Op-Ed | Fast Fashion Winners and Losers

As materials, transportation and labour costs rise, putting pressure on margins, producers of fast fashion face growing challenges that only some will survive.

Zara Flagship in New York | Source: myretailmedia.com

NEW YORK, United States – Much ink has already been spilled over the environmental unsustainability of cheap-chic, throwaway fast fashion. But is the fast fashion model also economically unsustainable? With t-shirts as low as $5 and jeans as low as $10, many companies selling fast fashion have very low margins and are particularly vulnerable to increases in materials, transportation and labour costs. Will these vulnerabilities sink the model? The short answer: for some, yes, but not for all.

Leading fast fashion firms such as Inditex (parent company of Zara) and Uniqlo, owned by Fast Retailing, split their sales between core, price-driven items that are made in China and other long lead-time countries and quick selling fashion items that have a heavy design investment and are produced close to its key retail markets. But as wages in China continue to rise, this sourcing matrix is becoming less competitive. Staying ahead of the curve means better forecasting demand to maximise low-cost capacity, without sacrificing quick turnaround times on fashion items.

Stephen Denning, supply chain expert and author of the book Radical Management, says: “Firms like Zara have solved the problem of how to get disciplined execution with continuous innovation. The way they lay out their factories, the design team is right in the middle of the factory, so that the whole process of learning from the manufacturers and vice versa is horizontal.”

Zara makes about half their goods in Spain, in factories the company owns itself. And it keeps those factories about 50 percent unbooked, so they can respond to quick trends. Because the factories are so close to their retail markets, they can completely refresh store inventories every two weeks. “It’s hard to copy, because Inditex is vertically integrated and others are not,” says Nelson Fraiman, professor of decision, risk and operations at Columbia Business School.

This means management has to be agile. Zara has two completely different sourcing teams: one for core items, and one for fast fashion, along with a big design staff watching the runways for new styles. “Zara has 250 designers, but they’re mostly copiers,” says Fraiman.

When margins get squeezed, as happened in 2010 when cotton costs spiked, vertically integrated retailers like Zara can rely on sales of higher margin fast fashion items to give them the breathing room they need to cut their losses on core items and avoid passing rising costs onto customers.

However, for American retailers like Sears or J.C. Penney, it’s a different story. These companies don’t have factories close to their target markets and they don’t have large design teams. They take another retailer’s designs, modify them slightly and send them to the same low-cost Asian factories that a firm like Zara uses to make its basic apparel.

In essence, they make the same fast fashion goods, poorly, on a time line that misses the demand peak. It has worked so far because they can offer the apparel at lower cost. But consumers are quickly losing interest.

“Keeping costs down in very important, but it’s also crucial to give at least similar attention to adding value. Time turns out to be a huge factor in delighting customers,” says Denning.

These companies are getting squeezed on two sides: by rising costs and by consumers who have more options and are becoming more choosy. These trends will only accelerate as the sourcing mix shifts and e-commerce booms. Denning says: “There’s been a massive shift in power in the marketplace from the seller to the buyer. Organisations operating in the old model are dying faster and faster.”

The market is bearing this out: retailers from Abercrombie to Kmart are closing stores, while firms such as Gap are seeing profit increases as they re-orient around the needs of their customers.

Price pressure is already driving some companies to turn a blind eye when subcontractors choose unsafe factories, putting reputations on the line and risking the lives of workers. Now, that’s an unsustainable model. It’s bad for business — and it’s bad for humanity.

Patrick Lamson-Hall is managing editor of Sourcing Journal Online, a resource for textile and soft goods executives working on the supply chain side of the business.