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The Economics Of Fashion

A Competition Of Brands    8 minute read

The Economics Of Fashion

 

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“Halston, Lagerfeld, de la Renta. What they did, what they created was greater than art because you live your life in it.”

Devil Wears Prada

Easily accessible or highly coveted, fashion, in all its forms, has become one of the pillars of consumerism around the world, and as a critical driver of the global economy, the fashion industry brings in around $2.4trn in value annually. In fact, if the fashion industry were ranked in terms of GDP, it would be the world’s 7th largest economy.

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The Economics Of The High Street

The high street today is dominated by brands such as H&M, Topshop, Zara, Mango and Gap. Of them these and the many others, one stands out. Inditex, the giant umbrella under which Zara, Pull&Bear, Bershka and Massimo Dutti fall, has been bringing in the billions. Inditex is actually so successful that its owner, billionaire Amancio Ortega, has a net worth greater than that of Berkshire Hathaway’s Warren Buffet. Fast fashion works.

Inditex retail stores have extended their tentacles across six continents. They produce 248 million garments each year, bringing 50,000 different products to life, which then get shipped to 6,500 stores in 88 markets.

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The company was founded in 1975 in Coruna, northeastern Spain. During the time of its IPO in 2001, its market capitalisation and outsized profits were comparable to that of other retailers at €9bn. Today, it has a market capitalisation of €87.5bn.

The Inditex business model is part what makes the company so successful. Most retailers business models focus on the two fundamental strategies: stocking less merchandise and updating the collections often. These businesses bulk buy in order to save the cost per garment. If the products are not selling the marketing teams will push harder, and pricing strategies, such as discounts and special offers will come into play.

€87.5bn is Inditex’s market capitalisation

Inditex, on the other hand, is pulled along by data collection from stores in real time. Quantitative data analysts consider how many of the garments are selling while the qualitative analysts are concentrating on why the garments are selling. The key to Zara’s success, therefore, is turning the personal tastes of its customers or predicting the trends before they happen.

They situate 200 designers at the company’s headquarters in Spain, who constantly collect information about the ideas and decisions that are made by consumers across the global chain stores. There are also scouts who probe the streets and malls across the world to understand the latest regional trend. Most other retailers pre-commit about 60% of their production while Inditex only plans for 15% of their designs. So that they can make up the loss quickly, Inditex uses government feedback to utilise 1,500 suppliers who are situated close to the distribution centres in Spain, Morocco and Portugal. They can design, manufacture and deliver new garments to the shop floor within weeks.

The design and logistics process of all Inditex products takes place within the company. This is advantageous because they have the flexibility to adapt to the rapidly changing consumer tastes. Zara and its co-subsidiaries are then able to produce only the clothes that are popular, while giving the consumer a sense that they will sell out if they do not buy the product immediately. The turnover for Zara, for instance, is 15 days.  This relieves costs on inventory and storage costs in every shop worldwide.

This approach can be compared to the one conducted by the Japanese automaker known as ‘lean manufacturing’ and is championed for its ability to reduce the vast quantities of waste disposal. While the business model of Inditex and Zara is not built to focus on sustainability, it ends up succeeding in doing so because a much smaller percentage of Zara’s items go to waste.

Inditex’s Cheif Communications Operator, Jesús Echevarría stated:

“I cannot afford waste. I need to secure that my production must be demanded.”

Zara has set the standard for the fashion industry, because, unlike designer models, who only bring out spring/summer and fall/winter collections twice a year, Zara brings out a number of collections each season. Zara can design, produce and distribute within four weeks, which, is comparatively shorter than the industry’s average of several months.

Zara has achieved all of this with no advertising campaigns. They rely on the power of word of mouth and the location of their landmark retail outlets. None of Zara’s main competitors has achieved the same outcome when offering the latest fashion at the lowest price.

The Economics Of Designers

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The economics of designer brands is a lot more complex. While their designs are beautiful, groundbreaking and setting the tone for the high street and the world, top designers are faced with significant issues. Unlike fast fashion, the luxury companies have problems with their business models.

Most high-end designers have licensing deals which allow goods to be sold under their brand name. This is a major source of revenue for companies like Gucci and Burberry, who sign partnerships with retailers in certain countries. Burberry had formerly signed a 45-year deal with Japan that had brought in £50m in revenue.

This allowed certain Japanese retailers to create merchandise, from dog covers to Scottish Whiskey bottles with the Burberry design and logo. But there are adverse consequences that are associated with the brand image. YSL and Burberry have ended these licensing deals this year as they struggle to take back control of their image. Prada, however, has retained their licensing image. They have chosen to do so in order to access the cosmetics market without needing to invest in or acquire the brands to access industry know-how.

The rise of digital and social media has put a tremendous amount of pressure on the current model. In the case of the British brand Burberry, they have been hit by weak sales on the back of the high streets success. October saw weak sales in Asia, and Burberry is facing rapidly declining profits for the second year in a row. This year they have announced plans for restructuring, including reducing discretionary costs by £20m.

Social media ensures that the model is instantly shareable online and therefore luxury brands have been unable convert the excitement post fashion show onto the shop floors at a pace that will even come close to that of social media. As mentioned previously, the time lag for brands such as Burberry is several months.

Burberry has since changed its model to sharing its fashion shows online and allowing the consumers to buy the items directly from the runway. The new design collections will henceforth be seasonless and branded as February and September as opposed to the former Spring/Summer and Autumn/Winter collections. In the future, Burberry will combine the presentation of its male and female collections on the runway, offering them as one unified collection to be shown at the global fashion events, like the London Fashion Week. The company is also now consolidated under one single umbrella including the brands Brit, London and Prorsum.

Burberry’s new strategy mirrors the problems faced by the traditional fashion show calendar. The pre-internet era left a legacy that is now ‘broken’, events are no longer closed to the press and wholesale buyers, and these designer brands must try to find new ways to compete with their high street counterparts.

The Next Trend

The shift in consumer habits in China, a country accounting for half of the world’s luxury spending in 2015, is set to send ripples through the market. While a few years back Chinese consumers were all about the brands and the logos, they now look towards less recognisable luxury items. This will affect companies with strong brand recognition, like Louis Vuitton, Burberry and Gucci, whose portfolios are largely made up of such products. It will, on the other hand, strengthen other more discreet luxury brands, which also shows a maturing and sophistication of the market.
On the other hands, in the lower segment of market, for the clients who wants to follow trends but cannot afford the top brands, this presents a clear opportunity for Inditex and as digital innovation expands, consumer trends are easier to spot but increasingly fast changing. Companies like Zara are therefore perfectly positioned to lead the market into the new era of uncertainty.

The intensifying geopolitical instability, which includes Brexit, Trump and terrorism also means that many trade deals are either stalled or under threat.

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