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Fast Fashion Reinvents Retail; Sweeping Innovation in Supply Chain Management

A major new report that closely studied the shopping patterns of teen consumers pinpoints the essential allure of fast fashion and its irrepressible march to retail dominance.

The report, issued by the Cowen Group, entitled “Fast Fashion Headwind Will Grow for Retailers-Ahead of the Curve Series,” conducted a series of “shop-alongs” in which retailer experts accompanied teens while shopping for apparel “to gain a better understanding of the appeal of Fast Fashion and why these retailers continue to gain significant market share in N. A. [North America].”

According to the Cowen Group, fast fashion retailers like Forever 21, H&M and Zara especially appeal to female teens for two primary reasons. First, the apparel is so inexpensive shoppers can buy a garment, wear it several times and then discard it or give it away, allowing them to experiment more with their attire and stay on top of new trends as they emerge. In some cases, female teens will buy a product with the intention to wear it only once. Additionally, these chains are packed with an enormous amount of inventory, offering a startling variety of offerings, especially attractive to young consumers hungry for diversity and novelty. “The core of Fast Fashion’s strategy is to quickly turn low-priced apparel and accessories to entice consumers to consistently update their wardrobe in line with rapid and sometimes unpredictable fashion trends.”

At the heart of fast fashion’s ability to “cause additional disruption to specialty retail” is its supply chain efficiency. The Cowen report emphasized this advantage which more traditional retailers are straining to duplicate with mixed results. “Beyond just offering on-trend fashion and low price points, each major Fast Fashion retailer has a very rapid design process which is highly integrated with that company’s massive supply chain infrastructure. We expect H&M, Forever 21, Uniqlo and Zara to grow sq. footage at a 10%+ CAGR the next five years in N. America.”

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The sum result of the rise of fast fashion is that “teen retail faces structural headwinds” that are considerable. More than a fleeting trend, the fast fashion business model “altered the way the consumer perceives and shops for value on a global basis.” This means that teen retail chains like Abercrombie & Fitch (A&F) and Aeropostale will struggle to remain competitive in the future unless they undergo massive internal reorganization of the kind that might not be feasible in a timely way.

Innovations in supply chain management are key to fast fashion, especially regarding inventory. “Broad and shallow inventory is the key to executing Fast Fashion with upfront commitments being very small with a large open to buy. Large bets on a specific style or category create markdown risk that Fast Fashion retailers do not want. To execute this strategy it requires massive supply chain infrastructure and the ability to commit to fabrics and manufacturing capacity seasons in advance.”

Even a practice as basic as the buying of yarn in bulk from suppliers is executed differently within a fast fashion model. “Fast Fashion retailers tend to buy millions of yards of fabric far in advance of production, since they do not know what style or fit they will need to chase into. The factories in turn are fed consistent business and orders from the Fast Fashion retailers. According to our supply chain contacts, the concept of blocking capacity to mills and factories is becoming more prevalent and competition for factory capacity that can provide the speed and quality retailers need is becoming more prevalent.”

This decision-making expediency is only possible with a decentralized hierarchy that empowers middle managers to execute autonomously. The more the power to make real determinations is pushed up the chain of the command, the longer lead times will be. “The decision making process of the buyers and merchandisers is extremely rapid, as decisions to commit to a style and have it go from factory to floor in as short as three weeks requires a cultural decision within the brand to empower designers and merchants. A slow moving design processes with multiple levels of management/merchant input is the antithesis of Fast Fashion. Inditex actually has designers inside many of the factories making decisions on orders and production.”

All of this might take a bite out of mall foot traffic, as fast fashion retailers look to shift more business to a ecommerce. “In our view the competitive environment has been exacerbated by the growth in total doors in the U.S. Specialty Retail sector particularly among apparel retailers. As cheaper Fast Fashion concepts proliferate, the need to operate brick and mortar locations may decline, particularly as the consumer increasingly shifts spending online. There have been few concepts decreasing the amount of doors operated despite mall traffic that is compounding lower and the significant shift in spend online.”

H&M is an illustrative example of the intensity with which fast fashion retailers are eyeing the opportunities potentially contained within cyber-sales, which could lowers costs and speed up inventory shifts even more. “H&M launched its e-commerce platform in the United States in August 2013, and the brand’s presence online should create additional brand awareness and prospects for further market share gains. H&M also recently opened a store in The Outlet Shoppes at El Paso. This is the first store the company operates in an outlet center, and while price points are the same as H&M’s full-price stores, the price points are still below those of many specialty apparel and accessories retailers in the outlet channel on certain key items. According to industry sources, H&M has signed two of the biggest real estate deals in the United States in 2014.”

At least in the short term, though, the fast fashion upstarts plan to expand their brick-and-mortar presence as well. “The fight for market share in the mall, particularly within the apparel category, may get more intense over the next several years as Fast Fashion concepts expand into more brick and mortar locations. Competition for declining mall traffic remains intense, and pricing power within non-athletic based apparel remains non- existent, which could be dilutive to gross margin as 2014 and 2015 progresses, particularly given the state of inventory growth throughout the group — which remains dramatically above sales trends due to competition for traffic and weather dislocation.”