Reacting to changes
Central to fast fashion is the dramatically reduced lead time from product design to store shelf. What would normally take six to 12 months, a successful retailer such as Inditex (the Spanish owner of Zara) has cut to as little as 15 days.
This agility to swiftly identify and act on emerging trends seen via social media engagement, as well as sales data, is a powerful advantage to spur sales growth and manage inventory.
Inditex has also established production sites closer to its main markets. Despite higher costs, the company sells more at full price rather than producing stock at lower cost in cheaper sites. Its focus on limited output of fashionable items at attractive prices creates a constant pull for customers into its stores and online.
Sporting goods company Adidas is also adapting to fast fashion, offering shoes that shoppers can customise, manufactured locally in developed markets at a low scale. Adidas aims to bring the lead time for half of its products down to 45 days, from nine to 12 months historically.
"Key to success in the new fashion retail environment is the combination of high product differentiation and high operational flexibility," says Inderst.
Online retailers such as Zalando and ASOS are also benefitting from millennials’ increasing online research and purchasing patterns, while focusing on fast and free delivery to provide a customised experience.
Pain in the high street
Traditional bricks-and-mortar stores are facing serious challenges: by producing large quantities of garments in remote locations, their items are often out of favour by the time they reach the stores, leading to costly markdowns. Many also struggle to establish a strong presence online.
Macquarie estimates that the seven European high street retailers it covers will expand sales by an average of 2 per cent a year to 2018, mostly through costly store openings. That compares to 11 per cent expected for Inditex – with stronger same-store sales – and compares with average growth of 26 per cent for ASOS and Zalando.
More broadly, operating margins for the sector will average 14.4 per cent by 2018, down from the peak of 17.5 per cent in 2012, Inderst says. Among high-street retailers, Inditex is winning and bound to improve its margins in the next three years.
"Many fashion retailers are struggling to evolve as quickly as their customers have," Inderst says. "In the era of ‘show now, buy now, wear now at a good price,’ they’ll need to rethink their entire sourcing and product strategy to remain relevant."
For more information on the reports ‘Online Fashion' (19 September 2016) and ‘Global Fashion – Faster Retailing, Please!’ (18 February 2016), contact Macquarie Research.