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Fast Fashion Needs New Models

Fast fashion is reaching an inflection point, say analysts. After a decade of blistering growth, it’s possible that the period of quick, easy returns is over. A new strategy might be needed, as nervous consumers demand higher quality goods and aren’t afraid to pay a little more for them. Some firms are pursuing this path, looking to more expensive goods and a slightly wealthier consumer to drive continued growth. Others, notably in Europe, are doubling down on cheap, quickly made clothes.

These two strategies are essentially opposing bets on the economic forecast. IMF and World Bank analysts predict modest growth in the coming decade, with a gradual recovery in the United States and continued uncertainty in Europe. The wild card, and the source of the differing strategies, is China.

Right now, China and Latin America are rapidly growing economies whose citizens have rising disposable income. Both have large populations of upwardly mobile young people — the target for quick, cheap, fast fashion clothes. The two economies are tightly joined — China sends machine tools and manufactured goods to Latin America, and Latin America sends coal, iron, and other raw materials to China.

If growth in China is based on speculative real estate bubbles and artificially high infrastructure spending, as some have hypothesized, then the inevitable deflation will not only wipe out China as a high-growth market for apparel, but will also make a serious dent in growth prospects in Latin America, where many fast fashion firms have planted flags.

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In a slowing economy, consumers lose interest in quick, disposable clothes. Frugality takes over, and consumers prefer to spend their money on more durable purchases that promise greater long-term use and values.

Firms that are focusing on more expensive clothes are, in essence, betting on slower growth, and looking to higher margins to boost profits. Firms that are pushing more quick-turn goods are betting on accelerating demand, and are hoping that profits will increase due to higher volumes.

Here’s how the leading fast fashion firms are navigating this tricky situation:

Fast Retailing, the Japanese fast fashion firm that owns Uniqlo, missed its earning target recently, causing a drop in its stock price. The move was blamed on falling consumer demand in Japan, leading Fast Retailing President Tadashi Yana to say that his marketing emphasis is starting to shift from low-priced goods to higher-priced goods, with an eye toward improving gross margins.

On the other hand, Inditex, the Spanish firm that owns Zara and several other chains, beat its profit forecast and shares were up. Despite this good news from Fast Retailing’s main competitor, gross margins were down, and owner Amancio Ortega stated that the company is not immune from the ongoing European economic crisis. Their strategy to boost profits? Lowering prices in Southern Europe, which likely accounts for the erosion of their gross margin.

Hennes & Mauritz (H&M) reported a similar problem, with sales rising but gross margins falling, largely due to markdowns in southern Europe. Despite the markdowns, the company attributed much of the sales increase to good weather — in essence, a neutral bet.

Mango, the smaller European fast fashion firm, is charting a course that balances low-prices with higher margin items. Their model, which aims to address the needs of a more diverse range of consumers, could be the key to navigating an uncertain retail landscape.

Mango made their money on quick-turn, disposable party clothes. The clothes featured distinct and flashy designs and were priced to be worn once. With the recession in Europe, however, Mango started losing sales. Consumers were no longer able to be cavalier with their clothing purchases. As a result, Mango recalibrated – they now offer clothes that are more versatile, better made and slightly more expensive. At the same time, they haven’t abandoned the styles and price points that made them famous.

This strategic positioning reflects a more nuanced understanding of the consumer market. In the current market, wealthy consumers are cautious, but they aren’t broke. They may still want a party dress, but they’ll pay more if they can also wear it to work the next day.

To make the shift in their product line, the company has diversified its sourcing base, developing relationships with a few high-quality manufacturers in Cambodia for its top end goods. They are also keeping much of their commodity production in China, to capitalize on low prices for items that are slower turn. This strategy is addressing the big problem at H&M, Inditex, and Fast Retailing – falling margins – without pulling low priced clothes from shelves, or sacrificing quality. Previously, Mango relied heavily upon Bangladesh for apparel production but came under critical fire after it was revealed that it manufactured clothing in one of the factories housed in the collapsed Rana Plaza complex, a disaster which killed over 1,100. Its defense that sourcing decisions are left to its suppliers did little to placate its detractors.

The shift also makes sense demographically. Affluent consumers are aging, and the “echo boom” generation – children of the baby boomers – is largely out of college and entering the workforce. Their clothing needs have shifted, and fast fashion firms that profited from the fickle tastes of younger shoppers will have to adjust their lines accordingly.

There likely isn’t a correct or incorrect strategy. No one knows how the economy will change in the next few years (though guesses abound). Firms that are concentrating in emerging markets are counting on high volume, and firms that are focused on developed markets, such as Europe and United States, are hoping higher margin sales will push their profits up. In both cases, a serious economic shift for the better or worse could derail their strategies and leave firms rushing to recalibrate around new consumer tastes — business as usual, for fast fashion.