Fashion Became a Form of Entertainment, but Fast-Fashion Companies Weren't Ready | 2017's Biggest Business Stories, No. 4

Growth and bubbles driven by enormous capital, the wealth and the problems piled up along the way, and a political direction no one can predict — after more than 20 years of prosperity, all three tangled together in this year's business world. There was no shortage of hot stories, but look closely and business logic was not what decided which companies won and which lost. This is the fourth piece in our series on 2017's biggest business stories.

For the first time, Karl-Johan Persson looked troubled in front of investors. The third-generation head of the H&M Group is living through the hardest stretch the company has known.

H&M, the earliest fast-fashion family business in the world, has now been running for a full 70 years, and Persson's years at the helm have been anything but smooth. In 2009, at 34, he was promoted from H&M's new-business development unit to CEO, just as the financial crisis hit. In 2011, Inditex, Zara's parent, passed H&M in market value and took the title of "world's largest fashion retailer" with it. In 2014, a garment building collapsed in the Savar district of Bangladesh, killing 1,127 people, and H&M, one of the building's main buyers, was pulled into the public outcry.

On December 15, H&M reported its fourth-quarter results for 2017. In the quarter, which ended November 30, group sales fell 4% — the first decline in more than 20 years. The stock dropped 15% after the numbers came out, leaving it at half its 2015 peak. H&M's operating margin has also slid from 23.5% in 2007 to 9.6% today, half of Inditex's.

Persson admitted that "H&M has made quite a few mistakes on physical stores," and that the company needs sweeping change. His answer is to close stores in large numbers while investing in e-commerce, and to hold the company's first investor conference next February.

H&M is not the only fast-fashion group in trouble. Through the first three quarters of fiscal 2017, Zara's sales reached €17.96 billion (about 140.72 billion yuan), holding 10% growth, though growth slowed in the second half. Gross margin has fallen from a 2013 peak of 59.8% to 57.4%, and the stock is down 4.5% — the brand's worst year since 2008.

Gap Group's sales rose 1% year on year in the three months to September 30, but comparable sales at its main Gap brand have not grown for 14 quarters straight.

Fast Retailing, Uniqlo's parent, has done a little better, though its performance at home remains flat, with earnings up just 1.4%.

Store closures have played out like a chain reaction around the world: in February, Zara closed its first flagship store in China, on Chunxi Road in Chengdu; in early April, Forever 21 announced it was leaving Scotland; in August, Gap left Australia; in September, H&M closed the Xidan Joy City store, one of its first flagships in Beijing; in October, Forever 21 closed its first flagship in Japan.

Brands have been swapping executives in the kind of revolving door familiar from the luxury industry, and fast fashion's top ranks face a generational handover: Fast Retailing chairman and CEO Tadashi Yanai hinted in an October interview with Nikkei that he plans to leave in two years; and Inditex founder Amancio Ortega retired for good on December 21, having just stepped down from the boards of 53 of the group's subsidiaries.

Seventy years in, the fast-fashion industry has finally reached a turning point.

For Young People, Fashion Has Become a Form of Entertainment

A fact no brand can hold off any longer: young people no longer get fashion only through stores. New shopping platforms keep appearing, new idols keep appearing, new ways to buy keep appearing.

These days, when you want a new outfit you often don't head straight for the mall. You check social media first, to see what friends or the bloggers and celebrities you follow are sharing; and once the new clothes arrive, you photograph them or post a video to share them yourself. In The Art of Work, Jeff Goins compares the two behaviors to "sprinklers" and "vacuums" — one sharing, one absorbing, two links in a food chain, around and around.

According to a report McKinsey has just published, social media users in the Philippines, Brazil and the UAE spend more than three hours a day on these platforms, and in some Southeast Asian countries more than eight. And according to another survey the US outlet Adweek published this March, 81% of people say friends' posts influence their buying decisions, and 85% say celebrities do. The British fast-fashion retailer Boohoo said in a report that after it paid celebrities on Instagram to promote to fans aged 16 to 24, its profits immediately doubled.

These changes are not simply online retail hitting offline retail. They also mark a change in what fashion means. On one side, getting and sharing fashion information and products quickly has sharpened young people's appetite for new styles — the consumer psychologist Kit Yarrow calls them the "I want it, and I want it now" generation. On the other, fashion has been turned into entertainment.

"Fashion, sports, film, television, books — these are all just different facets of global entertainment consumption," Ariel Emanuel, head of the US entertainment company WME/IMG, told The New York Times in September 2015. The company owns, runs or represents 13 global fashion events, including three of the Big Four fashion weeks — Milan, London and New York.

Fashion weeks look more and more like giant carnivals. Last September, to show its Tommy Now collection, Tommy Hilfiger built "Tommy Pier" at South Street Seaport. The music-festival-scale event, called "Tommyland," came with funfair rides, graffiti artists, a roller coaster, live music, and a boutique selling pieces straight off the runway. The designer explained: "We're delivering on a desire for instant gratification, blending fashion with pop culture."

In all sorts of shopping and marketing, "influencers" and "celebrities" have taken over as well. As we showed in our annual business piece on influencers, the top of the 2017 global beauty brand rankings went to two newly launched celebrity brands — Rihanna's Fenty Beauty and Kylie Jenner's Kylie Cosmetics. In China, luxury houses have started picking young celebrities of every kind as "brand ambassadors" while also working with fashion bloggers on WeChat: Givenchy released a bag with "Mr. Bags," Gucci sold its holiday collection through gogoboi's own store, Buda Jingxuan, and Burberry recently launched a limited edition with Kris Wu.

Buying fashion has itself taken on more of the qualities of entertainment. For a long time, the things people bought most online were books and music. But once returns and exchanges became reliable and the time and money it took to shop online fell, buying a dress, a lipstick or a bag became no different from listening to a song or scrolling through Weibo — all the more so as mobile payments and phone shopping spread.

Zhang Ying, 27, works in Beijing, earns 100,000 yuan a year and buys six or seven pieces of clothing on Taobao every month; when she's out and runs into a sale at H&M, Zara or Uniqlo, she'll pick up one or two more on the spot. By her account, some of the new clothes turn out not to suit her and go straight back; others she tires of after a few wearings and resells on Xianyu. In 2017 she sold 12 pieces in all and made more than 2,000 yuan.

She calls the whole thing "pretty fun." "When I've got nothing to do, I check whether the shops I like have new arrivals, grab the new pieces, unpack the parcels, then look at Xianyu to see if anyone's left me a message — the time goes fast."

Against the New Players, Fast Fashion Isn't Fast Enough Anymore

Fast Retailing is pooling every resource it has to make the company run faster — for Uniqlo, that means cutting the time from design to shipment to about 13 days, even though "Uniqlo is not a company driven by trends."

Gap and H&M are trying to speed up too. Gap's plan is to shorten its product cycle from 10 months to 8–10 weeks; H&M has named no figure, but keeps repeating that it must "improve supply chain efficiency."

By rights, fast-fashion brands should have been the ones to gain from these changes in how people shop. They were, after all, the only retailers that could put huge volumes of the newest styles in front of a mass audience at low prices. And gain they did: by McKinsey's count, sales across the fast-fashion industry grew 20% over the past three years.

But once everything had been fast-fashioned, the people who invented the model suddenly could not play their own game.

Leave aside the high-end brands' see-now-buy-now shows and the luxury houses building faster e-commerce of their own. Inside the very same market, new rivals are pulling shoppers away at a higher speed.

1. Ultra-fast-fashion brands

Competing head-on with the big four fast-fashion brands is a set of online "ultra fast fashion" labels, such as the British e-commerce companies Asos, Boohoo and Missguided. They price lower and move faster. In a report this April, the retail research firm Fung Global Retail & Technology found that an ASOS product takes 2 to 8 weeks from first concept to final sale, Boohoo needs only 2 weeks, and Missguided just 1. They also add new items faster and in greater numbers: Boohoo adds 100 pieces a week, Missguided 1,000 a month, ASOS 4,500 a week.

By comparison, Zara and H&M need 5 to 6 weeks to finish a new collection. They have in fact sped up a great deal — 60% of Zara's products are sourced from its European home base (mainly Spain and Portugal), it now puts out as many as 20 collections a year, it restocks its best sellers in 2 weeks, and new arrivals reach stores twice a week. H&M has raised its own output to 16 collections a year.

Compared with Zara, H&M and other chains that grew up on department stores and shopping malls, an e-commerce background has spared these newcomers the heavy cost of building physical channels. They also hold inventory costs down better, producing only small first runs and then adjusting to what customers say. At an ordinary fashion brand, the share of merchandise sold at a discount can reach 50%; at an ultra-fast-fashion brand, it is only 15%.

And remember, young shoppers are nowhere near as loyal to brands as the last generation. In a McKinsey survey, two-thirds of millennials said they would switch to a cheaper brand if it cost 30% less.

The accounts bear this out. ASOS, Boohoo and Missguided grew 2016 revenue by 38%, 51% and 75% respectively. Same-store sales growth stayed above 30% at ASOS and above 40% at Boohoo, while Zara's and H&M's slipped to 10% and 4%.

2. Online brands that sell direct to consumers

In early December, Everlane — an online brand that had always said it would never open a store — opened its first shop on Prince Street, in New York's SoHo shopping district. The store, more than 180 square meters, stayed packed for over a week after it opened; the tenants who had vacated that space before it included Zara and Gap's Old Navy.

Founded in 2011, the brand built its name on price transparency, with designs close to H&M's and Uniqlo's — mostly basics. It started with a run of 1,200 T-shirts that cost $7.50 each to make and now sells more than 500 products. There are already many design brands like Everlane that started online and sell direct to consumers (DTC), and they have grown more specialized: Warby Parker for glasses, Bonobos for menswear, Daniel Wellington for watches, Mismo for backpacks, Brands for sneakers.

Against traditional fast fashion, they have the advantage in speed, price and design. And selling online means they can become known in a new market without opening stores at H&M's pace. Last October, Everlane invited users on its site to vote for their own country, with the winner possibly getting permanent international shipping in future; mainland China came first with more than 8,830 votes, ahead of Australia (2,165), the UK (1,977), Singapore (787) and Hong Kong (725).

3. Instagram fast-fashion brands and independent fast-fashion shopping sites

Fast-fashion brands born on Instagram, along with some independent fast-fashion shopping sites, may take a share of the pie too. The better-known names in the first group include Represent, KNYEW and MNML. In fact you can see more and more brands like this on Taobao and Weibo as well. Their designs follow whatever is trending on Instagram at the moment, they can restock several times a week, and they set order sizes by how customers engage and what they say.

The second group includes sites like Style Mafia, Finery London and W Concept, which gather many small designer labels. Their prices run a little higher, but they carry more SKUs, restock quickly, and many of their styles are also fast copies of the big houses' runway looks.

4. Clothing rental and subscription-box companies

To satisfy the wish to wear new styles often and cheaply, there are also rental companies like Rent the Runway, and clothing subscription-box companies like Stitch Fix.

Rent the Runway, founded in 2009, has raised $150 million across five rounds. It began with gowns rented for occasional events — parties, dinners, weddings — and only later took on everyday clothes. Its plans include "Pay As You Rent" at $30 to $800 a rental, a $65-a-month "StylePass" and a $139-a-month "Unlimited." Le Tote, Rocksbox and VillageLuxe.com work much the same way; in China there are Nüshenpai and Yi Er San, among others.

Stitch Fix, a subscription-box company founded in 2011, went public this year; revenue reached $730 million last year, and it has been profitable three years running. In short, it is a fashion retailer that wraps a stylist's service inside a subscription box. You submit some basic information and Stitch Fix mails you a box mixing pieces from different brands, chosen on a stylist's advice. Stylists are also happy to give one-to-one suggestions and point you toward new labels.

5. And yes, there's Amazon

For US fast-fashion brands like Gap and Forever 21, the most obvious rival may be Amazon. Last year Amazon became the largest online clothing seller in the US, with sales of $16.3 billion — more than the other five in the top group combined: Macy's, Nordstrom, Gap, Kohl's and L Brands, the parent of Victoria's Secret.

By December, Amazon had also launched at least 8 fashion brands of its own. The newest, The Fix, is pure fast fashion: priced between $49 and $139, new items every month, Prime members only.

For Zara and H&M, whose largest regional market is Europe, the equivalent rival is Zalando. Founded in 2008, this European retailer buys from more than 2,000 brands and supplies 15 European markets. Revenue in the first three quarters of this year grew 28.7% year on year to €1.0747 billion, and its shares are up 27.5% for the year.

None of Fast Fashion's Answers Will Work Quickly

Fast fashion moved online far more slowly, and far later, than it moved onto the high street. H&M set up an official website back in 1997 but only added shopping in the past few years. Zara was a little earlier, opening online sales in 2010 — still 10 years behind ASOS.

Part of the reason is that stores alone were enough in the early years; part of it is the limits of a low-margin model. Anne Critchlow, an analyst at Société Générale, explained in an interview with BoF that value retailers — generally, retailers that make their money selling large volumes in bigger stores rather than by marking prices up — are the group in apparel retail hit hardest by online competition, because "for a retailer like that, trying to sell through online and offline channels at the same time seriously erodes margins."

That break between online and offline also means fast fashion's showing on social media often has little to do with its sales. In a year-end ranking of social media popularity, H&M, Topshop/Topman and Forever 21 took the top three places. In business terms, all three had a disappointing year.

As things stand — shopping habits changing, rents climbing offline, department stores battered — e-commerce is the only road left for fast fashion to grow on.

Inditex, Zara's parent, has put the weight of its e-commerce expansion on Southeast Asia, a market where Alibaba, JD.com and Amazon have all started spending harder too.

This December, Inditex also announced plans to sell 16 of its stores for €400 million (about $471 million), 14 of them at its Spanish headquarters and 2 in Portugal. Some analysts read the plan as preparation for expanding e-commerce in its home market of Spain. Credit Suisse estimates that online sales are currently only 5.5% of Inditex's total.

Besides e-commerce, the other route traditional fast-fashion brands are taking toward growth is expanding overseas. Uniqlo is the clearest case. This year it announced, one plan after another: opening 20 to 30 stores a year in the US; doubling its European store count to 100 within three years; entering India; and, in China, where it normally opens about 100 stores a year, raising that pace by 50% over the next two to three years to reach 1,000 stores by 2020.

The accounts show overseas markets have indeed done much to revive Uniqlo. In fiscal 2017, revenue at home grew just 1.4% and operating profit fell 6.4% year on year, while overseas revenue rose 8.1%, driven mainly by Southeast Asia, China and South Korea, where it had expanded heavily before.

Still, settling into a market with a different culture and a different retail trade has never been simple. H&M entered India last year and took 45.5 billion rupees in sales within six months, turning a profit. But in the US, its second-largest market and 13.3% of its sales, it ran into a rival's expansion: Primark, the British fast-fashion brand founded in 1969 and known for very low prices, sells comparable items at a half to a third of H&M's prices, and its sales per square foot ($682) are far above H&M's ($331).

H&M and Gap seem to prefer solving the problem with sub-brands.

H&M launched two new "lifestyle" labels this year, Arket and Nyden, and in its results COS, & Other Stories, Monki and Weekday all look much better than the main brand. At Gap, the sub-brand Old Navy has become the engine of growth. In September, Gap said it would close 200 Gap and Banana Republic stores over the next three years while opening 270 Old Navy and Athleta stores.

For now, though, the sub-brands cannot carry the load. Most of Gap's and H&M's sales still come from their core, namesake brands, which are also still the best-known names they have in every market.

China, Fast Fashion's Hope?

For many fast-fashion brands, China is one of the most important markets for keeping growth fast. But now part of their attention abroad has gone to Southeast Asia.

Making money here is clearly no longer as easy as it once was. This February, Zara closed its first flagship store in China, on Chunxi Road in Chengdu; in September, H&M closed the Xidan Joy City store, one of its first flagships in Beijing.

More than 10 years after arriving in China, fast fashion has run from good years into a slump. The change has tracked, in large part, the swings in retail property.

Take H&M, which expanded fastest. Between 2012 and 2016 its store count in China went from 134 to 444, more than twice Zara's. It managed that pace by following commercial property development in first- and second-tier cities closely, moving into Joy City, MixC and Wanda Plaza malls across the country one after another.

But from 2013 on, regional bubbles had already formed in commercial property. One set of figures we have cited more than once: in 2013, development investment in commercial retail property in China reached 1.1945 trillion yuan, up 28.28% year on year, and with it came vacancy rates of 15% to 20% at shopping malls in Chongqing, Shenyang, Qingdao and elsewhere — commercial development had run ahead of what the market actually demanded.

Today, H&M's average annual sales per store in China have fallen from 32 million yuan in 2012 to 19 million yuan in 2016.

From 2013, H&M began pushing its stores down into second- and third-tier cities. Of the 77 stores it opened in China in 2016, 53 were in second- and third-tier cities.

But going down-market does not make the competition any lighter. "The mass market in third- and fourth-tier cities has cheaper options, and the people with money to spend buy better-made, pricier brands — big womenswear labels like Ports and Jorya. Fast fashion ends up stuck in between," one industry insider said in an interview with the self-media account Retail Business School.

On top of that, over the past 10 years fast fashion has already done its work as a basic education in fashion. That first wave of fast-fashion shoppers may well have moved up in taste and in spending power, and their choices are far wider now.

Seen that way, H&M's sudden change of mind — it had said it would run only an official website in China, and now plans to open a flagship store on Tmall in 2018 — counts as one of the few remaining growth options that might actually work.

The decision came late.

Cover image from GQ, Pinterest and Zara