adjust accordingly.

The effects of business model changes to current revenue streams and Revenue streams and profitability profitability needs to be well understood.

Moving from product-centric sales towards services benefits a Product-service sytem development sustainable business model development.

Collaboration with third-party actors is needed when developing Collaboration sustainable business models.

Considering products, processes, technology and future investments Resources and capabilities that to develop a sustainable business model.

Both episodic and continuous change management is needed to Capturing change capture change patterns in the corporate environment.

The ability of management to identify and react to barriers (including Identifying barriers social, regulatory, market and financial barriers) for business model innovations.

Sustainable business model innovation efforts that focus on producing Efficiency less and being more effective in production to enable sustainablity.

Understanding and influencing customer attitudes, preferences and Customer perspective behaviors to achieve more sustainable consumption patterns.

2.2.2 Circular Business Model Innovations One aspect of CE literature that has gained popularity during recent years is how the shift from a linear economy model towards a circular one will translate into new business models on a micro- economic level (Pieroni et al., 2019b). According to Geissdoerfer et al. (2018a), the research on

22 circular business models has extended from a research field of sustainable business models. They state that circular business models incorporate sustainable business models’ aspects such as pro- active multi-stakeholder management and long-term perspective, but also specific aspects regarding resource loops (Figure 6).

Figure 6. Comparison of traditional, sustainable and circular business models (adapted from Geissdoerfer et al., 2018a).

As CE both changes the underlying logic of how companies organize themselves and alters the purchasing behavior of consumers, it requires innovations on companies’ business models (Planing, 2018). Circular business model innovations aim to create new ways of working to systematically uncover new sources of economic value along the product’s full lifecycle and thus boost resource efficiency and effectiveness (Den Hollander & Bakker, 2016). This requires companies to either transform their business model into a circular form or transition it towards a more circular form. That increases the importance of finding new types of collaboration partners and reconsider how value is offered to different stakeholders (Antikainen et al., 2017). Geissdoerfer et al. (2018b) categorize the types of circular business model innovations into start- ups, business model transformations, business model diversifications and business model acquisitions (Figure 7).

Figure 7. Types of circular business model innovations (adapted from Geissdoerfer et al., 2018b).

Previous literature has identified differences between CE-focused business models and other types of business models, which has led to the development of frameworks and models for innovating circular business models (Pieroni et al., 2019b). Antikainen and Valkokari (2016) argue that the concept of business model innovation requires additional elements when they are focused on CE. They added three CE perspectives to existing business model literature: recognizing trends and drivers at the ecosystem level; understanding the stakeholder value within a business and evaluating the business model impact on sustainability and circularity. Bocken et al. (2014) discuss that in addition to analyzing how value can be created, delivered and captured, circular business model innovations should also seek to understand where business models are destroying value, what kind of value is missed by a business model and what kind of entirely new value opportunities can be found through new activities and relationships.

Antikainen et al. (2017) argue that since CE is an overarching transition that is influenced by a large set of actors and takes time to happen, circular business model innovations should start with a future perspective. They divide circular business model innovation into following steps: 1. Understanding the future business environment and its impact on the business model innovation 2. Scenario building exercise to understand alternative CE futures 3. Understanding future customers through consumer discussions and online discussions 4. Business scenario workshops to seek new business models 5. Implementation of the business idea through rapid experiment or more complex pilot (Antikainen et al., 2017)

Labscher and Marelli (2014) on the other hand focus on the implementation of circular business models in their study. They provide six key areas to focus on when working on the implementation of circularity into business processes. These principles give a comprehensive overview of the managerial changes that organizations face when implementing new circular business models. The six principles are: 1. Sales model: Maximizing asset productivity through service selling instead of selling volumes of products 2. Product design: Design products that can be reused multiple times instead of focusing only on low production costs

3. IT management: Building organization-wide IT capabilities to track product and material data 4. Supply loops: Recovering own assets and enabling the use of recycled/used materials 5. Strategic sourcing: Building long-term strategic partnerships with suppliers and customers 6. HRM: Enhancing internal culture adaptation and capability development to enable a shift towards circularity (Labscher & Marelli, 2014).

Although there has been an accelerating interest towards circular business model innovations in the academic community and methodological support has been increasingly developed, the newness of the phenomenon still creates large challenges for companies to design and implement these new business models (Blomsma & Brennan, 2017; Pieroni et al., 2019a). As a reaction to this issue, Pieroni et al. (2019b) aimed to develop a pragmatic process model for circular business model innovations. Through a systematic literature review, the authors collected 16 different conceptual models and frameworks previously presented in the literature of circular business model innovations. By combining these models with empirical data from relevant industry organizations, they developed a more practice-oriented model that is divided into three steps: Sense, seize and transform. In the sense step, companies define the scope to start the CE transformation and prioritize different types of business model innovation opportunities. This is followed by the seize step which includes ideation of circular business models, screening the ideas, designing detailed concepts for a circular business model as well as evaluating and selecting the concepts for implementation. The last step, implementation, includes prioritizing business model innovation concepts, planning for subsequent actions, piloting of the concepts, launching of new circular business models and scaling them up through constant reviewing and adjusting. (Pieroni et al. 2019b).

Previous literature has also raised different challenges regarding circular business model innovations. Linder and Williander (2017) combine previous literature to enumerate the main types of challenges that arise when developing circular business models. They state that the main challenges related to finding the right customers for circular solutions, establishing operations for return flow of goods, being restricted to certain product categories, cannibalizing traditional offerings, being unable to respond to short-term changes in consumer preferences, having a lot of capital tied to the offering, having a larger operational risk, lack of support from regulators and being restricted into a small set of partners. Mentik (2014) states that a key challenge for companies designing circular business models is the inevitable interlinkages to the business models of other actors. They argue that no company can be alone circular, and circular business models need to be a part of a larger network that together create the required ecosystem for a CE. This creates a greater need for open innovation and co-creation between different actors (Antikainen et al., 2017). Acknowledging the uncertainties related to circular business model innovations, Weissbrod and Bocken (2016) emphasize the importance of experimentation and allowing failures to happen when moving towards a circular business model. Bocken et al. (2018) extend on the experimentation discussion through a case study of eight companies shifting towards circular business models. With this case study, they found out that experimentation creates change engagement both internally and externally, experiments can help in testing business model assumptions, collaborating with third-party partners can enable setting up experiments faster and the experimentation is an iterative that needs to include learning and sustainability checks along the way (Bocken et al., 2018)s.

2.2.3 Circular Business Model Innovations in the Fashion Industry The phenomenon of circular business models has not been extensively studied in the context of the fashion industry. As stated by Weissbrod and Bocken (2017), there is still a rather limited amount of previous studies and most of them are still exploratory due to the newness of the topic. Holtström et al. (2019) argue that circular business model innovations have distinct characteristics in the fashion industry, and they incorporate all steps from clothing design, production, sales/rental to repair, reuse and finally recycling.

Niinimäki and Hassi (2011) discussed how new values can be developed through service thinking. They argue that a radical new mindset and change is needed in the fashion business. To achieve this through circular business model innovations, Holtström et al. (2019) identify key aspects that fashion retailers should focus on. Firstly, consumers have a more essential role in the fashion industry compared to many other industries. The authors state that the fashion consumption patterns of customers are an essential part of circular business models; companies need to acquire deeper insights on consumer behavior. In addition to the importance of consumers, the fashion industry also has a distinct profitability characteristic. As the price pressure for fashion products is high, the question of profitability becomes a decisive factor in circular business models. Robust mapping of the cost-structures is therefore of high importance for new models such as second- hand selling and rental, that compete with traditional business models (Holtström et al., 2019).

The fashion industry also has a clear distinction between traditional established brands and modern start-ups. The start-up players are nowadays typically born sustainable and create a unique value proposition by originally combining approaches, resources and competencies. The more traditional incumbent fashion retailers on the other hand tend to proceed more cautiously with circular business model innovations, experimenting with small-scale green initiatives and promoting transparency in supplier selection and management (Weissbrod & Bocken, 2017). Business model innovations in fashion also tend to be marketed differently between incumbents and start-ups (Cortmiagli et al., 2016).

Weissbrod and Bocken (2017) study the inner entrepreneurial dynamics of circular business model innovations in the fashion industry. Through this study, they identify that the key opportunities for fashion retailers’ circular business model innovations is the enhanced focus on CSR, service-based business models and monetizing voluntary simplicity. On the other hand, a key challenge prohibiting the circular business model innovations is rethinking the design phase, educating consumers more, dealing with consumers’ negative images of the sustainability of fashion brands and aligning values along with the different actors across the supply chain. The authors also mention that technology has an important role in the industry’s circular business model innovations; high technology helps in radically rethinking manufacturing processes.

Todeschini et al. (2017) on the other hand focus on the importance of experimentation capability in fashion retailers’ implementation of new circular business model innovations. They combine Lean Startup thinking, triple bottom line value creation and organizational capabilities in their study. The results of the study state that (1) The desire to plan project activities and the lack of lean startup approach expertise across the organization slows down the implementation of circular

26 business model innovations, and (2) Triple bottom line value creation approach can be utilized in assessing individual experiments in a circular business model innovation implementation project.

Some studies emphasize the need for collaboration. Holtström et al. (2019) argue that developing a transparent relationship with suppliers and other stakeholders is needed for fashion retailers to develop competitive business models (Holtström et al., 2019). This is aligned with Pedersen and Andersen (2015) who also emphasize the importance of partnerships due to the systemic characteristics of sustainability challenges in the fashion industry. They state there is an increasing need to increase knowledge sharing and collaboration between fashion companies and also across different sectors.

Pedersen and Andersen (2015) have a more critical view of the circular business model innovations that have occurred in the fashion industry. Based on interviews with 36 global fashion industry experts, they argue that the scale and the scope of current business model innovations are limited and do not address the more fundamental challenges of dominant business models and consumption behaviors.

Other studies have focused on the role of business model innovations in fashion companies’ performance and within organizational aspects. Cucculelli et al. (2014) studied business model innovations’ role in the fashion industry during recessions. They analyzed 376 Italian small- and medium-sized clothing brands' during the recession following the 2008 financial crisis. The results show that novelty-centered business model innovations, together with investments in intangibles, positively affects the performance of a fashion retailer during recessions. Through a survey for 492 managers within the Swedish fashion industry, Pedersen et al. (2018) found out that a fashion retailer's core values and fundamental principles guiding the organization have a determining influence on the business model innovations and sustainability approaches taken. Holtström et al. (2019) also add that shifting towards circular business models is a process of continuous development for a fashion retailer and it occurs over time.

2.2.4 The Case of Used Clothing Resale Clothing resale, which represents collecting, selling and exchanging used fashion products, has developed into a growing trend in the fashion industry during the last two decades (Yang et al., 2017). It is widely accepted that clothing resale has a critical role in the industry’s transition towards CE (Choi & Cheng, 2015; Machado et al., 2019). Two interrelated parallel terms are used in clothing resale: Second-hand fashion and vintage fashion. Second-hand fashion is defined as previously owned and used fashion products, and it does not consider the age of a product (Guiot & Roux, 2010; Cervellon et al., 2012; Carrigan et al., 2012; Joung & Park-Poaps, 2013). Vintage fashion on the other hand is defined as rare and authentic clothing items that represent the style of a specific era. Vintage fashion products’ value is more connected to their age and era than second- hand products (Guiot & Roux, 2010; Cervellon et al., 2012; Yang et al., 2017).

Consumer perspective to clothing resale Most of the previous academic publications on clothing resale have studied the phenomenon from the perspective of the consumer. This is intuitive since consumers, their purchasing behavior and mind-sets towards used clothing are of great importance when it comes to clothing resale (Marzella, 2015). Da Costa et al. (2018) argue that consumer interest towards clothing resale is

27 growing rapidly, and fashion retailers have a key role in driving this mindset shift even further through increasing awareness and educating consumers.

Studies have presented a variety of different consumer motivations towards clothing resale. Many scholars agree on the fact that price is the main motivation behind consumers' second-hand purchasing decisions (Yang et al., 2017). Park and Armstrong (2019) argue that saving money is the biggest driver for clothing resale. However, their study identified additional major drivers: Timesaving and ease of use of an app/website. Gopalakrishnan & Matthews (2018) state that the main drivers for second-hand fashion are cheaper price, as well as the thrill of finding great deals, value for brands and variety of offerings. Carrigan et al. (2012) are aligned with this; they discuss that one key motivator for shopping used clothing is the thrill of finding unique items. Cervellon et al. (2012) state that the motivations to buy second-hand clothing and vintage clothing are different between each other; they argue that the main motivations to buy vintage items are nostalgia and fashion involvement. By studying the phenomenon in different cultural settings, Xu et al. (2014) found out that there are large cultural differences in consumer perceptions and motivations towards clothing resale.

Machado et al. (2019) explain the consumers’ purchase decisions with the fact that second-hand and vintage purchases are usually not planned purchases; consumers are mainly looking for 'treasures' which are unique items that cannot be found elsewhere. They also present a framework for consumer engagement in clothing resale (Figure 8).

Figure 8. Consumer engagement in clothing resale (adapted from Machado et al., 2019)

Sihvonen and Turunen (2016) studied fashion items’ value in the online second-hand market. They state that consumers’ perception of the value of a used garment can be divided into six antecedents: Quality, price, design, brand availability, origin and authenticity. They also found out that the age of the product may have differing impacts on its value. On one hand, higher age can decrease the

28 price due to lower perceived quality. On the other hand, the increased age of a product increases the prices in cases when the product gains a vintage perception or when the brand is less available, making the product rarer. The study also showed that different brand categories, for example, fast- fashion brands, luxury brands, authentic semi-brands, private label and design brands, had differing value dynamics in the online second-hand market.

Other studies have also focused solely on luxury clothing resale. Keim & Wagner (2018) pursued to find out what kind of factors drive consumer purchasing decisions specifically in vintage luxury fashion. Their results show that the drivers for purchasing these types of items are (starting from the most important one): (1) Need for uniqueness, (2), Fashion involvement, (3) Need for status, (4) No waste and (5) Nostalgia. Turunen and Leipämaa-Leskinen (2015) divided used luxury fashion purchases into five categories: Sustainable choice, Real Deal, Risk Investment, Pre-loved Treasure and Unique find. These types of luxury resale purchases depend on two dimensions: Whether the motivations behind the purchase are social-related or self-related, and how guaranteed the consumer is about the authenticity of the product (Figure 9).

Figure 9. Structuring the meanings of luxury fashion resale purchases (adapted from Turunen & Leipämaa-Leskinen, 2015).

Ferraro et al. (2016) identified four main customer segments of clothing resale buyers in their study. Their description and size for each segment are as follows: 1. Fashionable Hedonists: 39% of second-hand customers represent this segment. These consumers are characterized by hedonic motivations, driven by fashionability and surprises in second-hand stores. They are somewhat price-conscious and tend not to be driven by shopping enjoyment. This segment has a large variation in shopping frequency; it includes both frequent shoppers (weekly) and infrequent shoppers (once every six months) 2. Infrequent Fashionistas: 38% of second-hand customers represent this segment. Consumers of this segment are characterized by infrequent shopping; they purchase clothing once every

29 six months or less. They are not price-sensitive, and their purchasing decision is driven solely by fashionability. 3. Disengaged Second-Hand Shoppers: 17% of second-hand customers represent this segment. This segment has the lowest shopping frequency out of all segments; they purchase clothing once a year or less. The segment is not especially motivated to second-hand, but they still report doing it occasionally. They are not specifically driven by fashionability or price. 4. Treasure Hunting Influencers: 6% of second-hand customers represent this segment. This segment shops second-hand clothing the most frequently; most of them do it weekly. They have critical motivations of economic, recreational and fashionability behind their second-hand purchasing. The segment avoids large fashion chains, enjoy 'treasure hunting' and often disassociate themselves from the mainstream market (Ferraro et al., 2016).

Clothing Resale Influencing Business Models in the Fashion Industry Previous literature has also focused on the company and business model perspective of clothing resale. Weissbrod & Bocken (2017) state that clothing resale has a large impact on the fashion industry’s business models. These impacts include an extensive change in value propositions, delivery channels, customer relationships, key activities and revenue streams. Sorensen and Johnson Jorgensen (2019) found out that as many consumers have negative images towards the cleanness of second-hand stores and products, companies with a resale business model should ensure that all clothing is cleaned in their facilities and all damaged items are fixed or repurposed. They also noticed that clothing resale is very much impacted by the shopping experience and that resale actors could consider alternative merchandising techniques or shopping experiences to develop their clothing resale business models.

Kumar et al. (2018) on the other hand state that one of the main ways clothing resale affects business models is through new types of supply chain structures. They argue that the reverse supply chain of fashion retailers offers opportunities for alternative entrepreneurial business models. They visualized the supply chain structure of clothing resale based on the results of their study (Figure 10). Aspects such as ensuring the authenticity of second-hand items, creating a profitable business case through emphasizing the business model’s cost-structure and finding the right partnerships are also of high importance in clothing resale business models (Gopalakrishnan & Matthews, 2018; Zampier et al., 2019).

Figure 10. Typical fashion retail forward and reverse supply chains (adapted from Kumar et al., 2018).

Some scholars have studied the environmental benefits of clothing resale. Farrant et al. (2010) state that although some scholars have questioned the environmental benefits, clear proof can be found on the significant contribution of clothing reselling to reducing the environmental burden of the fashion industry. This is also aligned with the Life Cycle Assessment study on reselling conducted by Castellani et al. (2015), which shows that the environmental benefits of reselling are especially significant in the fashion industry where volumes of sold items are much higher than in many other industries.

2.3 Summary and Theoretical Framework To understand how fashion retailers can drive the industry’s transition towards CE through clothing resale business models, we utilize both the concepts of industrial transitions and business model innovations. As was presented in previous sections, a widely used framework for capturing industrial transitions is the MLP by Geels (2002). By giving an understandable overview of a complex and multi-dimension shift within industries, it has been especially useful in describing sustainability transitions (Geels, 2011; McMeekin & Southerton, 2012; Bolton & Hannon, 2016). This aspect could make it a suitable frame of reference to be used to study the CE transition in the fashion industry which is highly interrelated with the industry’s current sustainability efforts (Franco, 2016; Stål & Corvellec, 2018).

However, the MLP framework does not capture the business model component and the role of business model innovations within industrial transitions. To analyze the overlap between industrial transitions and business models, the first step is to define how are business models placed within the MLP (Bidmon & Knab, 2018). Transition literature often describes socio-technical regimes as dynamically stable. This means that the regime pursues incremental long-term improvements

31 while avoiding radical changes (Geels & Schot, 2010). Bidmon and Knab (2018) argue that incumbent business models are a part of the socio-technical regime because they enforce this dynamic stability by creating guiding rules among the regime actors. This view of placing existing business models into the regime is aligned also with the views business model scholars since the literature on business models often states that the existing dominant mode of doing business creates significant barriers to creating new business models (Chesbrough, 2007; Doz & Kosonen, 2010). Incumbent strategists are often reluctant to either make internal development efforts or accept externally developed business model innovations outside the focus of their existing business models due to path dependencies and fear of cannibalization of current sales (Chesbrough, 2010; Sabatier et al., 2012; Bohnsack et al., 2014; Velu & Stiles, 2013). This means that new business model innovations are in most cases driven by novel forces coming from outside the regime and trying to break the current status quo between existing business models (Bidmon & Knab, 2018) although there are some exceptions at which incumbent actors themselves may be the innovators (Berggren et al., 2015)

Bidmon and Knab (2018) argue that it is not only the large incumbent companies with dominant business models that new emerging business model innovations have to break through. They also have to break through the overall dominant logic in the industry, customers, financial actors and regulators that are all coupled with the current logic that the system operates in. Bolton and Hannon (2016) state that since sustainability transitions are systemic changes, business model innovations need to be aligned and have synergies with regulatory and market structures for them to drive the transitions. In other words, business model innovations have to be able to penetrate through the cracks in the existing socio-technical regime in industrial transitions for them to be established in the newly established socio-technical regime. Although this makes their position within transitions similar to technological niche innovations, they fulfill many requirements in industrial transitions that technological innovations do not. Unlike new individual technologies, for a business model innovation to diffuse it needs to be already well-articulated and communicated due to cross- boundary nature that requires redefinitions of transaction among a number of actors (Matthyssens et al., 2006; Zott & Amit, 2010). In addition to this, during the emergence of new business model innovations, regime actors have often already started questioning existing industry logics and evaluated the possibilities for new ways to create and capture value (Tripsas & Gavetti, 2000; Tikkanen et al., 2005; Martins et al., 2015). Due to these aspects, Bidmon and Knab (2018) define business model innovations’ place within the MLP as closer to the regime than technological innovations, but still coming from outside the regime as a disruptive force trying to shift the regime towards a new stable state. The MLP including business model innovations is visualized below in Figure 11.

Figure 11. Business model innovations as part of the MLP (adapted from Bidmon & Knab, 2018)

As a theoretical frame of reference, this thesis borrows concepts from business model innovation (e.g. Bidmon & Knab, 2018) and MLP literature (e.g. Geels, 2002) and uses these concepts to understand the empirical data gathered in this study. The framework by Bidmon and Knab (Figure 11) captures the incumbent players within an industry, their business models, the overall socio- technical regime and dynamics between actors within it, the high-level landscape forces causing change pressures into these dynamics as well as the business model innovations that have the potential to utilize these change pressures and shift the regime from one state to another. This makes it a suitable tool to analyze empirical data focusing on the role of clothing resale business model innovations within the fashion industry’s CE transition. Therefore, it is chosen as the main framework to structure the findings of this study.

33 3. METHODOLOGY

This chapter presents the research methodology used to fulfill the purpose of this thesis. It outlines the research design used, presents what different types of empirical data were collected and underlines how the data was analyzed. Finally, a description of the methodological rigor of the study is presented.

3.1 Research Design To fulfill the purpose of this thesis, which is to explore how fashion retailers innovate their business models in the context of clothing resale, a qualitative case study was conducted. According to Yin (2003), a case study is a suitable design to investigate a contemporary phenomenon in a real-life context when the boundaries between the phenomenon and context are not clear. The author also emphasizes that case studies are often characterized by “how” research questions. The research design could therefore be used to answer the main research question on how and under which conditions do fashion retailers innovate their business models to navigate the transition towards circular economy.

Since there is a limited amount of previous research on circular business model innovations in the fashion industry in general, and especially in the scope of clothing resale, an exploratory perspective on the case study was suitable (Blomkvist & Hallin, 2015). Exploratory qualitative case studies can provide new empirical insights and therefore contribute to the currently limited research on the phenomenon (Yin, 2003). As stated by Eisenhardt (1989), this empirical data is of high focus in the findings of a case study. By analyzing the empirical data using the chosen theoretical framework and previous literature, exploratory research can contribute to the theory (Yin, 2003; Sutton & Staw, 1995). This thesis pursued to do this by analyzing the collected empirical data in light of the theoretical frame of business model innovations as part of industrial transitions by Bidmon and Knab (2018) and combining this with existing literature on the circular economy transition and circular business model innovations in the fashion industry.

The analysis of the findings in this thesis can be characterized by abductive reasoning. Abductive reasoning is suitable when there is a need to switch between theory and reality in the course of the research process (Dubois & Gadde, 2002). The thesis explored a phenomenon with a lack of knowledge among both researchers and practitioners. This increased the suitability of the abductive approach since it enabled room for creativity or intuition in developing new knowledge (Andreewsky and Bourcier, 2000; Kirkeby, 1990; Taylor et al., 2002). As Kirkeby (1990) states, “Creativity is necessary to break out of the limitations of deduction and induction, which both are delimited to establish relations between already known constructs.” In addition to enabling creativity that has an essential role in pursuing unexplored research areas, the abductive approach allowed the thesis to iteratively gather, analyze and explain data (Ritchie & Lewis, 2013). Alongside the flexible data collection, making adjustments to the research questions throughout the research process was used. According to Eisenhardt (1989), this enables dynamically keeping the research focus on the relevant aspects of the phenomenon as new knowledge emerges from the empirical data. This type of flexibility is important when building theory from case studies (Miles et al. 1994).

34 3.2 Data Collection The data collection started with a preliminary study that aimed to understand the current situation in the fashion industry. During this, discussions were had with representatives from the fashion industry and academia. Previous literature on CE transitions and business models was also reviewed. The preliminary study enabled formulating a problem as a basis of the research. As argued by Saunders et al. (2016), a preliminary study is a suitable way to guide the direction of the research.

After the preliminary study was finished, the second part of the study consisted of gathering data from three types of entities: Incumbent fashion retailers, Emerging actors in the fashion industry and Knowledge and political institutions. The data from these entities were gathered using three different empirical data sources: (1) Unstructured interviews, (2) Company websites and (3) Industry reports. The more specific data sources used are summarized in the following sections.

3.2.1 Interviews To map the current situation in the fashion industry, the dynamics between regime-level actors and the change pressures caused by the transition towards CE, interviews were conducted. As Blomkvist and Hallin (2015) state, using interviews is a suitable way to collect information on complex phenomena in a qualitative case study. The interviews were conducted in an unstructured manner. Aligned with Saunders et al. (2016), unstructured interviews were considered suitable for the exploratory study. The unstructured nature of the interviews allowed the participants to discuss freely on the topics while the interviewer asked follow-up questions.

As stated by Eisenhardt (1989), a qualitative case study can include multiple types of interviews. To understand how fashion retailers can drive the industry’s transition towards CE through clothing resale business model innovations, four different types of regime-level actors were interviewed: Researchers, industry knowledge organizations, a political institution and a fashion company. As industrial transitions are multidimensional and systemic transitions that include the interplay of multiple different types of actors in a socio-technical regime (Geels et al., 2016), this variety of interviewees enabled a broader picture of the macro-, meso- and micro-level dynamics in the fashion industry. The entities interviewed are listed in Table 4.

35 Table 4. Interviews conducted during this study. Date Duration Interviewee Topics Representative from an Circular business model April 3rd, 2020 60 min industry association innovations in the fashion industry Representative from an Circular business model April 3rd, 2020 60 min industry association innovations in the fashion industry Representative from an Circular business model April 16th, 2020 60 min industry association innovations in the fashion industry Member of the April 8th, 2020 60 min European Parliament Circular economy and regulations Researcher – Fashion Circular economy in the fashion March 19th, 2020 60 min industry industry Researcher – Circular March 27th, 2020 60 min business model Circular business models Researcher – Circular economy in the fashion April 24th, 2020 60 min Sustainability industry Multiple interviews 60 min Representative from a Circular business model February-April 2020 (multiple) fashion retailer innovations in the fashion industry Multiple interviews 60 min Representative from a Circular business model February-April 2020 (multiple) fashion retailer innovations in the fashion industry Multiple interviews 60 min Representative from a Circular business model February-April 2020 (multiple) fashion retailer innovations in the fashion industry Representative from a Circular business model May 6th, 2020 60 min fashion retailer innovations in the fashion industry Representative from a Circular business model May 8th, 2020 60 min fashion retailer innovations in the fashion industry

3.2.2 Company Websites To understand what types of resale business model innovations are emerging in the fashion industry and how incumbent companies are reacting to these innovations, websites of both incumbent fashion retailers and emerging actors were analyzed. This is aligned with Saunders et al. (2016), who state that company webpages can be a useful source of data for research projects requiring national or international comparison from a large number of actors. The companies analyzed in this thesis were selected based on their relevance to the study scope; emerging actors and incumbents that have introduced resale business model innovations were prioritized in the analysis. In total 48 company websites of emerging actors and 45 company websites of incumbent fashion retailers were analyzed. These company websites are listed in Table 5. Each company website was accessed between February and April of 2020. The data collected from the websites of emerging actors is presented in Appendix A, and the data collected from the website of incumbent actors are presented in Appendix B.

36 Table 5. Companies whose websites were analyzed in this study. Company Websites - Emerging Actors /id/ Hardly Ever Worn It RE-NT Armoire Haverdash Rent the Runway Bag, Borrow or Steal Helpsy Restyle Closet Better World Fashion Heroine Sellpy Blonde Gone Rogue HURR Collective Something borrowed Circos I:CO Style Lend Depop Le Tote The RealReal Designer Wardrobe Lena The Renewal Workshop Ecoalf Lizee ThredUP Emmy Love that Bag Tradesy For Days Modsie Trove Front Row My Ex Wardrobe Vaatepuu Glam Corner My Private Boutique Varie Grailed Poshmark Vestiaire Collective Gwynnie Bee Re/Done Vinted Hack Your Closet Rebelle Zero Waste Daniel Company Websites - Incumbent Fashion Retailers & Other Stories ELSK New Yorker Acne Studios Esprit Nordstrom Adidas Fenix Outdoor Nudie Jeans American Eagle Filippa K OVS Ann Taylor GANNI Patagonia Arc'teryx Guess Pearl Izumi Banana Republic H&M Polarn o Pyret Boomerang Hania New York Puma Burberry Hope Samuji Carhartt Inditex Stella McCartney Columbia Loft Suitsupply COS Madewell The North Face Designers Remix Mara Hoffman Timberland Diesel Marks & Spencer Toad & Co. Eileen Fisher MUD Jeans Urban Outfitters

3.2.3 Industry Reports As a final source of empirical data, reports from the industry have been collected to gain additional insights into the fashion industry’s transition towards CE. As stated by Saunders et al. (2016), industry reports can be a valuable source of data since they can be a way to gather additional or different knowledge. The organizations conducting the industry reports may also have put significant resources in gathering this knowledge (Saunders et al., 2016). Industry reports are used in this study to complement the data collected in the interviews and analysis of company websites. This proved to be an effective method to include views of industry organizations that were unable to give an interview due to the uncertain COVID-19 situation. The industry reports were selected based on their relevance to the study scope; reports from highly recognized industry associations and consulting firms regarding the CE transition in the fashion industry were prioritized. Each industry report was accessed between February and April of 2020. The industry reports analyzed are listed in Table 6.

37 Table 6. Industry reports analyzed in this study.

Industry Reports Source Business of Fashion & McKinsey & Co: The State of Fashion 2020 Business of Fashion, 2020 Fashion for Good & Accenture Strategy: The Future of Circular Fashion Fashion for Good, 2019 Fashion for Good & BCG: Financing the Transformation in the Fashion Industry Fashion for Good, 2020 Global Fashion Agenda: Resale Toolbox Global Fashion Agenda, 2018 Global Fashion Agenda: 2020 Circular Fashion System Commitment Global Fashion Agenda, 2019a Mistra Future Fashion: Swedish Market for Pre-owned Apparel Mistra Future Fashion, 2019 Sitra: Service-based Business Models & Circular Strategies for Textiles Sitra, 2015 ThredUP: Resale Report 2019 ThredUP, 2019

3.3 Data Analysis The abductive reasoning used in this study enabled comparing insights from both literature and empirical data throughout the research process (Blomkvist & Hallin, 2015). This allowed for data triangulation from literature, interviews, company analysis and industry reports (Yin, 2003). Due to this abductive nature, the empirical data was analyzed parallel during the collection process. As proposed by Eisenhardt (1989), the research direction was revised throughout the research process as new insights emerged from the empirical data.

A theoretical framework was used to analyze the collected data. The framework chosen to act as suitable theoretical lenses for analyzing the data is the business model innovation variation of the MLP presented by Bidmon and Knab (2018). This framework was chosen since it captures the multi-dimensionality of industrial transition and, unlike the traditional MLP, it focuses on business model innovations instead of technological innovations on the niche innovation level of the transition. By analyzing the empirical data using the chosen theoretical framework and previous literature, exploratory research can contribute to the theory development (Yin, 2003; Sutton & Staw, 1995).

The analysis of the interviews focused on flexibly interpreting the views of the different regime actors. As stated by Saunders et al. (2016), this type of research adopts a much lower level of structure. Research approaches that structure meanings through a narrative rely more on the researcher’s interpretation (Saunders et al., 2016). Therefore, the interviews were analyzed in an unstructured manner without coding. Instead, notes were taken from each interview and possible alternative explanations were reflected throughout the process. As discussed by Alvesson and Skölberg (2010), a reflective approach (e.g. without systematic coding) can be an appropriate way of doing qualitative research. Analyzing the interviews with some level of reflexivity enabled the study to have a more reflected view on the interviews, which helped in avoiding bias and overconfidence in data analysis techniques (Alvesson & Skölberg, 2010).

3.4 Methodological rigor To assess the quality of the research, multiple factors are evaluated. The quality of an explorative qualitative case study is measured based on its validity and reliability (Yin, 2003; Blomkvist & Hallin, 2015). A description of these aspects is presented in this section. In addition to this, the operationalization of the theoretical concepts is presented.

38 3.4.1 Validity and Reliability Validity is defined as studying the right phenomenon that is intended to be studied. This relates to the relationship between data collection methods and research questions (Blomkvist & Hallin, 2015). Aligned with Yin (2003), a key action ensuring validity of a research is to include multiple different data sources into the empirical findings. This action is followed in this thesis; the empirical data consists of different types of interviews as well as company websites and industry reports. Miles et al. (1996) also state that making adjustments to the research direction based on new empirical findings can eliminate potential individual biases towards the research results. This is done in the thesis be refining the research questions according to insights collected throughout the process. Finally, the use of a theoretical framework in analyzing the empirical data, as is done in this study, also increases the validity of the research (Lewis, 2000; Gale et al., 2013).

The reliability of research means that the research is conducted in a way that similar outputs can be achieved if the study was replicated afterwards (Blomkvist & Hallin, 2015). Aligned with Yin (2003), this study strives for reliability by revealing the purpose of the study and the theoretical concepts used to the interviewees. As suggested by Shah and Corley (2006), the study aimed for reliability also through purposive and theoretical sampling.

3.4.2 Operationalization To clarify how the theoretical framework is used to describe the findings, this section indicates the connection between theoretical aspects and empirical data. This enables an understanding of how the different components of the MLP with business model innovations (Bidmon & Knab, 2018) reflect the empirical case.

First of all, the socio-technical landscape is conceptualized as a high-level paradigm shift towards sustainability in the fashion industry. This includes mindset shifts of consumers, companies and other actors that create a need for decreased material-intensity in the industry. Development in this socio-technical landscape accelerates the demand for CE, and thus opens up windows of opportunities for CE-related niche innovations.

As in the framework by Bidmon and Knab (2018), the niche innovation level is divided into technological innovations and business model innovations. In this thesis, technological innovations are conceptualized as new technologies that improve CE activities in the fashion industry. The business model innovations, which are the focus of this study when it comes to the niche innovation level, are conceptualized as novel circular business models that enable clothing resale and are largely introduced by emerging actors such as start-up companies. They include different variations of new business models that have been developed to answer to the growing markets of clothing resale (Chapter 4.2).

Lastly, the focal socio-technical regime is conceptualized as an organization field where the dominant actors in the fashion industry, namely incumbent fashion retailers, operate. These companies are the main focal point when studying the regime-level and its response to the emerging business model innovations. Other actors within the socio-technical are also briefly introduced in the empirical findings. These include adjacent industries, regulators and customers.

39 4. FINDINGS

This chapter outlines the empirical findings from the gathered data. Each sub-chapter introduces key findings from different aspects of the fashion industry’s transition towards CE. Chapter 4.1 describes what kind of niche innovations are emerging as a result of the changes in the socio- technical landscape. Chapter 4.2 focuses on the resale business model innovations; it describes the empirical findings on the clothing resale market, its dynamics and emerging actors introducing new business model innovations. Chapter 4.3 outlines how the existing socio-technical regime is reacting to these emerging business model innovations. Finally, chapter 4.4 presents empirical findings on how the current development is linked to the possible future transition within the industry. The focus areas of sub-chapters 4.1-4.4 are placed in the theoretical framework below in Figure 12.

Figure 12. The focus of each sub-chapter in the findings section.

4.1 Landscape Changes Creating Windows of Opportunities for Niche Innovations The transition towards CE is a phenomenon that is very much accelerating in the fashion industry. Multiple interviewees state that although some efforts have been made during the past decade to achieve circular operations, the industry is still merely in its starting phases and a tremendous amount changes are needed for the transition to happen on a larger scale. This is a systemic transition that requires the co-evolution of the fashion retailers’ business models, emerging actors’ business models, technologies, consumers, regulators, financial sector actors, adjacent industries, and other types of incumbent regime actors. This development is already on its way; emerging start-ups are pushing new circular business model innovations; a part of the incumbent companies have started pursuing their circular business model innovations, technologies are developed for individual circular activities, some consumer segments are becoming increasingly

40 environmentally cautious, regulators are trying to take a more active role in driving the transition and the financial sectors is investing more capital in CE solutions. However, an issue raised in the interviews is that this development is happening somewhat in silos, and better alignment between different actors in the socio-technical system is needed.

4.1.1 Business Model Innovations Emerging More Rapidly Than Technological Innovations According to the interviewees, the slowly occurring changes in the landscape- and regime level dynamics are paving the way for innovations in the fashion industry. Niche innovations have a vital role in the industry’s transitions towards CE; both technological innovations and business model innovations are emerging in the transition. Although the interviewees focused on business model innovations, some also mentioned technology-focused innovations. Many of these are focused on clothing recycling technologies. The business model innovations and technology innovations can be somewhat intertwined; technological advancements into for example more robust recycling technologies can act as enablers for further adoption of business model innovations as they can increase the incentive for fashion companies to retain ownership of their garments with novel business models.

The empirical data gathered from the industry reports gives more insights on the main differences between technological innovations and business model innovations emerging on the niche level. The Fashion industry’s innovation and collaboration platform Fashion for Good emphasizes that technological innovations around CE are currently mostly focused on recycling and fabric production technologies, whereas circular business model innovations are more centered around clothing resale. They also discovered that the circular business model innovations have diffused into the industry at a much faster pace than circularity-related technology innovations. This more rapid development of business model innovations can be seen in the time-to-market graphs where they plot the market shares and times since the inception of circular business model innovations and technology-focused (Raw materials) innovations (Figure 13). The lack of sufficient investments in technological innovations has been the main barrier for more large-scale deployment (Fashion for Good, 2020).

Figure 13. Time-to-Market of circular business model innovations versus technology-focused innovations based on the analysis of Fashion for Good and BCG (Fashion for Good, 2020).

Sitra, a Finnish think-tank and investment organization, also analyzed the differences between different types of circular innovations (Sitra, 2015). Based on their report, focusing on service- based solutions and circular strategies in the fashion and textile industry, the main differences between second-hand selling, renting and recycling solutions from the perspective of fashion retailers can be derived (Table 7). Currently, the business case for recycling is mostly potential only in the B2B markets, whereas second-hand selling and renting can be more economically viable at least for certain product types. Based on the interviews, when the recycling technologies have become better in the future, this opens up more opportunities for fashion retailers’ business models. As one interviewee stated:

“When recycling technologies become more robust, there are larger incentives to use old garments as raw materials for new garments. This can lead to fashion retailers becoming more willing to retain the ownership of their products with for example rental business models.” (Industry association representative, 2020)

However, as stated in both interviews and industry reports, currently the innovations emerging in the industry are more focused on resale business model innovations focusing on either second- hand or rental solutions.

42 Table 7. Differences between clothing second-hand sales, rental and recycling solutions from the perspective of a fashion retailer (Sitra, 2015). Solution Suitability From Fashion Retailers' Perspective

• The brand’s style and product types affect the suitability of this model. Timeless and minimalist brands are especially suitable for second-hand sales. • Consumer is the company's supplier in second-hand sales. Success depends on the company's ability to set up sufficient reverse logistic systems to take back large number of high-quality products that can be resold. Second-hand • Second-hand sales enables companies to monetize on the growing second-hand markets currently Sales dominated by customer-to-customer trade. Especially luxury and kidswear are attractive second-hand markets. • There is a risk of cannibalizing the company's first-hand sales. This may be mitigated by knowing the target audience, differentiating products and traning sales staff.

• The cost of implementing clothing rental can be relatively limited because it does not require changes in sourcing, product design or production processes. • Rental can be especially suitable for high-quality, expensive garments as well as seasonal products, Renting maternity wear and kidswear • The largest challenge of establishing clothing rental is being able to acquire users to the service. In most cases, building a user base takes time to develop.

• Currently, recycling models show the most potential within B2B markets and when material recovery is easy and cost-effective. • The cost of recovering materials (including cost of reverse logistics and recycling) are in many cases than the actual value of those materials. This often shifts the focus of recycling business models to brand benefits and premium pricing of recycled products. Recycling • The commercial viability of recycling models can become more attractive when recycling technologies become better and more cost-effective, or when changes in virgin resource prices and policy incentives favor recycling. • To achieve product take-back necessary for recycling, companies need to extend their responsibility and organize infrastructure and partnerships. Models such as renting and incentivized product take-back can be a potential way to achieve this.

Aligned with Fashion for Good (2020) and Sitra (2015), the higher rate of diffusion and present- day feasibility of clothing resale solutions were also emphasized in the interviews. According to the interviewees, there is a very high number of clothing resale business model innovations emerging in the fashion industry. This development has been extremely rapid during the past few years and is expected to accelerate further in the upcoming years. The next section focuses on the empirical findings of the clothing resale markets, different types of solutions for clothing resale and the emerging actors introducing new resale business model innovations.

4.2 Business Model Innovations in the Highly Growing Clothing Resale Markets Driven by Emerging Actors Although the industry’s transition towards CE is a systemic change and should be viewed holistically, some interviewees state that resale will most likely be the first significant step towards circularity for most companies. Companies currently experimenting with resale business models have witnessed that instead of cannibalizing their traditional sales, resale can prove to be a source of new customers and even profitable business cases with existing customers due to lower material costs and higher sales prices gained from exclusivity or treasure-hunting aspects. The new business

43 models can also have a positive influence on the fashion retailer’s brand image in the eyes of environmentally conscious consumers.

4.2.1 The Market for Clothing Resale Growing Rapidly The high growth expectations of the clothing resale markets is emphasized by multiple interviewees and industry reports. Some of the interviewees state that this high growth rate is one of the main reasons some fashion retailers are interested in the resale markets. When examining how much the resale market is expected to grow, different reports and interviewees referred to an analysis conducted by the leading online resale platform ThredUP. Their 2019 Resale Report was conducted in collaboration with a third-party retail analytics firm GlobalData (ThredUP, 2019). The report shows that the total second-hand apparel markets have grown from the size of 11 billion USD in 2012 to 24 billion USD in 2018 and are expected to grow to 51 billion USD in 2023 (Figure 14). They divide the market into traditional Thrift & Donations, which is an offline- focused second-hand market including for example yard sales and thrift shops, and Resale, which is an online-focused second-hand market that includes companies enabling C2B2C or C2C second- hand apparel sales. The high market growth is largely driven by the growth in the online-focused resale market (ThredUP, 2019).

Figure 14. Total second-hand apparel market (in billion USD) according to ThredUP (ThredUP, 2019).

The Resale Report also analyses the consumers purchasing second-hand apparel. Their analysis shows that in 2018, 64% of women are willing to buy second-hand fashion. This same number was 45% in 2016 (Figure 15). They also state that the number of women who purchased second- hand products grew from 44 million in 2017 to 56 million in 2018. Their analysis also shows that 18-37-year-old consumers adopt second-hand 2.5 times faster than other age groups. Split between age groups are visualized in Figure 16 (ThredUP, 2019).

Figure 15. Women who have bought or are open to buy second-hand products in the future (ThredUP, 2019).

Figure 16. Purchasers of second-hand apparel, footwear or accessories per age group (ThredUP, 2019).

The importance of younger consumers adopting used clothing more rapidly into their buying habits was also a key point that rose in many interviews. One interviewee stated that this change is driven largely by the justice- and environment-driven mindset of younger consumers. Another interviewee however stated that it is yet unclear whether this will be a long-lasting change in the consumers’ mindsets, or whether the increasing interest towards used clothing items is more related to price-cautious and fad-driven attributes that can be associated with the young age.

4.2.2 Resale Solutions with Differing Sales Channels and Profitability Levels The market for clothing resale consists of different types of solutions. A report by Mistra Future Fashion (2019), a Swedish research program, categorize the different clothing resale solutions in the Swedish markets into eight different categories:

45 1. Flea markets: Traditional physical places where customers can sell goods to each other. 2. Online C2C swapping: Consumers selling clothing to each other through for example Facebook groups. 3. Online classified platform: Platforms used as a meeting place for consumers (e.g. Blocket). 4. Online marketplace: Platform that includes integrated services for payment or bidding (e.g. Tradera). 5. Collect and resell online webshops: Online platforms taking care of the whole transaction process (e.g. Sellpy). 6. Physical second-hand store: Both for-profit and not-for-profit stores focusing on second- hand sales. 7. Own product take-back and resale: Fashion retailers collecting used apparel themselves and reselling them through their own sales channels. 8. Clothing rental: Services offered to rent garments instead of buying them (Mistra Future Fashion, 2019).

The findings of Mistra Future Fashion (2019) also show that the market shares of these different types of solutions have shifted in recent years. They state that the importance of online channels is increasing in the resale markets; online marketplaces, classified platforms and online C2C swapping have captured the majority share of the resale market while flea markets and physical second-hand stores have been steadily losing their dominant market position. The market is currently largely dominated by C2C sales occurring in these general online platforms and social media sites. Although some newer collect and resale actors and rental actors have entered the market and a few established fashion retailers have started offering their own resale solutions, they still have not captured significant market shares. One of the main reasons this development has been at such a small scale so far is because out of all the incumbent fashion retailers, less than a handful have engaged with clothing resale so far. However, if the clothing resale market continues its fast-paced growth and gains more market share of the entire fashion industry, a larger number will start to adapt to this development (Mistra Future Fashion, 2019).

According to the interviewees, the profitability of different types of resale solutions is largely unknown to actors within the industry. A report by Fashion for Good (2019) aims to shed more light on this issue by analyzing the profitability of clothing recommerce (second-hand sales), one- off rental and subscription-rental in four different price categories: Value Market, Mid-Market, Premium and Luxury. The report's analysis shows that the rental and subscription-rental business models are very attractive in the luxury segment, whereas recommerce is the most financially attractive model in lower value segments. The profitability of each business model in different segments is visualized in Figure 17 (Fashion for Good, 2019).

Figure 17. Financial viability of resale business models based on the analysis of Fashion for Good and Accenture Strategy (Fashion for Good, 2019).

4.2.3 Different Types of Resale Business Model Innovations Largely Driven by Emerging Actors The growing resale markets and the shifting dynamics of resale solutions used have spurred new companies to introduce different resale business model innovations. According to many interviewees, this development has been largely driven by emerging actors; a vast majority of the circular business model innovations have been introduced by newly established start-up companies. This can be seen from the emerging actors within clothing resale business model innovations identified in this study (Appendix A); many of them were established in the last decade. One interviewee stated that most of the new companies established today in the fashion industry have either circularity- or sustainability-focused value propositions. These start-ups are looking to capitalize on the growing need for a more sustainable fashion. The growth in the number of start-ups founded with a focus on different circular business innovations is a good signal of the diffusion of these innovations within the fashion industry. These innovators have an essential role in the industry’s CE transition since they are pushing the change through their new business models.

The emerging start-up companies are pushing a variety of different types of clothing resale business model innovations into the market. The company websites analyzed in this study give a broad sample of emerging actors’ business models. As is shown in Appendix A, the business models of these actors include both incremental and radical innovations and are both B2C and B2B focused. During all interviews, four different types of business models introduced by start- up companies were described. These can be summarized as follows:

• Born-circular fashion retailers: Many of the newly established companies include smaller fashion brands that focus on circularity in their clothing design. They employ a business model that is in many parts similar to that of incumbent fashion retailers, expect

47 for additional circular aspects such as product take-back systems, upcycling and reselling used garments or recycling garments from used clothing and other material.

• Online second-hand: A very large number of different types of online second-hand solutions have emerged during the past years. Solutions in this category combine the idea of second-hand stores with either B2C or C2C online commerce by enabling used clothing resale through a website. This happens both through more traditional social media platforms and general C2C marketplaces, as well as industry-specific platforms focusing specifically on clothing resale. Broadly speaking, the fashion industry-specific platforms include C2C platforms that enable peer-to-peer transactions between consumers and C2B2C platforms where the company sources the used clothing from consumers and resells them to other consumers through their website.

• B2B solution providers for CE: The industry’s increasing focus on CE has also created new types of B2B business models that are aimed at helping incumbent companies to become more circular. These companies provide different types of back-end operational or technological solutions for incumbent fashion retailers. Some of the incumbent companies shifting towards resale are partnering with these companies in clothing take-back, reverse logistics, sales channel management and other types of aspects that are not a part of their core business model.

• Clothing as a service: Many of the interviewees also discussed the emerging business model innovations that provide clothing as a service instead of selling them as one-off items. Several newly established companies offering these types of solutions are keeping ownership of the garments and renting or leasing them to consumers through both subscription-based and one-time solutions. This type of business model innovation is gaining a lot of interest in the fashion industry.

Although the business model innovations have been largely driven by newly established start-ups, some companies within the existing regime have reacted to the development by innovating their business models. The next section goes through the empirical findings on the reactions of incumbent fashion retailers and the current dynamics between different types of regime-level actors.

4.3 Regime Beginning to React to Emerging Innovations Different of regime actors within the fashion industry are navigating the growth of clothing resale markets in varying ways. As mentioned in the previous section, the interviewees stated that start- up companies are often in a favorable position to pursue circular business model innovations. This is because they can experiment with new solutions and improve them through an iterative trial- and-error process. This is often not the case for the incumbent actors since they are heavily locked in their current operations and supply chain networks, which increases the risk involved with trialing new business model innovations. As stated by one interviewee:

48 “Companies will need to do dramatic changes quickly but are unable to because they are locked in their current operating models. Especially the long and complex supply chains are inhibiting fashion companies to move towards circular economy.” (Researcher, 2020)

However, some of the largest incumbents have been successful in pursuing new circular business model innovations due to their superior financial resources. Often it is, in fact, the smaller incumbent fashion retailers who have been more reluctant to react to the emerging circular business model innovations; small and mid-sized companies that have their roots as a traditional fashion brand do not have the financial firepower of their large multinational peers to make necessary investments to establish new resale business models, nor do they have the ‘Lean Startup’ ability of new companies to test-and-fail new business models since they are locked in their traditional ways of working. One interviewee stated that these smaller traditional fashion retailers can however be more credible in establishing resale schemes than their larger counterparts if sustainability is already embedded in their brand’s core values. Customers may also be more willing to buy used items from these smaller retailers than large fashion chains due to better customer loyalty, timeless design or higher perceived product value.

4.3.1 Incumbent Fashion Retailers Introducing Business Model Innovations As stated in multiple interviews, most of the incumbent fashion retailers today have taken a rather passive approach to the industry’s CE transition. One interviewee stated that although many companies are actively monitoring the situation, the amount of companies that are already pursuing new business models is still rather few.

Many fashion retailers are currently however active in communicating their dedication to increase circularity in their operations. Global Fashion Agenda (2019) created a campaign where incumbent fashion retailers sign a commitment to increase CE in their operations. The campaign, called the ”2020 Circular Fashion System Commitment”, has been signed by 90 different fashion retailers, and it includes four different action points that the retailers can commit to: Circular design, garment collection, resale and textile recycling. By analyzing their status report, the number of commitments per action point can be derived (Figure 18).

Figure 18. Amounts of incumbent fashion retailer signatories per action point in Global Fashion Agenda’s ”2020 Circular Fashion System Commitment” (Global Fashion Agenda, 2019a).

Based on the 2019 signatory status report by Global Fashion Agenda, the main challenges fashion retailers have been facing in trying to reach their signed commitments have been: • Lack of circular design tools and standards • Lack of regulatory frameworks incentivizing circular effots • Availability of sorting and recycling technology at scale (Global Fashion Agenda, 2019a).

As can be seen from Figure 18, only a handful of fashion retailers have committed to the area of clothing resale. According to one of the interviewees, this is because clothing resale often requires the company to innovate its business model, whereas recycling and circular design can sometimes be more pursued with lower-threshold individual activities.

Another report published by Global Fashion Agenda aims to give guidelines on how fashion retailers can pursue new clothing resale business models. Their report, called Resale Toolbox, analyses the industry’s development towards clothing resale to summarize best practices for strategists (Global Fashion Agenda, 2018). The toolbox aims to support incumbent fashion retailers aiming to explore clothing resale with more information on the business model variations currently employed in the industry. From lessons learned in the industry, the five main steps needed before establishing a resale channel can be concluded:

1. Assess current operations: The sales channels used and existing logistics influence whether either online or offline resale is more suitable. 2. Analyze product range: Feasibility analysis of product type, quality and brand value for resale. 3. Garment collection scheme: Used garment collection is an essential part of resale business models. This can be done either by establishing an own collection scheme or partnering with an external company. 4. In-house resources: Determining if the company has needed skills and knowledge the in- house to implement a resale channel. 5. Financial power: How much capital the company has to invest into the resale channel going forward. 6. Revenue streams: Analyzing the revenues and possible additions to corporate responsibility gained from resale (Global Fashion Agenda, 2018).

By analyzing the occurred reactions of incumbent fashion retailers, the resale toolbox also concludes seven clothing resale business models most commonly adopted by incumbent fashion retailers. These business models are online second-hand shops, online resale platforms, offline second-hand retail, sell-to-redistribution, collaboration with charities, partnership with a solution provider and rental services (Global Fashion Agenda, 2018). According to the report, factors influencing which type of resale model is the most suitable for a fashion retailer are quality; volumes and product types sold through main sales channel; garment collection scheme; sales channels used; existing logistics; existing business model and overall business and sustainability strategy (Global Fashion Agenda, 2018). The most commonly adopted business models, their descriptions and situations where they are most suitable are presented in Table 8.

50 Table 8. Descriptions of the resale models most commonly adopted by incumbents (Global Fashion Agenda, 2018). Online Offline Online/offline Partnership Online second- Online resale Second-hand Sell-to- Collaboration with a solution Rental services hand shops platforms retail redistribution with charities provider Reselling Online Reselling Collected Collected A third-party Service company's own platform collected garments sold garments given service allowing garments through enabling garments to a service to charity company customers to a brand-owned customer-to- through a brick providers, repairs and use products online shop customer and mortar which usually resells collected while the Description clothing store sends items to garments ownership of reselling several markets them is retained for multiple by the purposes company including resale

• Is an online • Wants to • Already has a • Collects large • Collects • Does not have • Is willing to company resell a broad brick and amounts of garments with resources or radically • Has resources to range of mortar store garments with varying quality prefer not to change or establish an products • Has mainly varying quality and quantity establish own expand the online shop • Does not want local customers and quantity • Does not have resale channels traditional Suitable if • Has logistics to establish a • Offers high- • Does not have resources or • Collects business model the company system that reverse logistics value products resources or prefer not to garments with • Has sorting enable online system prefer not to establish own varying quality and preparation sales establish own resale channels and quantity resources • Offers high- resale channels established value products

Most of the resale business model innovations pursued by the incumbent fashion retailers identified in this study (Appendix B) can be placed within these seven categories. An exhaustive categorization of the incumbent actors identified is presented in chapter 5.2. What is common for the incumbent actors pursuing resale business model innovations is that they are deploying the new resale business models as an add-on to their existing linear model. According to some interviewees, this is because the core linear business model is the focus of the companies and the resale business model innovations are more or less early-stage pilots where companies are testing how they could enter the growing resale markets. As can be seen in Appendix B, most of the companies are also using partnerships in their pursue of resale business model innovations. These partnerships vary between brand endorsements of resale start-ups, direct transactional partnerships with resale companies or using a white-label company to handle the back-end operations of the resale solution. As the resale business model is not the core business of the fashion retailers, they are more willing to rely on partners that have expertise in the resale markets. One interviewee argued however that if the resale markets would show more significant business cases in the future, fashion retailers would be more willing to take the business model fully into their control. By doing this, the fashion retailers would both capture the full economic potential of the resale business model innovation to themselves and control the customer data collected from the resale transactions.

4.3.2 Other Regime-level Actors Influencing the Transition All types of actors within the incumbent socio-technical regime play a role in the industry’s transition towards CE. As stated in the previous section, the importance of collaboration is emphasized by multiple interviewees; they state that incumbent companies, start-ups and other types of actors need to be better aligned for the industry to transit towards CE. Since the new circular business model innovations require new types of operations, it is hard for the incumbent

51 fashion retailers to pursue them on their own. In addition to collaborating with the emerging niche innovation level actors, fashion retailers can look into collaborations with other types of companies. Cross-industry collaboration is discussed by some interviewees; there is an increasing need for the fashion industry to collaborate with adjacent industries such as industrial clothing and textiles or completely different types of industries to better pursue circular business model innovations.

Alongside companies from the fashion industry and adjacent industries, customers and regulators are regime actors that have an essential role in the industry’s transition. Customers’ mind-set shift towards becoming more environmentally aware and justice-driven is increasing the need for new business models in the future. This is currently especially important among specific consumer segments and the younger generation. This shift will not happen quickly, but companies still need to better understand the underlying needs and perceptions of consumers to cope with the change in the long-term. Regulators on the other hand have a large role in ushering the transition. As stated by multiple interviewees, currently many fashion retailers are unwilling to the risk of implementing circular business models without regulatory incentives. Although it has not happened yet in the fashion industry, increased regulatory incentives, both subsidies and penalties, have driven the CE transition forward in other industries. This may change in the future also in the fashion industry. One interviewee stated that:

“So far the changes in the industry have not been large enough. I believe regulators’ role in the fashion industry’s transition towards circular economy will grow in the future.” (Member of the European Parliament, 2020)

4.4 Possible Future Changes in Regime Dynamics Creating Incentives to React Early As the industry’s transition towards CE has merely taken its first steps, the circular business model innovations emerging in the industry are early-stage disruptors trying to penetrate the existing regime. According to some industry reports and interviewees, being one of the actors pursuing this early stage development can prove to be beneficial in the future if the transition towards accelerates further.

In their 2020 Circular Fashion Commitment, Global Fashion Agenda emphasizes the importance of reacting early to the growing resale markets. They state that companies that have already established resale channels have been able to take advantage on the growing momentum in the resale markets and expand their resale channels at a fast pace, whereas companies at the beginning of their resale journey have been more reliant on partnerships with third-party organizations or existing second-hand platforms (Global Fashion Agenda, 2019a). Another industry report also emphasizes the strong position of fashion retailers that already have more established resale channels due to an early reaction to the resale trend. The Business of Fashion, together with the consulting firm McKinsey & Company, released its 2020 report on the fashion industry’s development. The report, called ”The State of Fashion 2020”, states that brands, such as Patagonia, that have pioneered novel resale business models early are in a strong position now that the growth of the resale market is accelerating (Business of Fashion, 2020).

52 Early mover advantage in resale business model innovations is also emphasized in the interviews; some interviewees state that due to the increasing relevance on used clothing sales and rental, business model innovations focusing on these aspects can currently be a source of competitive advantage in the international markets. The sale of new clothing will never stop, but the transition towards CE will change the dynamics of the industry in the future. Multiple interviewees state that reacting early to the emerging resale business models is an important way for incumbent fashion retailers to be better equipped to the CE transition when for example the shifting consumer mindsets, regulatory frameworks and technology development make CE a larger part of the industry. Resale business models, like other circular business models, can in some ways be viewed as risk mitigation for the incumbent fashion retailers to stay relevant and have a competitive advantage also in the future.

53 5. DISCUSSION

This chapter discusses the empirical findings together with the findings from the literature review. The discussion is structured based on the three sub-questions of the study: (1) Chapter 5.1 states what are the main types of circular business model innovations that are emerging in the clothing resale market; (2) Chapter 5.2 explains on how incumbent fashion retailers are responding to these emerging business model innovations in clothing resale; (3) Chapter 5.3 discusses the role of clothing resale in the fashion industry’s overall transition towards CE.

5.1 Innovations Emerging in the Fashion Industry Based on previous literature, business model innovations have a significant role in sustainability- related industrial transitions (Hannon, 2016; Bidmon & Knab, 2016). The empirical data shows that this is also the case for the CE transition in the fashion industry. Along with technological innovations, business model innovations have a role in driving the industry’s transition. However, there is a distinction between innovations in business models and technology-focused innovations in the case of the fashion industry’s circularity. Technology-intense innovations are more often focused on raw materials, upstream production processes and material recycling, whereas consumer-facing resale operations are more dominated by business model innovations. The circular business model innovations have also diffused at a much faster pace, resulting in higher market shares in a shorter amount of time than technological innovations (Fashion for Good, 2020). This is aligned with Bidmon and Knab’s (2016) argument that niche business model innovations often start from a more established position in the MLP than niche technological innovations.

Previous literature states that a large part of fashion industry’s circular business model innovations is introduced by newer industry players that are ‘born circular’ (Weissbrod & Bocken, 2017). This can also be seen from Appendix A; many of the emerging resale actors identified in this study were founded during the past decade. As stated in the interviews, the growing number of start-ups focusing on a certain type of circular business model innovation can be seen as a signal for the diffusion of the innovation.

These newer companies are pursuing a variety of different types of circular business models ranging from purely B2B solutions to B2C and C2C products and services. As per the interviews, the four most common types of business model innovations emerging in the fashion industry are born-circular fashion brands, online resale platforms, B2B back-end service enabling resale and clothing as a service. The emerging actors identified (Appendix A) can be divided into these four high-level categories. The division of these categories along with the main business model components (Morris et al. 2005) and sustainable business model innovation characteristics (Holtström et al., 2019) of them are presented below in Table 9. Although this categorization is not an exhaustive representation of all possible business model innovations introduced in the clothing resale market, it gives an overview of the most prominent resale business model innovations based on the empirical findings of this study.

54 Table 9. Categorization of emerging actors identified in this study. Business model component Main sustainable business model Type of business model Example companies focus for innovation (Morris innovation characteristics et al., 2005) (Holtström et al., 2019)

Re/Done, For Days, Better World Born-circular fashion Offering, internal capability, Resources and capabilities, customer Fashion, Blonde Gone Rogue, /id/, Zero retailer competitive strategy perspective Waste Daniel, Ecoalf

ThredUP, The RealReal, Poshmark, Vinted, Tradesy, Sellpy, Emmy, Varie, Revenue streams and profitability, Depop, Grailed, Rebelle, Designer Internal capability, competitive Online resale platform resources and capabilities, customer Wardrobe, Heroine, Hardly Ever Worn It, strategy, economic perspective Modsie, My Ex Wardrobe, My Private Boutique, Love that Bag, Restyle Closet

Collaboration, efficiency, resources and B2B back-end service I:CO, Trove, The Renewal Workshop, Market, internal capability, capabilities, identifying barriers, enabling resale Helpsy, Lizee, RE-NT competitive strategy customer perspective

Rent the Runway, Bag, Borrow or Steal, Gwynnie Bee, Style Lend, Haverdash, Le Product-service system development, Offering, competitive strategy, Clothing as a service Tote, Armoire, HURR Collective, Circos, revenue streams and profitability, economic Front Row, Hack Your Closet, Something customer perspective Borrowed, Vaatepuu, Lena, Glam Corner

The born-circular fashion retailers’ business models are mostly focused around making garments around unorthodox materials. As stated in the interviews, this is a common business model for many new small-scale brands that are looking to differentiate through a sustainable value proposition. The start-ups identified in this category have a variety of different inputs used in their garments; for example, Re/Done and Better World Fashion are creating new items by upcycling used clothing, whereas Zero Waste Daniel and Ecoalf are creating brand new clothing from scrap material and recycled fabrics. Further categorization of different types of born-circular fashion retailers is however beyond the scope of this study. Based on the business model components of Morris et al. (2005), these companies are innovating around the offering, internal capability and competitive strategy factors. The main sustainable business model innovation characteristics (Holtström et al., 2019) of this business model focuses on resources and capabilities as well as the customer perspective.

The online resale platform category has several examples of different types of websites dedicated to clothing resale. This is the furthest penetrated circular business model innovation type in the fashion industry with the largest amounts of innovators established (Fashion for Good, 2020). These companies operate websites that vary from both general resale platforms including all types of garments to more niche platforms focusing on specific price segments or product types. Based on the profitability analysis from Fashion for Good and Accenture Strategy (2019), this type of business model innovation can create attractive business cases in mid-market, premium and luxury price-segments. However, the suitability of these innovations depends on the style and product line of the sold brands; timeless and minimalist brands naturally allow multiple sales cycles over time (Sitra, 2015). As discussed by the interviewees, online second-hand companies can be divided into C2C platforms and C2B2C platforms; for example, Poshmark, Vestiaire Collective and Vinted

55 provide platforms where consumers can sell used garments directly to each other, whereas ThredUP, The RealReal and Sellpy source the items from consumers and are themselves in charge of the transaction. From a business model perspective, companies in this category have focused on internal capability, competitive strategy and economic factors in their innovation activities (Morris et al., 2005). They largely represent the sustainable business model innovation characteristics of Holström et al. (2019) in revenue streams and profitability, resources and capabilities and customer perspective.

The third type of emerging business model innovation, B2B back-end service provider enabling resale, includes companies that handle the operational side of circular business models on behalf of incumbent fashion retailers. These companies are not directly in a transactional relationship with the end-consumer since they act as operational partners for companies in the fashion industry. These business model innovations can be divided into second-hand sales and rental solution providers (Fashion for Good, 2020). Second-hand sales solution providers such as I:CO, Trove and The Renewal Workshop provide the back-end operations that enable their customer organizations to start second-hand sales schemes, whereas rental solution providers do the same but for rental schemes. These emerging companies’ business models are highly focused on the market, internal capability and competitive strategy factors (Morris et al., 2005) and their main sustainable business model innovation characteristics relate to collaboration, efficiency, resources and capabilities, identifying barriers and customer perspective (Holtström et al., 2019).

The final type of circular business model innovation emerging in the clothing resale market is clothing as a service. These companies are renting or leasing the garments to consumers while retaining the ownership of the product to themselves. As stated in the interviews, clothing as a service business model innovations are currently gaining a lot of interest in the fashion industry. Clothing as a service can be divided into one-off rental and subscription rental. Both of these types of rental models can prove to be highly profitable especially in the luxury value segment. However, especially one-off rental has less profitability potential in lower-priced segments (Fashion for Good, 2019). As discussed in the report of Sitra (2015), clothing rental can prove to be a suitable option for higher-quality, high-priced and long-lasting products as well as occasion wear, maternity wear and kidswear (Sitra, 2015). However, they bear a high risk for companies not to be able to acquire a large enough customer base quickly enough to establish a profitable business case. As can be seen from empirical findings, in addition to providing B2C rental services either with a one-off logic or a subscription logic, some of the emerging start-ups operate a peer-to-peer rental platform where consumers can rent garments to each other. These business model innovations are largely changing the offering, competitive and economic factors of incumbent fashion retail business model (Morris et al., 2005) In terms of sustainable innovation characteristics, they are employing product-service systems, have new types of revenue streams and profitability and focus on customer perspective (Holtström et al., 2019).

As previous literature from Foss & Saebi (2017) states, different business model innovations can be divided based on their scope and their novelty. In terms of novelty, born-circular fashion retailers and online resale platforms can be new for a specific firm or customer segments, but they have still been present in the fashion industry for a longer period. As opposed to them, B2B resale solutions and clothing as a service can be considered to have a shorter time since inception (Fashion for Good, 2020). On the other hand, the scope of the online resale platforms and clothing

56 as a service can be considered architectural since they make more radical changes into the industry’s traditional business model, whereas the scope of born-circular fashion retailers and B2B back services for resale can be considered more modular since they only focus on a specific part of the existing business model. The four main types of emerging business model innovations can therefore be structured into the business model innovation framework of Foss & Saebi (2017). This is illustrated in Figure 19.

Scope

Modular Architectual

Born-circular fashion New on a firm-level Online resale platform retailer Novelty New on an industry- B2B back-end service Clothing as a service level enabling resale

Figure 19. Four main types of resale-related business innovations based on scope and novelty (adapted from Foss & Saebi, 2017).

To fulfill the purpose of this thesis of exploring how fashion retailers innovate their business models in the context of clothing resale, the present-day emergence of the niche innovation level of the MLP was the first focal point of the study. Findings from the empirical data indicate that the main types of circular business model innovations emerging in the clothing resale market are born-circular fashion retailers, online resale platforms, B2B back-end service enabling resale for other companies and clothing as a service. Reflecting these innovations to previous business model literature, the thesis found out that they differ between each other on the business model component they are innovating on. As is summarized in Figure 19, the scope of the emerging business models include both modular and architectural innovations, and the novelty of them is ranging from being new on a firm-level to being new in the fashion industry.

5.2 Regime Reaction Towards Clothing Resale Business Model Innovations Incumbent companies in the dominant socio-technical regime level of the MLP deploy different types of strategies to defend their position from innovations (Smink et al., 2015a; Fuenfschilling & Trugger, 2014). As argued in the previous literature, incumbents have four different behavior types during transitions: First to enter the niche; Follow into niches; Delay the transition and Remain inert (van Mossel et al., 2018). During this study, no examples of incumbents first entering the niches or delaying the transition were identified. However, the findings of this study show that some of the incumbent fashion retailers have introduced their own clothing resale business model innovations, which can be seen as following into niches. As stated by Mistra Future Fashion (2019), the portion of these incumbents is still rather limited when it comes to the entire fashion

57 industry, and most fashion retailers still today are remaining inert when it comes to the niche business model innovations in the CE transition.

By focusing specifically on incumbents that have followed into niches by introducing resale business model innovations, this study identified 45 different actors ranging from small to large companies. As discussed in the interviews, the larger incumbents have both an advantage and a disadvantage. On one hand, they often have significant financial resources to invest in circular business model innovations. On the other hand, they are largely locked in their current operating model and supply chain networks, which makes shifting business models much more difficult. The small and mid-sized incumbents on the other hand have less financial firepower to invest in circular business model innovations. They can however have a suitable position to move towards clothing resale if their brand is perceived as more sustainable, timeless or high value (Sitra, 2015).

As can be seen from Appendix B, many of the identified incumbents have introduced new resale business model innovations through partnerships. This is aligned with the previous literature by Andersen (2015) and Holtström et al. (2019) that states that collaboration between different types of actors is essential in the fashion industry’s circular business model innovations. The importance of collaborations is also emphasized by multiple interviewees.

Appendix B shows that there are a variety of different types of circular business models that incumbent fashion retailers have pursued in response to emerging clothing resale markets. Some of the companies have even pursued multiple different kinds of resale business models simultaneously. The different resale business model innovations introduced by the fashion retailers can be categorized on a high level based on whether the resale channel is online, offline or both online and offline (Global Fashion Agenda, 2018).

Online Business Models Many of the business models introduced by incumbent fashion retailers are purely online-focused (Appendix B). Some of the companies, such as Boomerang, Patagonia and Eileen Fisher have established their own branded online second-hand shops either on their main website or on a separate website. This business model is pursued either alone by the fashion retailer or with an external partner that handles the back-end operations related to the resale.

Other brands have established partnerships with external online resale platforms. This strategy has a lot of variation in the types of partnerships established; some fashion retailers are selling their collected garments directly through an online platform (Filippa K) whereas others are merely endorsing the C2C resale of their brand’s garments through promotion campaigns (Stella McCartney, Burberry). H&M on the other hand has invested in an online resale platform, becoming a major shareholder of it. A more unique solution is pursued by the kidswear company Polarn O Pyret; they have established a purely peer-to-peer marketplace inside their main website.

Offline Business Models Some of the resale business models introduced by the incumbent actors are not online-focused. One of the clearest examples of this are the fashion retailers reselling used garments through their brick and mortar sales channels. Examples of this include establishing separate branded second- hand brick and mortar stores (Filippa K, Acne Studios), selling collected second-hand garments

58 through normal brick and mortar stores (Hope), establishing temporary resale campaigns (Guess, Samuji) or complementing established online second-hand sales with brick and mortar sales (Eileen Fisher, Nordstrom, Nudie Jeans).

Other offline business models include selling collected garments directly to an external redistributor without establishing own resale channels. As can be seen from the identified incumbents (Appendix B), many of the companies, including for example Suitsupply, OVS, Columbia, Adidas, Fenix Outdoor and New Yorker, are pursuing this solution. As stated in the Global Fashion Agenda’s resale toolbox (2018), this solution is especially suitable if the company collects large amounts of garments, garments are of varying quality and quantity and there is not a large motivation to establish own resale channels. As a similar model, some retailers, such as Inditex, Puma, Esprit, are delivering the collected garments straight to charity organizations.

Online/Offline Business Models One of the online/offline business models used by incumbent fashion retailers is repurposing and upcycling the collected garments into new products. Companies such as Patagonia, COS, Urban Outfitters and Diesel have sold individual repurposed and upcycled products in their own sales channels. Designers Remix also did this through a project where they collaborated with an art university to create new clothing out of used Designers Remix items. Eileen Fisher on the other hand is complementing its second-cycle sales with a third-cycle solution where garments that are too worn-out to be resold are upcycled into art.

Some of the incumbents have also established their clothing as a service solution. As can be seen from Appendix B, most of the fashion retailers pursuing this business model innovation are large US-based companies that are using an external back-end solutions provider in establishing their clothing rental schemes (Ann Taylor, Loft, Banana Republic, American Eagle). Other examples of this include Urban Outfitters that founded their own rental subsidiary, MUD Jeans that established a rental service without an external partner and H&M that is piloting clothing rental in its brick and mortar stores.

By using the empirical findings on the incumbent fashion retailers (Appendix B), interviews and Global Fashion Agenda’s resale toolbox (2018), a categorization of the resale business models that incumbent fashion retailers have introduced can be derived. These categories are own online second-hand shop, brand-owned C2C platform, partnership with external resale platform, brick & mortar second-hand, sell-to-redistribution, repurposing & upcycling and clothing as a service. Descriptions of each of these models along with example companies using them are presented in Table 10. The amount of different resale business model innovations introduced is also visualized in Figure 20.

59 Table 10. Types of resale business models incumbent fashion retailers are pursuing as a reaction to clothing resale (Global Fashion Agenda, 2018; Appendix B; Interviews).

Type of resale business model Description Example companies

Resale of brand's own collected garments Boomerang, Eileen Fisher, Nudie Branded online second- through a branded resale webshop either Jeans, Patagonia, The North hand shop on main website or on a separate website Face, Arc'teryx, Nordstrom

Brand-owned C2C resale Estabilishing a peer-to-peer resale platform Polarn O Pyret platform on the brand's own online channels Online

Stella McCartney, Burberry, Collaborating with an external online Partnership with external Filippa K, H&M, Madewell, resale websites to drive achieve B2C or online resale platform Carhartt, Pearl Izumi, Mara C2C resale Hoffman, Toad & Co. Filippa K, Acne Studios, Hope, Brick & mortar second- Collected clothing items resold in the Eileen Fisher, Nudie Jeans, hand brand's own brick and mortar stores Nordstrom, Guess, Samuji H&M, Suitsupply, GANNI, & Collected clothing items sold to a service Other Stories, OVS, Columbia, Sell-to-redistribution provider, which usually sends items for Adidas, Fenix Outdoor, New Offline multiple markets and purposes Yorker, Guess Inditex, Puma, Timberland, Collaboratng with Collected garments given to charity Marks & Spencer, Esprit, Hania charities organizations New York, The North Face

COS, Designers Remix, Eileen Collected garnents turned into new items Repurposing & upcycling Fisher, Urban Outfitters, Diesel, and resold ELSK, Patagonia Service allowing customers to rent MUD Jeans, GANNI, H&M, Ann products (one-off or subscription rental);

Online/offline Clothing as a service Taylor, Loft, Banana Republic, products still owned by company and American Eagle, Urban Outfitters returned after use

Figure 20. Amount of clothing resale business model innovations introduced by incumbent fashion retailers.

60 As stated in previous literature by Geissdoerfer et al. (2018b), circular business model innovations can be divided into start-ups, business model transformations, business model diversifications and business model acquisitions (Figure 7). What is common for each of the resale business model innovation introduced by incumbent fashion retailers, is that they can be described as business model diversification. In this type of business model innovation, the existing business model of the incumbent stays in place, and an additional business model is created. None of the identified incumbent-created resale business model innovations categorize as a start-up or a business model transformation since all the incumbents had a linear first-hand business model that they are still running parallel with the newer business model. Individual examples like H&M have some business model acquisition characteristics since they identified and invested in an already established innovative business model. However, as a business model acquisition would include integrating the external business model into the existing one, which is not the case in H&M’s acquisition, this can also be considered as a business model diversification effort (Geissdoerfer et al., 2018b).

When mirroring the findings to the components of the integrated business model framework by Writz et al. (2016), it can be argued that the customer and market components are of high focus within these diversified business models. They can have drastic changes to companies’ customer relationships and target groups, market offering models and revenue models. From the other business model components (strategic and value creation), the network model and procurement model are currently highly interlinked with each other. As stated in the interviews, setting up a robust reverse logistics systems to procure used clothing from the consumers is challenging for fashion retailers, which has led to a larger importance on the network aspects of finding the right business model partners.

The parallel business models employed by the incumbent fashion retailers should also be considered in regard to the future of the industry’s CE transition. As argued by Hacklin et al. (2018), during times when value is migrating rapidly between companies, substituting an existing business model’s key elements with an entirely new business model innovation is more suitable than launching a secondary business model in parallel with the old one. CE has not caused a truly rapid migration of value yet in the fashion industry. However, as identified in both the interviews and by Mistra Future Fashion (2019), this situation may change in the future through changes in consumer mindsets, regulatory frameworks and technologies. As stated by Geissdoerfer et al., (2018a), an organization’s capability to move into new business models can become a key success factor in sustainable transitions.

To fulfill the purpose of this thesis, the second area explored was the existing regime-level and how it is interacting with emerging niche innovations. The findings indicate that, in the empirical context of clothing resale, most incumbent fashion retailers are remaining inert and mostly monitoring the business model innovations emerging in the industry. Those incumbents that have taken a more active reaction towards the emerging business models, which represents a smaller portion of the companies, have established secondary resale business models parallel with their core linear models. The secondary business models can be divided into eight different categories: Branded online second-hand shop, brand-owned C2C resale platform, partnership with external online resale platform, brick & mortar second-hand, sell-to-redistribution, collaborating with charities, repurposing & upcycling and clothing as a service. Most of these business models have

61 currently been introduced via partnerships. This may change in the future if the increasing attractiveness of the clothing resale incentivizes the companies to take more control over their resale business models. Comparing the findings to previous literature showed that all of the fashion retailers are using a business model diversification strategy which can be suitable in early changes of transitions when value is not migrating rapidly between companies.

5.3 Pathways for Clothing Resale Business Model Innovations in the Industry’s Circular Economy Transition The clothing resale market has seen tremendous growth across segments, and this growth is expected to accelerate in the upcoming years. The number of consumers buying and considering buying used clothing has risen significantly only in the past two years (ThredUP, 2019; Park & Armstrong, 2019). This development has led to a growing number of new emerging actors entering the fashion industry with innovative resale business models. The most common emerging start- ups introducing new resale business models include born-circular fashion retailers, online resale platforms, B2B back-end resale solution providers and clothing as a service (Chapter 5.1). Although still to a limited extent, some incumbent retailers have started introducing resale business model innovations of their own (Mistra Future Fashion, 2019). These incumbents have mostly introduced newer resale business models as secondary business models in parallel with their traditional business models (Chapter 5.2).

The motivations behind introducing resale business model innovations have some differences between emerging and incumbent actors. Newly established start-ups are aiming to find competitive advantages by creating resale-based business models and capitalize on the growing resale markets. Incumbent fashion retailers on the other hand have a variety of short-term and long-term motivations behind moving towards resale. To some extent, new circular business models can improve fashion retailers’ image among sustainability-conscious consumers. Also, similarly to the emerging actors, incumbents are attracted by the rapidly growing resale markets and are looking to capture profitable business cases through selling used clothing. These profitable short-term business cases are especially achieved among high price segment brands such as luxury brands (Keim & Wagner, 2018; Fashion for Good, 2019). The profitability of used clothing resale can also be driven by the uniqueness, exclusivity and treasure-hunting aspects of used clothing that can create higher price points to vintage items (Turunen & Leipämaa-Leskinen, 2015; Keim & Wagner, 2018; Interviews). Resale business models can also be a way for fashion retailers to address completely new customer segments.

Although short-term benefits can be found in some cases, many of the motivations why fashion retailers are introducing resale business model innovations are focused on the long-term time perspective. Multiple interviewees in this study emphasized circular business model innovations as a risk mitigation activity for incumbent fashion retailers. These incumbent actors are identifying that the dynamics in the fashion industry are changing, and to ensure long-term competitive advantage, they have to keep up with the change.

As stated in previous literature, socio-technical transitions in the MLP can follow four different types of transition pathways: Substitution, Reconfiguration, Transformation and De-alignment and re-alignment (Geels et al., 2016). Based on the empirical findings of this study, an argument can

62 be made that the CE transition in the fashion industry is currently following a Reconfiguration transition pathway since the industry is currently witnessing a combination of new and existing business models and incumbent regime actors are creating partnerships with new entrants. Past literature states that these types of parallel business models that the incumbent fashion retailers are employing are a suitable strategy in this type of a transition pathway when the emerging innovations have a symbiotic relationship with the existing regime (Hacklin et al., 2018). However, as identified in the interviews, the industry’s transition towards CE is still at a very early stage, and different regime aspects such as regulations, consumer mindsets and technological development can shift the course of the transition. As regulatory actors are taking an increasing role to drive CE in the industry, younger generations are driving larger adoption of used clothing adoption among consumers (ThredUP, 2019) and development in for example recycling technologies are creating more incentives for companies to shift more heavily towards retaining the ownership of garments, the value migration between the companies can be more rapid in future stages of the fashion industry’s CE transitions. This can create a more disruptive relationship between niche circular business model innovations and the existing regime, shifting the transition pathway from Reconfiguration into Substitution, where new entrants may fully replace the incumbent actors (Geels et al., 2016).

If the transition pathway in the fashion industry’s CE transition will move more towards Substitution in the future, incumbent fashion retailers will have a higher pressure to protect their position with innovative efforts (Geels et al., 2016). In this case, incumbents that have reacted early and started introducing circular business model innovations already during these first stages of the industry’s CE transition will be in a stronger position than incumbents that have remained inert (van Mossel et al., 2018; Business of Fashion, 2020). Through their early business model diversification, these companies have already to some extent developed necessary components such as reverse logistics, sales channels, internal capabilities and partner networks needed for circular business models (Weissbrod & Bocken, 2017; Kumar et al., 2018; Geissdoerfer et al., 2018b; Global Fashion Agenda, 2019a; Business of Fashion, 2020, Interviews), and through experimental learning iteratively created a circular business model suitable for them (Chesbrough, 2010; Sosna et al., 2010; Interviews).

The third focus area of this thesis was to expand the view from the current development within clothing resale business model innovations into possible future stages of the fashion industry’s transition. The findings show that CE transition in the fashion industry is a systematic change and clothing resale is only one part of it (Ellen MacArthur Foundation, 2017; Hvass & Pedersen, 2019; Interviews). However, for many incumbent fashion retailers clothing resale will most likely be the first step towards circularity. While introducing resale business model innovations may have many short-term benefits especially for certain types of brands and products, their larger role for incumbents can prove to be risk mitigation against future changes and a source of long-term competitive advantage. Fashion retailers that are currently reacting early to the CE transition by diversifying their business model with novel resale business model innovations strengthen their future position if changes in regulatory frameworks, consumer mindsets and technologies further accelerate the fashion industry’s CE transition.

63 6. CONCLUSION

This chapter provides an overall conclusion of this study. First, the background and purpose of the thesis are revisited. After that, the aim of the study is concluded. Lastly, the findings’ implications are discussed and potential directions for future research are presented.

The potential of CE to decouple economic growth from environmental constraints has spurred practitioners’ and researchers’ interest in the concept. Moving from the linear “take, make, disposal” resource management approaches towards a more paradigm that keeps resources in a loop of usage can be a way for material-intensive industries, such as the fashion industry, to increase the economic value created while maintaining similar or smaller environmental footprint. However, companies are struggling to capture the potential of CE because circularity can require large shifts in the way companies deliver value.

This thesis mobilized concepts from the MLP framework (Bidmon & Knab, 2016), business models (Morris et al., 2005; Writz et al., 2016; Holtsröm et al., 2019), incumbent strategies (Mossel et al., 2018; Hacklin et al., 2018; Geissdoerfer et al., 2018a) and transition pathway literature (Geels et al., 2016; Karakaya et al., 2018) studying the fashion industry’s transition towards CE. The study focused on business model innovations and their role within the transition by conducting a case study on clothing resale. The thesis aimed to explore how fashion retailers innovate their business models in the context of clothing resale. This aim was translated into three sub-research questions that each focused on one part of the MLP. Insights from the three sub- questions enabled exploring the emerging niche innovations, their relationship with the existing regime, and their linkage to the possible future transitions within the regime. Based on the findings from this thesis, business model innovations have a key role in the fashion industry’s transition towards CE. In the current early stages of the transition, many incumbent fashion retailers are not taking an equally active approach in innovating their business models as newly established actors whose novel business model innovations can be currently seen as one of the key drivers of the transition. Fashion retailers are however actively monitoring the business model innovations emerging in the industry, and some of them have already started diversifying their business model by introducing secondary clothing resale business models parallel with their core linear model.

This gradual experimentation with clothing resale includes a variety of business model innovations, ranging from second-hand sales and rental that is done via both online and offline channels. The type of resale business model suitable for a fashion retailer is largely dependent on the product type, price category, brand image and existing operations of the company. Currently, the secondary resale business models introduced by fashion retailers are to a large extent established via partnerships with emerging actors such as online resale platforms and B2B back- end service providers. If the transition towards CE accelerates further for example due to further changes in technologies, consumer behavior and regulations, more fashion retailers may be more inclined to take full control of their resale business models instead of using external partners.

Although incumbent actors may find some immediate economic and brand benefits of introducing newer circular business model innovations, larger benefits can often be focused on the long-term time perspective. In terms of the future outlook of the industry’s transition, dynamics within the

64 industry are expected to change in the long-term. Reacting to the emerging changes early by diversifying the existing business models, fashion retailers are likely to strengthen their position during these later stages of the industry’s transition towards CE.

6.1 Practical Implications The inherent potential of CE to decouple economic growth from environmental constraints in the fashion industry has spurred practitioners’ interest in CE and circular business models. However, due to the newness of the topic and the dissimilarity of circular operations with the traditional linear operating models, existing regime actors desiring to take part in the CE transition face challenges regarding strategies to pursue circularity. The findings of this thesis can increase the knowledge of regime actors by providing new insights into the phenomenon. By using a broad set of empirical data, the study identifies what types of circular business model innovations are being driven from outside the existing regime. This can guide practitioners by giving them an overview of what direction current innovation efforts are pushing the industry’s transition, as well as identifying types of emerging actors that could act as partners along with this transition. For fashion retailers, the findings shed more light into the dynamics of clothing resale business models both now and in the future; they display a broad overview on how some companies have started moving towards clothing resale with a business model diversification strategy, and how these efforts can strengthen their position in the future.

6.2 Theoretical Implications These findings from the empirical data collected in this thesis provide new insight to the growing literature of CE. By focusing on all levels of the MLP, a view of the interlinkages between different aspects of the CE transition was achieved in the context of clothing resale in the fashion industry. The findings also shed more light on the relationships between the concepts CE, industrial transitions and business model innovations by providing new empirical insights into the role of business model innovations in an industry’s transition towards CE. Moreover, the findings contribute to the literature on the fashion industry by extending previous studies’ views on CE. Focusing on the specific scope of clothing resale enables new in-depth empirical insights into CE- related literature in the fashion industry.

6.3 Limitations and Future Research As with other previous studies using the MLP to explore transitions within industries, the thesis has its limitations. The broad view gained from incorporating industry-wide empirical data on emerging business model innovations and incumbent fashion retailer responses enable exploration of circular business model on a macro and meso level, but it lacks more in-depth micro-level view. Future research should therefore expand on this research by focusing on the organizational aspects of introducing a circular business model. Case studies focusing on a single or a few actors that have already introduced circular business model innovations, such as the companies identified in this study (Appendix A; Appendix B), could shed more light on the challenges and success factors of innovating business models around CE. This would strengthen the findings from this study and increase the knowledge on how company-related aspects such as established sales channels, supply chain networks, product portfolio and brand image affect the implementation of circular business model innovations.

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78 APPENDIX A: EMERGING ACTORS

In this appendix, business models of the emerging actors identified in this study are displayed.

Table 11. Business models of emerging actors identified in this study (part 1/2).

Year Data Company Country Description founded collection Company ThredUP USA 2009 Online second-hand store allowing buying and selling used garments. website Online second-hand store allowing buying and selling used garments. Company The RealReal USA 2011 Focused on luxury fashion. website Online peer-to-peer platform allowing consumers to buy and sell and Company Poshmark USA 2011 share their garments with each other. website Vestiaire Online peer-to-peer platform allowing consumers to buy and sell their Company France 2009 Collective garments with each other. Focused on premium and luxury fashion. website Online peer-to-peer platform allowing consumers to buy and sell their Company Vinted Lithuania 2008 garments with each other. Focused women's fashion. website Online peer-to-peer platform allowing consumers to buy and sell their Company Tradesy USA 2009 garments with each other. Focused women's luxury fashion. website Company Sellpy Sweden 2014 Online second-hand store allowing buying and selling used garments. website Company Emmy Finland 2014 Online second-hand store allowing buying and selling used garments. website Online and brick & mortar second-hand store allowing buying and Company Varie Sweden 2012 selling used garments. website Online peer-to-peer platform allowing consumers to buy and sell their Company Depop UK 2011 garments with each other. website Online peer-to-peer platform allowing consumers to buy and sell their Company Grailed USA 2013 garments with each other. Focused on men's fashion. website Online peer-to-peer platform allowing consumers to buy and sell their Company Rebelle Germany 2013 garments with each other. Focused on luxury fashion. website Online peer-to-peer platform allowing consumers to buy, sell and Designer Company New Zealand 2013 exchange their garments with each other. Focused on women's luxury Wardrobe website fashion. Online peer-to-peer platform allowing consumers to buy, sell and Company Heroine USA 2017 exchange their garments with each other. Focused on women's luxury website fashion. Hardly Ever Online peer-to-peer platform allowing consumers to buy, sell and Company UK 2012 Worn It exchange their garments with each other. Focused on luxury fashion. website Online peer-to-peer platform allowing consumers to buy, sell and Company Modsie Australia 2016 exchange their garments with each other. Focused on luxury fashion. website My Ex Online second-hand store allowing buying and selling used garments. Company UK 2014 Wardrobe Focused on luxury fashion. website My Private Online peer-to-peer platform allowing consumers to buy, sell and Company Switzerland 2009 Boutique exchange their garments with each other. website Online second-hand store allowing buying and selling used garments. Company Love that Bag Canada 2013 Focused on luxury handbags. website Online peer-to-peer platform allowing consumers to buy, and sell their Company Restyle Closet Australia 2016 garments with each other. Focused on luxury fashion. website Leading global solutions provider for the collection, certified sorting, Company I:CO Germany 2009 reuse and recycling of used clothing and shoes. website Back-end B2B service provider enabling retailers to set up resale Company Trove USA 2012 schemes. website The Renewal Back-end B2B service provider enabling retailers to set up resale Company USA 2015 Workshop schemes. website

79 Table 12. Business models of emerging actors identified in this study (part 2/2).

Year Data Company Country Description founded collection Company Helpsy USA 2012 Take-back & redistribution service provider website Back-end B2B service provider enabling retailers to set up rental Company Lizee France 2019 schemes. website Back-end B2B service provider enabling retailers to set up rental Company RE-NT Germany 2018 schemes. website Company Re/Done USA 2014 Fashion brand creating used Levi's into new jeans and clothing. website Fashion brand employing a swapping service where the brand's used Company For Days USA 2016 garments can be returned with a significant discount. Returned website garments are then used to make new products. Better World Fashion brand creating unique leather jackets from used jackets and Company Denmark 2015 Fashion other material. website Blonde Gone Fashion brand creating garments from leftover fabrics from large Company UK 2017 Rogue productions. website Fashion brand creating garments from surplus fabrics that were not Company /id/ UK 2018 sold by the textile mills and are left in storage. website Zero Waste Company USA 2015 Fashion brand creating garments from scrap material. Daniel website Company Ecoalf Spain 2009 Fashion brand creating garments from recycled fabrics. website Rent the Online rental platform focused on luxury dresses and accessories. Company USA 2009 Runway Provides both one-off rental and subscription rental services. website Bag, Borrow or Company USA 2004 Online rental platform focused on designer handbags. Steal website Company Gwynnie Bee USA 2011 Subscription-based fashion rental service. website Company Style Lend USA 2013 A peer-to-peer rental platform. website Company Haverdash USA 2011 Subscription-based fashion rental service. website Company Le Tote USA 2012 Subscription-based fashion rental service. website Company Armoire USA 2016 Subscription-based fashion rental service. website HURR Company UK 2018 A peer-to-peer rental platform. Collective website Company Circos Denmark 2019 Online rental platform focused on kidswear and maternity wear. website Company Front Row UK 2016 Online rental platform focused on women's luxury fashion. website Hack Your Company Sweden 2019 Subscription-based fashion rental service. Closet website Something Online rental platform focused on women's fashion. Provides both one- Company Sweden 2016 borrowed off rental and subscription rental services. website Brick and mortar rental solution focused on women's fashion. Company Vaatepuu Finland 2014 Provides both one-off rental and subscription rental services. website The Online rental platform focused on luxury and vintage fashion. Company Lena 2014 Netherlands Provides both one-off rental and subscription rental services. website Company Glam Corner Australia 2012 Online rental platform focused on designer dresses. website

80 APPENDIX B: INCUMBENT FASHION RETAILERS

In this appendix, the identified incumbent fashion retailers who have introduced clothing resale business model innovations are displayed.

Table 13. Incumbent fashion retailers’ resale business models (part 1/2).

Using a Company Size Country Description of resale business model partnership Data collection

Collecting own brand's used garments directly from Boomerang Small Sweden consumers and selling them through their main website. No Company website Collecting own brand's used garments directly from consumers and selling them through their own separate resale website/stores. Garments that are too worn-out to be resold are upcycled into art. Using an external Yes (back-end Company website, Eileen Fisher Large USA partner to handle back-end operations. operations) company report Collecting own brand's used garments directly from consumers and selling them through their main website/stores. Garments that are too worn-out to be Nudie Jeans Mid-sized Sweden resold are used as repairing material. No Company website Collecting own brand's used garments directly from consumers and selling them through their own separate resale website. Piloting a few upcycled products from different products that are too worn-out to be resold. Using an external partner to handle back-end Yes (back-end Sustainability reports, Patagonia Large USA operations. operations) company website Selling returned and damaged garments through their own resale website. Using an external partner to repair the garments. Also collecting all brands' used garments Yes (back-end Company website, The North Face Large USA in-store and sending them to a charity organization. operations) company report Collecting own brand's used garments directly from consumers and selling them through their own separate resale website. Using an external partner to handle Yes (back-end Company website, Arc'teryx Large Canada back-end operations. operations) company report Collecting own brand's used garments directly from consumers and selling them through their own separate resale website/stores. Using an external partner to Yes (back-end Sustainability reports, Nordstrom Large USA handle back-end operations. operations) company website Established an own online customer-to-customer resale platform in their main website. Consumer's can sell the brand's garments to each other without transaction Company website, Polarn o Pyret Mid-sized Sweden costs on the platform. No company report Started a temporary promotion campaign where customers selling the brand's garments in an external online customer-to-customer resale platform receive a Stella McCartney Mid-sized UK discount voucher to the brand's first-hand garments. Yes Company website Started a temporary promotion campaign where customers selling the brand's garments in an external online customer-to-customer resale platform receive an Sustainability reports, Burberry Large UK exclusive shopping event in the brand's stores. Yes company website Collecting own brand's used garments directly from consumers and selling them through their own branded resale store. Also collaborating with an external online customer-to-customer resale platform to sell some of Sustainability reports, Filippa K Mid-sized Sweden the collected garments. Yes company website Collecting all brands' used garments in-store and sending them to an external resale/recycle partner. Became a major shareholder in an online second-hand fashion start-up. Piloted in-store clothing rental Sustainability reports, H&M Large Sweden services. Yes company website Buying own brand's used garments from an external online second-hand start-up and sells them through Madewell Large USA their own stores. Yes Company website Collecting own brand's used garments directly from consumers and selling them through their own branded Acne Studios Mid-sized Sweden resale store. No Company website Collecting own brand's used garments directly from consumers and selling them through separate sections Hope Small Sweden within their stores. No Company website

81 Table 14. Incumbent fashion retailers’ resale business models (part 2/2).

Using a Company Size Country Description of resale business model partnership Data collection Started a temporary in-store second-hand campaign to collect and resale own brand's used clothing. Also collecting all brands' used garments in-store and Sustainability reports, Guess Large USA sending them to an external resale/recycle partner. Yes company website Started a temporary in-store second-hand campaign to Samuji Small Finland collect and resale own brand's used clothing. No Company website Collecting all brands' used garments in-store and Suitsupply Large The Netherlands sending them to an external resale/recycle partner. Yes Company website Collecting all brands' used garments in-store and sending them to an external resale/recycle partner. Also GANNI Small Denmark piloting a clothing rental service. Yes Company website Collecting all brands' used garments in-store and & Other Stories Mid-sized Sweden sending them to an external resale/recycle partner. Yes Company website Collecting all brands' used garments in-store and OVS Large Italy sending them to an external resale/recycle partner. Yes Company website Collecting all brands' used garments in-store and Columbia Large USA sending them to an external resale/recycle partner. Yes Company website Collecting all brands' used garments in-store and Sustainability reports, Adidas Large Germany sending them to an external resale/recycle partner. Yes company website Collecting all brands' used garments in-store and Fenix Outdoor Mid-sized Switzerland sending them to an external resale/recycle partner. Yes Company website Collecting all brands' used garments in-store and New Yorker Large Germany sending them to an external resale/recycle partner. Yes Company website Collecting all brands' garments and sending them bo a Sustainability reports, Inditex Large Spain charity organization. Yes company website Started a temporary campaign to collect all brands' Sustainability reports, Puma Large Germany garments and sending them to a charity organization. Yes company website Collecting own brand's used garments and sending Company website, Timberland Large USA them to an external charity organization. Yes company report Collecting own brand's used garments and sending Marks & Spencer Large UK them to an external charity organization. Yes Company website Collecting all brands' garments and sending them to a Sustainability reports, Esprit Large Hong Kong charity organization. Yes company website Collecting own brand's used garments and sending Hania New York Small USA them to an external charity organization. Yes Company website Selling returned and damaged garments through an external website. Using an external partner to repair the Carhartt Large USA garments. Yes Company website Selling returned and damaged garments through an external website. Using an external partner to repair the Pearl Izumi Mid-sized Japan garments. Yes Company website Selling returned and damaged garments through an external website. Using an external partner to repair the Toad & Co. Small USA garments. Yes Company website Selling returned and damaged garments through an external website. Using an external partner to repair the Mara Hoffman Small USA garments. Yes Company website Repurposing and selling returned and damaged garments through their own stores. Using an external Yes (back-end Company website, COS Mid-sized Sweden partner to repair the garments. operations) company report Started a campaign where used garments are collected, upcycled and sold through their own stores. Collaborating with art university students in the Designers Remix Small Denmark upcycling. Yes Company website Piloting selling a few upcycled products from different collected used garments. Started an own rental Company website, Urban Outfitters Large USA subsidiary. No company report Piloting selling a few upcycled products from different Diesel Large Italy collected used garments. No Company website Piloting selling a few upcycled products from different ELSK Small Denmark collected used garments. No Company website MUD Jeans Small The Netherlands Established a clothing rental service. No Company website Yes (back-end Ann Taylor Large USA Established a clothing rental service. operations) Company website Yes (back-end Loft Large USA Established a clothing rental service. operations) Company website Yes (back-end Banana Republic Large USA Established a clothing rental service. operations) Company website Yes (back-end American Eagle Large USA Established a clothing rental service. operations) Company website