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 keeping a very close eye on maintaining brand image.
While brands can come and go as they become unfashionable, fashion companies have come up 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 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.
Zara: Setting an Example for the Rest
Zara reinvented the supply chain by first waiting to see the fashion shows of the high end fashion labels (around six months ahead of a season) in order to gain an idea what will be en vogue. After that it designs and produces garments 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 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 evolve during the season. This fast model avoids making fashion mistakes and having to sell at a discount.
All apparel manufacturers 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. Although in H&M's focus is price rather than fashion, it decided to relocate some of its production closer to the market to be faster. For the jobs it continues to outsource to Asia, H&M imposes tighter deadlines to shorten the supply chain.
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.
Globalization of Fashion
While luxury goods companies have been successful selling their products around the world, fashion companies have also become global. H&M, established in Sweden, 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 percent more stores per annum. Zara was originally successful in Southern Europe and Latin America, but later expanded into Asia, some emerging markets, and has now entered the USA. It also opens 8 percent – 10 percent more stores per annum. Inditex has grown into the world's largest apparel company, with more than 20 billion euro in sales and a market capitalization of 90 billion euro.
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.
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.
The jury is out for US fashion designer Michael Kors. After being one of the fastest-growing brands in recent years, the wave of popularity seems to be declining along with sales. Kors handbags were highly desired and the company went into aggressive store expansion to capitalize on its success. Kors went public in late 2011 at a share price of USD 24. It peaked at close to USD 100 in the summer of 2014. But unfortunately for the fashion designer, the apex was followed by an equally sharp drop after the brand grew too aggressively and suffered from overexposure. The company is now closing stores, de-emphasizing logo products, and focusing on the higher end to regain its aura.
The Key to Success
The success of a brand lies in its longevity and resilience. Hermes is a great example of a conservatively managed brand and why the company attracts one of the highest valuations in the luxury goods sector. The Birkin bag created in 1984 is still one of the most desired handbags, even by fashionistas.
Burberry is a great example of a brand that was successfully rejuvenated. The check logo had become overexposed with the British football fans wearing Burberry products and cheap copies spreading everywhere. But with Christopher Bailey as a new designer since 2001, the brand has been repositioned and successfully elevated to become a fashionable luxury brand. Higher-margin accessories, fragrances and babywear were added. The brand jumped from being worth 200 million British pounds in 1997 to 6 billion. But not every brand can stretch itself into new product categories.
Is Fashion Worth Investing In?
In conclusion, fashion companies can be worth investing in when they are riding a successful trend, or conservatively managed, or recovering from a setback. But, to avoid long-lasting pitfalls, beware of overexposure and brand fatigue, and take a close look at the supply chain behind the model. Selling at full prices is the key for profitable growth. Globalization offers great growth opportunities for successful companies.