TFR | Strategy Consulting

The Fashion disruption

Polish-born sociologist Zigmunt Bauman described our modern life as “liquid modernity“, where change is occurring more and more rapidly. Social entities are flexible, plastic. “Each new structure which replaces the previous one as soon as it is declared old-fashioned and past its use-by date is only another momentary settlement – acknowledged as temporary and ‘until further notice” (Modern Liquidity). Fashion is a mirror of our times, and fast-fashion is its customized version.

• What are the origins of Fast Fashion? What does “Fast” mean?

Regular fashion lifecycles are based on seasonality. It means that collections are designed to last 6 months, 26 weeks, corresponding to Spring/Summer or Autumn/Winter seasons. As a business, it means that the retailer is burning cash one year before its product is being sold in their stores. The smaller the retailer, the more in advance he will need to anticipate payments to suppliers and the later he will get paid by clients or customers (B2B or B2C).  In the case of leading fashion retailers, it’s the oposite. Fast fashion retailers, and standard retailers, pay to suppliers around +60 days after receiving the stock and this allows them to finance their operations thanks to their suppliers.

So, originally, the characteristics of the business stresses the balance sheet, very sensitive between days of payment (days of payables) and collection period (days of receivables), with a high level of uncertainty because of fashion trends (if the customer likes the product or not), weather conditions (a warm winter will let stores with high levels of coats and jackets inventories) and others externalities altering demand.

First movers, disrupting an industry

Benetton was one of the first fashion companies that decided to postpone the dyeing process from yarn dye to garment dye.  Postponement means transforming a product into its final form at the latest possible moment. Benetton performed their value chain in order to track the in-season sales and dye just-in-time according to current demand. For example, if they were selling more green pullovers, they would dye pullovers that were already manufactured, in green color. Thanks to that, the italian brand could react to demand and deliver the right product, in the right place and at the right time.

The second revolution in the fashion industry happened when a few retailers worked very hard on the less artistic part of the business, the supply chain. After Benetton, Zara reinvented fashion thru real time trend identification and best-in-class operations. Nowadays, a new product reaches a Zara store in 2 weeks, at a margin that is higher than their rivals.

A standard merchandise lifecycle in Fashion

Zara made a step further pushing a centenarian industry to reinvent itself. For the rest, even for luxury retailers, it was a matter of to adapt or die. Zara doesn’t have a great and famous designer like Alessandro Michelle in Gucci, Jeremy Scott in Moschino or Karl Lagerfeld in Chanel. The Spanish fast-fashion company has an army of people dedicated to analyse the environment (trends, social buzz, special events, competition products, celebrities, customers feedback from their stores).

Then, Zara will test them in a selection of stores and depending on the results, it’s going to produce a higher amount for the rest of stores. Zara is capable to do it mixing near shore (60%) and off-shore (40%) production. For the basics, it produces in off-shore countries (e.g. China, Bangladesh, Vietnam) where lead-times are around 2 months by boat. For trendy items (fast-fashion), Zara is producing in near-shore locations such as Morocco, Spain, Portugal, Turkey, Bulgaria or Poland. All the production is sent to Arteixo, Zara’s headquarters, and from there, inventories are sent to all the stores around the world. With this business model, Zara has more profitability (Inditex ROS is 14% compared to 9% in H&M, 4% in GAP and 3% in Fast Retailing) than most apparel retailers, with a higher turn, and higher margins by selling less during discount periods (they produce and send less stock per item in order to sell inventory before sales and promotions). Zero advertising strategy and no capsule collections with top designers are key elements too. And finally, Zara’s supply chain is vertical integrated, while H&M outsources most of its production.

In the chart above we can see the days of inventory (=inventory/COGS)*365) from 2012 to 2016 of the global leading fashion retailers. Fast retailing is reducing its days of inventory since 2013. GAP, the king of basics, is surprisingly the retailer with fewer days of inventory, while H&M has difficulties to compete with Inditex, which keeps stable. You may ask yourself, where is Zara’s 2 weeks of inventory rotation? Firstly, it’s Inditex group, not Zara. Secondly, the ratio is an average and Zara is using fast-fashion releases with part of their assortment. In fact, every retailer plans its collection with a split of basics items, seasonal, special events, fast-fashion, capsule, customization…that have different lifecycles and time-to-market.

How and why to plan a fast-fashion collection?

See below an illustrative case: These are a few examples on how to split the assortment, but there are other strategic reasons when planning the collection such as price perception (e.g. Put a €2.000 crocodile shoes near a pair of shoes of €700. The second one looks cheaper!) or value proposition (.e.g. innovative products such as 3D printed Nike shoes).

If we plan the collection by type of fashionability…

Each SKU will have a different margin but the idea is that near-shore suppliers will produce trendy items (fast-fashion items) that are released in less than 2 weeks because of their short lead times. Those items cover a more intangible need for the customer and therefore the willingness to pay will increase. Those trendy items are used by retailers to push loyal customer to come back more times to the store. The idea is “buy it today, or you won’t see it again”.

On the other side of the coin, basics (e.g. white shirt) will be manufactured in off-shore suppliers. Those items are easily forecastable, and retailers repeat them with just a few different details. Those items are covering basic needs for customers and are produced in off-shore suppliers (if we are in Europe, it means China, Vietnam, Bangladesh, Sri Lanka, India or Pakistan.

Zara SS17 Collection – from zara.com

Price, the less fashionable factor, but maybe, the most important one

The key success factor is selling at the right price and the sooner, the better (i.e. before discounts). Fast fashion companies tend to have a significant lower amount of sales during discount periods and also set up lower discounts compared to other fashion retailers (20-40% compared to typical 50-70% discount range from department stores or other fashion companies). Pricing is one of the most complex variables in retail, and even more in a seasonal business where customers are saavy enough to search the best price on the internet (try to track the price of a product here and you will see the impact of Black Friday or other special daily events). What amount of the inventory will the retailer sell at 0% of discount? And at 20%, 40%, 60% or more? The flexibility and agility of the company will permit to reduce the impact of discounts.

Key elements to the Fast Fashion process:

The next revolution, a step beyond Fast-Fashion

Fast-Fashion is continuously evolving. Big Data and Analytics are the current MUST of the industry, including sustainability and Omnichannel. More and more systems are integrating retailers structures, from CRM, ERP to PLM. Fast Fashion has such a big margin that Food retailers are entering the market (e.g. Carrefour, Lidl). In fact, Primark parent company is British Associated Foods… Fashion seems to become a commodity.

Millennials and technology are accelerating fashion lifecycles. “See Now, Buy Now” is the next “commodity” for mass-market and luxury apparel retailers. Rebecca Minkoff, Ralph Lauren, Tommy Hilfiger or Burberry are some examples of brands that are going “direct to consumer”. This last move shortens the traditional gap between the runway show and retail availability and even Prada is offering a couple of bags right after their runway AW16. Facebook, corporate apps, Snapchat are some of the platforms used to connect the new releases (most of them, capsule collections) to brand lovers.

Millennials redefined ordinary retail channels while modifying the usual journey to purchase: from Research Online, Purchase Online (ROPO) to Showrooming. We are used to the ephemeral and this is already impacting product design and planning. Zara has already implemented RFID globally and customers can check the real availability of a SKU in its offline and online stores. Modern Liquidity is changing the rules. Retail players that will adapt faster to the sharing, experience, customize and sustainable circular economy will be more likely to prevail. The ones betting for immediacy will succeed.