MONTHLY FOCUS NO 5 - 2011
Fast Fashion:
Out-of-the-Box Thinking in the Apparel Industry
By LEE Joon-Hwan
Co-authored by
AHN Shin-Hyun, HA Song,
HONG Sun-Young
May 2011
Abstract
Fast fashion companies like Inditex (Zara), H&M, and Fast Retailing (Uniqlo) that
came into their own after the 2000s are now some of the strongest players in the global
fashion industry. Their niche, “fast fashion,” refers to their ability to capture the latest
fashion trends and bring them to the public as quickly as fast food. Global fast fashion
businesses over the past five years have been characterized by high revenue growth
(15%) that far exceeds industry averages, and profit margins (10%) that surpass those of
global IT firms. Their success has done much to counter the conventional wisdom that
apparel is a declining industry with little potential for profits.
Fast fashion owes its global success to “out-of-the-box” thinking that departs from
convention by carefully studying changes in the environment, particularly today’s
shortened fashion product cycles, as well as the rise of emerging markets (particularly in
Asia) and the fragmentation of the industry’s value chain. These departures from
convention include: c A shift from “planned production” to quick response production
that responds to changes in the market ad hoc, instead of anticipating demand and
preparing products for the season in advance. dA shift from “local business” to “global
business,” with globalized HR and operations, and a focus on attaining dominance in
emerging markets. eA shift from following trends to leading trends, by continuously
providing leadership and innovation in new products instead of imitating famous
designers. fA shift from media centric marketing to spatial marketing, by using retail
space to directly reach customers and build brand identity, instead of relying on
traditional advertising.
Fast fashion has proven that industries that have long faced low profits and low growth
can monitor changes in the environment and reinvent their ways of doing business to
seize new opportunities. Lessons learned from fast fashion include: cBusinesses have
to pursue “quick management” to respond to the environment. By strengthening
consumer monitoring, they can build a base for product planning, production, supplies,
distribution, and marketing. dBusinesses must secure global competitiveness by
reinvention and process innovation from a perspective that departs from existing
convention. e A flexible and creative culture is needed to create constant change.
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I. The Fast Rise of “Fast Fashion”
Recently, Forbes released its 2011 list of the World’s Billionaires. One surprise was that
the richest men in Spain, Sweden, and Japan were all chairmen of “fast fashion”
companies, including Inditex of Spain (Zara), H&M of Sweden (Hennes & Mauritz)
and Fast Retailing Co. of Japan (Uniqlo).
From the 2000s onwards, fast fashion retailers like Zara, H&M, and Uniqlo have
emerged as the new heavyweights in the fashion industry. “Fast fashion” refers to
clothing lines that produce, package, and distribute the most up to date fashion trends,
as quickly as fast food. Unlike conventional clothing companies where designers plan
their new lines every season, fast fashion retailers design, manufacture, and release new
products ad hoc, whenever new trends appear.
Fast fashion retail made its first landing in Europe, the homes of Zara and H&M, before
sweeping through the US and Asia. Fast fashion has been experiencing rapid growth not
only in mature markets like Spain, the UK and Japan, where the apparel industry has
been hit by recession and increasingly saturated markets, but also in emerging
economies like Korea and China. Sales growth in this new segment of the industry far
exceeds the average for apparel as a whole, with market share for fast fashion providers
continuing to increase.
Table 1. Market Share and Growth of Fast Fashion by Country
Classification
Spain
UK
Japan
Korea
20
16
11
2
Fast Fashion
16.1
13.5
14.7
77.4
Industry Average
4.5
3.5
-3
4.7
Market Share (in 2010)
Sales Growth Rate
(For
the
most
recent 5 years)
Note: 1) Data for Korea is from 2008-2010 (after the arrival of Inditex in the country).
2) Companies subject to market analysis in each country: Spain (Inditex, Mango and
H&M); the UK (Topshop, NewLook, George, Inditex and H&M); Japan
(Inditex, H&M, Fast Retailing and Shimamura); and Korea (Fast Retailing, Inditex and
H&M).
Source: by Samsung Economic Research Institute, from interviews with fashion businesses.
Thomson Research; NATIXIS; Duetsche Bank; Korea Fashion Association; and
Euromonitor.
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Fast fashion companies also enjoy notably high operating profit margins beyond those
of even high tech firms like Hewlett-Packard (8.9%), Apple (21.7%), IBM (20.2%) and
Canon (11.1%). In Europe, H&M and Zara have profits far beyond the 7% average for
Europe over the past five years (2006–2010) at 23.3% and 16.2% respectively. In the
US, fast fashion retailers like Gap and the Limited, still maintained relatively high
operating profits of 10% even as their sales declined significantly during the US “Great
Recession.”
Figure 1. Results from the Top 10 Global Fast Fashion Companies (2006–2010)
(Unit: $1 million, %)
Ranking
Company (Brand)
1
Hennes & Maurits
(H&M)
2
Inditex (Zara)
3
GAP (GAP, Banana
Republic)
4
Fast Retailing (Uniqlo)
5
Country
Operation
profit
to
Sales Increase Rate Operating
Profit
to Sales
(5-year avg.)
sales
(5-year
avg.)
(5-year
avg.)
Sales
Sweden
15,426
11.5
23.3
Spain
15,401
17.1
16.2
-2.1
10.5
US
14,664
Japan
9,704
26.2
15.0
Limited Brands
(Victoria’s Secret)
US
9,613
-2.5
10.2
6
Next(Next)
UK
-0.3
15.2
7
Polo Ralph Lauren
(Polo)
US
7.4
14.2
8
Shimamura
(Shimamura )
Japan
11.1
8.4
9
Esprit(Esprit)
Hong
Kong
9.6
18.9
10
Abercrombie & Fitch
(Abercrombie & Fitch)
1.1
13.1
US
5,489
4,979
4,681
4,332
3,469
Such striking performance from fast fashion companies has made short work of the
stereotype that the apparel industry, and in particular the affordable apparel industry, is a
sunset industry with low prospects and low profitability. Such stereotypes persist to the
present day. In March of this year, American market research firm IBIS listed apparel
manufacturing as one of America’s “10 Dying Industries,” along with textile mills,
wired communications carriers, newspaper publishing, photofinishing, and DVD rentals.
If this is true, what have fast fashion companies done to make themselves so successful?
The success of the fast fashion industry in spite of a decline in apparel manufacturing
provides important implications not merely for apparel makers, but companies in many
other industries in overcoming stagnant growth and low profits.
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II. Factors in the Success of Fast Fashion
Changing Environment of the Fashion Industry: Accelerated Fashion Cycles,
Emerging Markets, and Diversification of the Value Chain
As it entered the 2000s, the fashion industry underwent dramatic changes in both the
consumers and regions it serves, and the companies that are its mainstays.
Developments in media over the past decade have greatly accelerated the speed in
which fashion trends spread among consumers, while drastically shortening the life
span of any particular trend. News on fashion can now spread through the Internet and
social media nearly instantaneously anywhere in the world. As the life cycle of fashion
grows increasingly truncated, consumers have learned more and more towards
ephemeral chic, and cheap, quasi-disposable clothes, rather than expensive and longlasting garments designed to weather the test of time.
Global fashion has also seen its center of market gravity shift increasingly toward
emerging market economies. Emerging markets have seen remarkable increases in
spending on clothing as urbanization has created a growing middle class with high
purchasing power. Cities in emerging countries will account for two thirds of world
GDP growth between 2005 to 2015.1 In these countries, middle-class urbanites familiar
with Western-style consumption patterns and modes of thinking have begun to devise a
unique fashion sense of their own. In 34 of China’s largest cities, per capita spending on
apparel has increased by an annual average of 45% over the last four years.2
Within fashion enterprises themselves, supply chain management has emerged as the
key to attaining competitiveness. Supply chain management (SCM) in particular has
evolved on increasingly fierce global competition, reshaping the fashion industry’s
global value chain. Fashion businesses have reengineered their worldwide supply chains
by turning to experts in SCM like Hong Kong’s Li & Fung.
Out-of-the-Box Thinking in Fashion
Global fast fashion companies have succeeded by jumping on the latest changes in the
fashion environment, and ignoring previous conventions. This kind of out-of-the-box
1. BCG (2010). Winning in Emerging-Market Cities - A Guide to the World's Largest Growth Opportunity.
2. From Samsung Economic Research Institute on the basis of CEIC data.
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thinking can be seen in the following four innovation solutions.
Figure 2. Four Examples of Out-of-the-Box Thinking in Fast Fashion
Shortened
fashion cycles
X Planned
Production
Response
Production
• Strengthened market monitoring
• Building of a quick response
production system
Y Local Business
Global
Business
• Globalization of the market
• Globalization of HR/Operations
Z Trend Follower
Trend
Leader
• Development of new products
/materials
• Rapid commodification
• Active cooperation with outside firms
[ Media-centric
Marketing
Space-centric • Branding of stores
• Systemization of store operations
Marketing
Rising
Emerging Market
Economies
Segmentation of
the value chain
① From "Planned Production” to “Quick Response Production”
Global fast fashion companies have established a “quick response” production system
that can immediately adapt to the latest trends and flexibly adjust inventory to meet
consumer demand. The conventional method of apparel production relies on “planned
production” that typically develops product designs and inventories for the entire season
in advance. This method is optimized for the customary biannual Spring/Summer and
Fall/Winter fashion shows. Planned production has the advantages of achieving
economies of scale by producing large quantities of clothes in advance. If pre-season
expectations go awry, however, apparel providers are vulnerable to low sales and piling
inventories of unsold products. US fashion retailer Gap experienced precisely this
problem in 2000 when its planned production faltered on mistaken forecasts of demand.
As customers dwindled due to the then economic recession, the company altered its
product strategy to pursue the youth market by producing large quantities of trendy
items like miniskirts, low-rise jeans, and leather pants in bold primary colors. These
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new products, however, failed to attract the teenagers that the company was depending
on to revitalize its brand, while driving away its mainstay grownup customers. As a
result, Gap saw its same-store sales decline for 29 straight months. Gap founder Donald
Fisher once recalled this disaster by saying “it took us 30 years to get to 1 billion dollars
in profits and two years to get to nothing.”3
In contrast, fast fashion companies produce a large variety of new designs in small
quantities and confirm customer response before producing more. At the same time, fast
fashion companies continue to track the consumer zeitgeist at fashion shows, as well as
on the streets and in stores. Inditex manufactures only 15% of its products before the
season, with the remaining 85% produced only as needed in line with customer demand.
To support its quick response fashion system, Inditex built a rapid response production
network that can complete the entire process of design, manufacturing, and delivery of
apparel to stores in only two weeks. Inditex also leverages global production networks
that can use the optimum supplier for each product and region. H&M in turn relies on
750 suppliers in 30 countries, and has been able to reduce the average product lead time
from conception to delivery by 15-20% on average per year.4
Figure 3. Product Precommitments: Zara vs. Traditional Industry
1ST QUARTER
VISIT TO
EXHIBITIONS
DESIGN
INTRODUCTION
TO COLLECTION
3RD QUARTER
MANUFACTURING
ZARA
INTERNAL MANUFACTURING
DISTRIBUTION AND
SALES
35%
55%
EXTERNAL
MANUFACTURING
40-50%
15%
5TH QUARTER
85%
SALES
MARKDOWNS
65%
DESIGN AND RAW MATERIAL SOURCING
4TH QUARTER
SALES
MARKDOWNS
TRADITIONAL
INDUSTRY
2ND QUARTER
② From “Local Business” to “Global Business”
Fast fashion companies have moved beyond the familiarity of their home markets and
traditional conceptions of the fashion industry as a “local business” by vigorously
pursuing new markets worldwide. This rapid overseas expansion has enabled them to
3. Julia Boorstin. (April 13, 2006.). Fashion Victim-Can a numbers guy from Disney correct Gap's style
missteps? Fortune.; The Gap (2010). Annual Report.
4. To minimize potential risks, H&M has selected its suppliers on the basis of past performance. H&M
(2009). Annual Report.
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hedge the regional risks that occur when a business is highly concentrated in a particular
region, while allowing them to secure new growth engines on a global scale.
Fast Retailing, Inditex and H&M, have increased the number of their overseas stores by
an annual average of 47.3%, 19.6% and 11.6% respectively, a rate that has even
outpaced growth in revenues. Much of this expansion has focused on emerging markets.
By exploiting the increasing trend toward consolidation of consumer preferences
worldwide, fast fashion retailers can now distribute the same up to date clothes in both
developed and emerging markets simultaneously. Honeys of Japan, for example,
achieved rapid growth in China by catering to fashion conscious Chinese women and
releasing in China and Japan simultaneously, or in some cases, even releasing in China
first. Fast fashion has also pushed for a conspicuous retail presence in the trendiest
commercial areas of major cities. These heavily trafficked areas, including Xintiandi in
Shanghai and Myeong-dong in Seoul, can rapidly raise brand awareness and sales
despite their high rents. In Myeong-dong, the retail heart of Korea’s capital, there are
now three Zara stores, and two H&M and Uniqlo stores, as well as a Forever 21 and
Mango, all within 200 meters of each other. These global fast fashion retailers have
attracted Korean consumers in droves.
Table 2. Overseas Stores for Fast Fashion Companies
(Unit: Number of Stores)
Classification
Europe
US
Asia, Middle East, Africa
Total
H&M
1,743
247
43
2,062
Inditex
1,204
188
216
3,216
16
1
899
916
Fast Retailing
Note: Uniqlo for Fast Retailng, and Zara for Inditex.
Source: Deutsche Bank (July 7, 2010). Retailing Fast Retailing.
③ From “Trend Followers” to “Trend Leaders”
Fast fashion companies, moreover, have now established themselves as “trend leaders,”
in marked contrast to the previous convention where affordable ready to wear garments
were designed simply as lower rent versions of haute couture. Fast fashion has met the
needs of mass consumers who covet unique designs that reinterpret or preempt those of
the most famous designers. Conventional affordably priced brands have traditionally
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imitated prestigious brands, or relied on classic styles and steady sellers. In contrast, fast
fashion brands have been able to nimbly commodify the styles of couture catwalks
while simultaneously reflecting shifting customer preferences through accelerated
release schedules. Prada, for example, introduced ostrich skin as an exotic new material
in its fall/winter 1999 fashion collection, and released an ostrich leather handbag the
next year for US$2,800. During the same season, fast fashion brand Bebe released an
ostrich handbag for only US$78, while Victoria’s Secret sold an imitation ostrich-leather
skirt for only US$50.5
Fast fashion companies have also built brand value through development of joint brands
in collaboration with outstanding designers and celebrities. Such collaborations have
typically been for a limited time period, to maintain a low-cost business structure while
still creating trend-setting designs. H&M for example, began collaborative efforts with
Karl Lagerfeld, the head designer of Chanel, and has since released a new lineup of
special products by star designers and celebrities every September. This helped to push
H&M’s brand value up to US$16.1 billion, putting it at 21st among Interbrand’s 100
“Best Global Brands” for 2010.
Fast fashion companies have also stimulated consumer sentiment by developing
innovative clothing materials, or recasting specialized clothing as trendy daily wear.
Fast Retailing (Uniqlo) became a global business by popularizing fleece garments as
daily wear, and lowering prices through use of mass produced fleece fabric. Fleece,
traditionally used for upmarket winter clothes due to its light weight, fine texture,
warmth, and ease of handling, proved highly popular with consumers everywhere. Fast
fashion companies also ignited consumer interest with the creation of entirely new
fashion categories. Inspired by yogis wearing regular training suits, Lululemon created
its fashionable “second-skin” yoga clothing for women, resulting in skyrocketing sales
growth. Lululemon’s revenue grew from 18 million dollars in 2004 to US$700 million
in 2010, with an operating profit margin of 25.4 %.
④ From 'Media-centric Marketing' to 'Space-centric Marketing'
In contrast to conventional fashion businesses, which have long relied on flashy
advertising through major media sources, fast fashion companies have actively
deployed “spatial marketing” that utilizes retail stores themselves as customer contact
5. M. J. & Fiske, N. (2003). “Trading up.” Penguin Group.
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points. Fast fashion’s typically larger and more spacious stores increase the length of
customer stays in store, and allow consumers to enhance brand familiarity by providing
an enjoyable shopping environment. Fast fashion has transformed stores from a sales
space to a cultural space where one can encounter diverse experiences. In the dimly lit
stores of Abercrombie & Fitch, for example, salespeople dance to loud in-store music,
providing an upbeat, club-like atmosphere. When Fast Retailing launched Uniqlo in
New York in 2006, the company opened “pop-up stores” shaped like cargo containers
that provided a strong image of Uniqlo as a brand freshly imported from Japan.
More surprising still is that affordable fast fashion brands can actually use their
shortened product life cycles and even occasional shortages to create “scarcity value”
for their products. Unlike ordinary clothing retailers, that stock their new products
throughout the season, fast fashion brands restock as frequently as once a week. Such
rapid product turnover spurs consumers to purchase desirable items at full price
immediately instead of waiting for markdowns or end-of-season sales, as their window
of opportunity to purchase is narrow. Customers also are motivated to make repeat visits
because new products are available almost every time they come. In London, Inditex’s
customers visit stores an average of 17 times per year, compared with only four annual
visits to competitors.6 Thanks to the high traffic in its stores, Inditex has been able to
maintain a high profit structure with improvements in its inventory turnover ratio and
share of full-price sales.
Table 3. Comparison of Fast Fashion and Ordinary Apparel Companies by Performance
Classification
Product Shelf Life Cycle
(by week)
Inventory Turnover Ratio
(times per year)
Percentage of Full-Price
Sales
Operating Profit Rate
Average for Fast
Fashion Companies
US Apparel
Industry Average
Korean Apparel
Industry Average
4
16
16
8.4
4.6
4.1
80%
50%
50%
19.5%
9%
8%
Note: 1) The fast fashion companies included in this data analysis are Inditex, H&M and Espirit
2) The inventory turnover ratio is defined as the cost of goods sold divided by average
inventory and used as an index to tell the number of times inventory is sold in a time
period such as a year (as of 2010 for the fast fashion companies; 2009 for the US; and
2008 for Korea).
Source: Samsung Economic Research Institute on the basis of interviews with fashion
businesses, each company’s Annual Reports, and Thomson Research.
6. Ferdows, K, Lewis, M. A. & Machuca, J. (November 2004.). Rapid-Fire Fulfillment. Harvard Business
Review.
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III. Implications
Thus far this paper has discussed a number of factors that have made fast fashion
companies a success. What, then, can other companies and industries learn from these
companies?
First, companies seeking to enjoy the success of fast fashion companies need to learn
from their “rapid management” systems that can exploit changes in the environment
almost instantaneously. As new business models emerge along with shorter and shorter
product cycles, approaching obsolescence of existing business models and products is
becoming an almost daily problem. This affects far more than the fashion industry. In
the IT industry, a common perception is that “a week-long delay in the development of a
new product results in a 1% drop in the price of that product (1 week=1 point).”
Constantly emerging new goods and services, moreover, have gotten customers
increasingly enthusiastic about the latest and the new. In this regard, companies need to
overhaul their value chain, from consumer monitoring and product planning, through
production and distribution, to logistics and marketing, while also cutting down on
product leadtimes by sharing information and resources. Samsung Electronics, for
example, was able to sell 360,000 units at Walmart alone by securing the right
inventories at the right time from neighboring countries, including Mexico during
“Black Friday”7 2008, when US demand for LCD TVs surged.
Second, domestic demand-oriented business models, technology, and processes need to
be revamped to suit global conditions. Businesses perceived as declining or limited to
the domestic economy can reinvent themselves as global businesses through innovative
approaches. In the furniture sector, long considered a “local” industry due to its heavy,
hard to ship products, Ikea of Sweden built a globally dominant business around flatpacked, easily shipped, ready-to-assemble furniture. The company reinvented itself as a
multinational furniture provider by outsourcing production to 1,074 suppliers around the
world, keeping only planning, design, logistics, and marketing in Sweden. Japanese
curry restaurant Coco Ichibanya grew into the largest of its kind (1,200 stores) by
standardizing and modularizing portions for rice, curry types, and level of spiciness, as
well as the specific mix of toppings.
A flexible and creative organizational culture is thus the starting point to enabling the
7. “Black Friday” is the day after Thanksgiving in the US, is the beginning of the Christmas shopping
season, and is the busiest shopping day of the year.
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kind of out-of-the-box thinking needed to drastically revamp business models and shake
up the competition. Flexibility and creativity should be encouraged to exploit the
changing environment and to leverage innovation models from other industries. To this
end, a company’s entire organization must resist complacency and continue to
brainstorm to come up with innovative solutions.
How is your own industry changing now, and how are you rethinking your own
business? When rethinking your business strategies, much can be learned from the
nimble maneuverings of fast fashion companies.
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