One of the things I’ve focused on in my career is addressing mature industries, and the textile industry unquestionably comes into that category. When you look at printed matter for textile, the market annually is about US$165 billion to $170 billion, making it a huge potential market to grow in. Kornit is unique in the sense that it’s offering a disruptive solution. To penetrate a mature market successfully you must have a need for disruption, and Kornit has a very disruptive solution for a market that is in real need for change.
Kornit’s disruptive solution
As I mentioned, textiles (wearables and home décor) is a mature industry worth annually around $1 trillion. Of that amount, $165 billion is represented by printed matter, which, for the most part, is based on the screen printing process.
The problem with screen printing is that the set of processes is very lengthy and costly and, as a result, it has required customers to order large quantities of a single design. Although it’s been doing a phenomenal job, it’s being challenged by trends that we see happening in the industry right now.
There are three elements really influencing the need for change right now. First, on the demand side, customers and consumers are looking to be unique. People want to express themselves with what they’re wearing, and how they’re dressing up their house or their office and, so, they want to get unique designs.
Secondly, if we’re looking at screen printing, you are actually dependent on printing the same design time and time again and, as a result, the supply chain is having difficulty dealing with that demand and is, instead, relying on older techniques to survive.
The third element is the environment: the World Bank states that around 20% of industrial waste-water comes from the washing of textile mills. China and many other developing countries depend on textiles as their main source of living and we, in the western world, have relied upon them in order to do what we need. However, there are now problems with the environment, which mean that changes are having to be made.
The arrival of fast fashion
Ask yourself what is the single largest failure of the textile industry and, without question, the answer inevitably is inventory management. While brands and retailers like to create demand through sales, the amount of lost revenue and margin is huge as a result. What’s happening is that the normal method of sourcing textiles takes between 21 and 25 weeks so, if you are a designer you need a very good crystal ball to look into the future. You might be putting together a set of ten different samples that you want to go from Hong Kong to New York but, by the time you reach the shelves, many things will have happened. You don’t know from those ten items which one is going to be a home run and which is going to be a slow mover, resulting in over- or under-stocking. By the time you are able to react, the season is over. For that reason there has been the advent of fast fashion.
I think the best example of fast fashion has been Zara, with H&M and Mango also following suit. What they are doing is basically changing the concept altogether by moving to smaller quantities. To achieve this, they’re actually doing almost all of their manufacturing in Europe, known to be much more expensive than Asia from a wages and from an infrastructure standpoint. Yet they are able to do this very successfully and cost effectively.
A study carried out some years ago by Harvard University demonstrates the comparison in the move to fast fashion versus traditional retailers. It shows the percentage of actual and marked down revenues and the number of garments that are marked down versus the overall goods sold. If you are a traditional retailer, about 40% of your revenue is being marked down and some 60% of the items that you’ve manufactured are being marked down.
In the case of Zara, the numbers are very different. The study shows that only about 20% of revenue is being marked down and only 15% of the items manufactured are being marked down. Not only are the financials better but what they are actually doing is creating scarcity of supply. They want the shoppers to frequent the shop, several times a season; and what the shoppers want is to be unique. People don’t want to be seen wearing something that someone else has purchased somewhere else. And so if we look at what’s happening now it’s a real change.
A lot of the business is moving online. As a result, what we are seeing is rather than stocking larger inventories of particular designs, now manufacturers are able to store blanks without actually putting an embellishment on those items until the very last minute, and until they know that there is demand for that particular design.
The digital business model
If you are a big creator in the textile market you have to account for your business model. The fixed cost element is very high with traditional production. Having digital equipment allows you to invest minimally in infrastructure and be able to react quickly to surges in demand. These days we are seeing a lot of demand being set through social networks and via the internet in general. Both represent a very fast kind of market, which is quick to respond to market trends, and this is also very important.
Looking at the market and its $165 billion worth of printed matter, we believe that about $5 billion to $10 billion worth of garments are being manufactured digitally, annually, right now. What’s interesting is that there are about 300,000 prospective customers out there, and this means, in reality, that anyone who is doing any type of embellishment on a garment or on fabric is an addressable customer for us at some point in time. You can see we’re just in the beginning of this revolution; at 2% penetration of digital, we are just at the outset of this change taking effect.
Kornit has enjoyed a CAGR [compound annual growth rate] of more than 30% in the last three years; in 2014 it was up to 34%, so it’s a fast growing company with a lot to offer. We’re developing printers, we’re developing inks and consumables, and we’re selling them. Added to that, there are software, services and other capabilities. On top of that we’re now penetrating another growth trajectory for the market, which is printing on wide-format fabrics. Until recently, most of the focus has been printing direct-to-garment (D2G). But now we’re entering a market in which we are printing on 2 m wide fabric, and this is a very interesting growth opportunity for us.
There have been successful attempts at modifying existing digital printers for paper to fabric but there are many limitations. We print and expect the results to go through a harsh environment such as washing and drying cycles, and to perform well with rub fastness without losing the elasticity of the fabric. Kornit’s challenge has been to enable these attributes and others while printing at very high throughput, an area we excel in. That’s why a key part of our focus is on high volume manufacturing as we’re able to achieve hundreds of garments per hour at extremely high quality.
In order to be able to print on a garment, you need a pre-treatment process. What Kornit Digital has been able to achieve uniquely is to encompass all of that pre-treatment process into the printer. This allows us to take away the separate process, which is very cumbersome, needs more labour, and is actually very energy and labour intensive because you’re talking about high temperature processes. As a result, the cost for prints goes up because of the separate pre-treatment element.
What’s also unique about Kornit is that we offer an end-to-end solution. The inks and consumables we develop ourselves. We see how advantageous that is when we’re adding more applications and including more types of challenging fabrics and helping our customers expand the markets they’re addressing
The focus for the future
What you’re going to increasingly see from Kornit is that its roadmap will focus on productivity, continuing to improve cost of ownership and adding more functionality through software capabilities. We like to break our market into four distinct customer types; custom decorators, online businesses, contract printers and brand owners. Most of our business has been coming from custom decorators and online printers thus far. The next frontier will undoubtedly be the brands and large retailers as they continue to transition to fast fashion.
Looking forward, we’re going to be adding more capabilities in the direct-to-garment market and we’ll penetrate deeper into the roll-to-roll market. We have big expectations from our next generation very high-end systems called Vulcan. As stated, we’re focused on high-volume production, with the business model being the faster you run, the more output you have and this means the more inks and consumables you need to consume. It’s a win-win situation.
Gabi Seligsohn was appointed as the CEO of Kornit Digital in April 2014. Prior to joining Kornit, he spent 15 years at Nova Measuring Instruments (Nasdaq: NVMI), holding several key positions ranging from sales, business development and global business management. He served as Nova’s president and CEO from 2006-2013. Under his leadership, Nova underwent a strategic transformation to become a highly profitable, leading edge equipment supplier to the semiconductor industry. Before Nova, he spent two years as sales manager for key financial accounts at Digital Equipment Corporation. During his tenure there he led the transformation of the Tel-Aviv Stock exchange from a frontal trading floor to an online trading platform.
He also serves as a director on the Board of Directors of DSPG Inc (Nasdaq: DSPG) and holds an LLB Law degree with Honours from Reading University.
T-shirts from Zara