Fashion

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