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Fast Fashion Model Makes Quick-Turn Winners and Losers

Much ink has been spilled over the environmental sustainability of fast fashion, but what about the economic sustainability? With t-shirts as low as $5 and jeans as low as $10, many companies selling fast fashion have low margins and are particularly vulnerable to materials costs, transportation, and wage increases. Will these vulnerabilities sink the model? Short answer: for some, but not for everybody.

Leading fast fashion firms such as Inditex (parent company of Zara) and Uniqlo split 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 the retail floor. As wages rise in China, this sourcing matrix is becoming less competitive.

Staying ahead of the curve means forecasting demand to maximize low-cost capacity, without sacrificing quick turn 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 they own themselves, and they keep those factories about 50% unbooked so they can respond to quick trends. Because the factories are so close to their 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.

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This level of sophistication 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 can rely on higher margin fast fashion items in order to cut their losses on core items, and avoid passing costs on to customers.

For wholesalers and most U.S. retailers, it’s a different story. Those companies generally 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 basic apparel.

In essence, they make the same fast fashion goods, poorly, on a time line that misses the demand peak. It works because they can offer the apparel at lower cost, but consumers are losing interest in this model.

“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.

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

Price pressure on wholesalers is already driving them to choose unsafe factories, putting reputations on the line and risking the lives of workers. That’s the model that is unsustainable. It’s bad for business, it’s bad for growth, and it’s bad for humanity.