GLOBAL INVESTOR 1.16 — 30 MANAGING THE SUPPLY CHAIN THE RISE AND FALL OF FASHION COMPANIES It’s all about the key factors of supply and demand. For fashion companies, the secret to achieving long-term success lies in effectively managing both their supply chain and distribution channels, while at the same time keeping a very close eye on maintaining brand image – be it the apparel labels they sell, or the company brand itself.
GLOBAL INVESTOR 1.16 — 31 hile brands can come and go as they become unfashionable, fashion companies have emerged with branded stores, but no branded products, and become a worldwide success. The key to succeed as a fashion company is the efficiency of the supply chain. The importance of the supply chain The unbranded fashion company Zara, owned by Inditex, and to a lesser extent H&M are fashion houses. Their stores are branded, but their clothes are not. They sell fashion. Zara has shaken the fashion world with its fast supply chain, allowing it to de-risk fashion and sell at full prices, which is the key to a fashion company’s profitability and value. The old model for an apparel company was to design a collection, produce prototypes, send it to production (most often outside the company) and have it delivered to stores – with the whole process taking a year. When the product reached the store, the company might have missed the latest fashions of the season, but would still have to promote and sell its stock because the orders were already passed on to its suppliers for most of the collection. This process is called a “push” system. For more on the supply chain, see p. 48 Zara reinvented the supply chain by first waiting to see the fashion shows of the highend fashion labels (usually around six months ahead of a season) in order to gain an idea of the fashions for the next season. After that it designs and produces garments all at the same location in its headquarters in Spain and, within a few weeks, delivers the products to the stores. Zara owns its supply chain and all of its stores, whereby the stores report what is and what is not selling, so that Zara only produces what is in demand. Its designers are on the street or watching the Internet blogs to see the new fashions, so that the collection can continue to evolve during the season. This fast model avoids making fashion mistakes and having to sell at a discount. All apparel manufacturers, from Benetton and Vögele to the high-end fashion labels, have had to learn from this model and try to adapt their supply chains accordingly. H&M, which designs in Sweden, but then outsources production to Asia in order to reduce costs, has had to evolve as well. While H&M is more about price than fashion, for its fashion part it has relocated production closer to the market in order to be faster. For the jobs it outsources to Asia, H&M imposes quicker deadlines to shorten the supply chain. It has also developed capsule collections with well-known fashion designers to create more interest in the company. Japanese retailer Uniqlo, purchased by Fast Retailing in 2005, has an excellent inventory control system, and puts the right product at the right time in the right location. However, Uniqlo has a small number of designs that tend to be more simplistic and practical than those of Zara or H&M. It manufactures its clothing in Japan, but also outsources some work to China. Uniqlo organizes sports events to create interest for its brand with tennis player Novak Djokovic as its global brand ambassador. More exclusive fashion brands tend to have less efficient supply chains and lower volumes, and hence returns are more difficult to generate. The most promising ones tend to be acquired by large luxury groups that can use their negotiating power for advertising or real estate to help improve returns. Globalization of fashion While luxury goods companies have been successful selling their products around the world, fashion companies have also become global. H&M has its roots in Sweden and was first successful in Northern Europe, but has since successfully expanded into Southern Europe, China and the USA. Global growth opportunities allow it to add 10% more stores per annum. Zara was originally successful in Southern Europe and Latin America, but later expanded into Asia, Russia, and other emerging markets, and has now entered the USA. It also adds 8%–10% more stores per annum. Inditex has grown into the world’s largest apparel company, with more than EUR 20 billion in sales and a market capitalization of EUR 90 billion. H&M generates around EUR 20 billion in sales and has a market capitalization of EUR 50 billion. Each company holds more than 5% market share in only a few markets. See also the article on fashion in India, p. 14 The pitfalls of fashion While successful models have emerged, the history of fashion is marked by failures too. One of the most common pitfalls is to become overexposed. Under new CEO Michael Jeffries in the 1990s, Abercrombie & Fitch became the top brand for teenagers. Stores with loud music, the smell of cologne, teens dancing on the floor, and a popular logo led to worldwide success. But when the logo became overexposed, it lost its teen appeal and customers moved away. The company has now been struggling to revive the brand for the past five years. For a related article on fashion marketing and advertising, see p. 26 The jury is out for US fashion designer Michael Kors. After being one of the fastest-growing brands in recent years, the World’s largest apparel retailers Both companies showed similar market cap values until 2010, when Inditex (Zara) took a more vertical trajectory, while H&M continued at its previous pace. Source: Bloomberg in EUR bn 120 100 80 60 40 20 0 May 01 Inditex market cap May 05 May 10 H&M market cap May 15
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