by Martin Lariviere
Inditex, parent company of fashion retailer and go-to ops example Zara, reported strong earnings this week as they increased the fraction of their sales coming from outside of their home market of Spain (Inditex’s First-Half Profit Soars, Sept 23, Wall Street Journal). They have also ramped up web sales. While Inditex has done well, there is an interesting counterpoint in the press right now questioning whether fast fashion, a retail movement of which Zara is an exemplar, is falling out of favor. Here is how the BBC put it:
There are two issues here. One is a question of taste/consumer mood. If money is tight, it may be better to buy one more expensive piece that can be used over a longer time than two or three cheap chic pieces that will either wear out or look hopelessly dated in a matter of weeks. There is also the question of what’s so special about fast fashion if everything is fast fashion (Fashion chains far from cheerful about future of cheap chic, Sept 19, The Observer).
Wolfson’s estimate that sales volumes could decline by 10% as a result of price hikes is compounded, says Saunders, by a sea-change in shopping habits: “There has been a psychological shift because everyone has bulging wardrobes full of stuff. Fast fashion has just become so ubiquitous that it is not a novelty any more.” He believes some shoppers are trading up and spending more on fewer items of clothing.
That suggests that some firms might back off from rapid style introductions and put more emphasis on longevity and build (over design) quality. I am not convinced that is an over all winning strategy. Classic styles and good quality sounds like department store offerings. Young shoppers don’t usually prefer the Macy’s (NYSE:M) of the world. Distinctiveness and fresh offerings at reasonable prices are things a large number of buyers will value and probably always will value. The real question is likely to be more which of the current fast fashion line ups can survive a shake out.
The other part of the story is rising costs, notably for labor and cotton. From the Observer article we have
Debenhams’ deputy chief executive, Michael Sharp, explains that 60% of the cost of clothing on the shop rails is in the fabric and about 30% of the fabric cost is in the raw material: “The approach Debenhams is taking is to pass it on to customers and we think most other retailers will have to do the same.” The department store chain says its prices will rise, like Next’s, by up to 8%.
Sharp also points to “increased labour costs all around the world”, less spare capacity in Chinese factories, rising freight costs and the unfavourable impact of foreign exchange movements as other pressures being faced by retailers.
From the Wall Street Journal (Cotton Surge Could Rip Apparel Retailers, Sept 23) we have the following graph of cotton prices:
At one level, this reinforces the shift in consumer tastes. If retailers have to raise prices because of higher costs, that forces customers to think twice about what they buy. But it also brings us back to Inditex.
Their bread and butter is their European network of stores supported by a largely European network of suppliers. This has generally meant higher labor costs relative to other firms that source more from Asia. Inditex has then relied on superior logistics and inventory control facilitated by local production which has then served to offset the higher production cost.
Global increases in input prices then seem to strengthen Inditex’s hand. Higher cotton prices affect everyone but it also means that Zara’s higher labor costs are then a smaller portion of total cost. On top of that, they are less exposed to raising Chinese wages. If there is a shakeout coming in fast fashion, you gotta like Inditex’s chance of coming out ahead.