Is Covid-19 the catalyst for the end of fast fashion?
Updated: May 9, 2020
Barcelona, Spain. Day 55+ after lockdown and fashion stores have not opened yet. Best prospects say they may start opening next Monday, April 11th but with prior adoption of many safety measures to prevent from virus resurgence.
Although there is a wide variety of prospects about the impact of the global lockdown, they are all from bad to worse. Experts say that Covid-19 may suppose the biggest economic contraction since WWII.
During these last 6-8 weeks we have been witnessing the changing consumers’ consumption habits: from buying survival and safety goods (aka “essentials) to buying home entertainment (TV streaming services, in-house fitness, puzzles,…) and indulgence goods.
But, during all this period, fashion sales have dropped to almost 90%.
Main reason for this sudden, unprecedented drop is that "no-one wants to buy clothes to sit at home in," as Next's boss Simon Wolfson said.
Despite the store openings in few days, prospects for fashion consumption in 2020 have been reduced by 50% in Spain not only because of the lockdown but also due to a decline in consumer confidence as the expected variation of GDP will be around -10% and unemployment rates are also expected to brutally rise up to 20%. Globally, fashion revenues are expected to contract by 27% to 30% in 2020, according to McKinsey.
In periods such as the one we are living now, people focus on securing the basics, therefore all big expenditures and non-essential goods are postponed. And, what is more expendable than fashion?
In this context, many voices are saying that Covid-19 may be beginning of the end of fast fashion but I’m not that sure I would subscribe to this statement.
The principles of fast fashion
Fast fashion is a segment of the apparel industry which aims to meet the rapidly changing preferences of a segment of customers that want to follow trends in fashion but at a fraction of the cost.
The emergence of fast fashion happened in the early 2000’s, when some companies made possible to bring designs from the catwalk to the storefront at a lightning fast pace, and, more important, at affordable prices.
Needless to say, fast fashion allowed access to all consumers to express themselves through clothing as never happened before.
In order to meet a steadily growing demand for fashionable garments at an affordable cost, fast fashion companies (Inditex and H&M would be the most well-known) have developed not only rapid design-to-delivery mechanisms but also efficient supply chains, lowered production costs and used low quality fabrics.
So, fast fashion has been on the spotlight for many years due to its success but also due to the controversy behind some of its policies to reduce costs.
Fast fashion before Covid-19: New competition pushing
As per the revenue growth figures, fast fashion may be considered a case of success, as it was historically competing against “legacy” fashion brands by providing fashionable garments at very low prices.
But, with the digital revolution, new categories have appeared to get the share of budget for traditionally fast fashion items. Therefore, competition now comes not only within the fast fashion industry players but also from the apps, gaming and digital subscriptions such as Netflix.
As a result of it, the growth in the share of spend in fast fashion has been reduced and many brands are struggling to grow, which means, they are through financial issues due to unsold inventories that, because of the nature of fast fashion, are worthless in few weeks. Most relevant cases would be H&M, that reported $4.3b of unsold inventory in 2018, or Forever 21, who went bankrupt last year.
Covid-19, unexpected and complete stop in consumption = killed by inventory
Succeeding in retail is probably about the ability to manage the risk of unsold inventory and this becomes especially critical in fast fashion whose exposition to product obsolescence is the highest as it is only a matter of weeks.
Some reports say that, in a normal year, unsold inventory accounts for 30% of total stock. Then only imagine the impact of an unexpected stop in consumption for almost 2 months for a segment whose product waves are from two weeks to 3 months maximum. As an example, Zara just announced to write off nearly €300m of inventory early in March, as it was expected to closure half of its stores, which is roughly half of the stock for 1 wave.
So, as said before, if prospects for fashion are tough without the Covid-19, now there will be really hard times for those fast fashion brands that don’t have a robust financial position to cope with such high write offs. According to McKinsey, if stores remain closed for two months, 80% of publicly traded fashion companies in Europe and North America will be in a state of financial distress.
Fast fashion after Covid-19: good prospects for the (financially) fittest
Consumerism is at the heart of current society, globally. And people want to be dressed in a fashionable way, always. And most of the population has a limited budget for clothing (which, by the way, will decrease in the short term due to recession) and, nowadays, there are no alternatives to fast fashion as, for example, fashion rental services are still highly priced for the mass of consumers.
So, although the increased competition from other categories, as said previously, the fast fashion market will continue to grow globally as far as it is able to provide access to aspirational status through budget and fashionable garments.
Additionally, as a result of the covid-19, bankruptcies and M&A in this sector will be accelerated and, therefore, winners will significantly increase their market share.
Is the fast fashion model financially sustainable?
The fast fashion model is financially sustainable as far as brands have the ability to reduce the risk of the investment in inventories. In other words, inventory is a killer for fast fashion brands. And the Covid-19 has drastically shown the importance of tackling a number of factors that contribute to the huge amount of over inventory.
Therefore, financial feasibility will require investing in developing capabilities around visibility, prediction and prescription (analytics), collaboration, and production flexibility (either by bringing more production near-shore or local again or developing news ways of building relationships with suppliers to shorten lead times specifically).
In my opinion, fast fashion, although there is a lot of controversy about its business model, is here to stay for a long time as it is covering a need for a massive segment of the population and making money out of it. And Covid-19 has shown which parts of the value chain need to be reviewed to make the business more resilient for the future.
The main threat to this industry may be the growing societal commitment with sustainability, which will lead to rethinking consumerism, and, because of that, the rise of alternatives to fast fashion to be dressed in a fashionable yet sustainable way for most of the population, who have a very limited, and decreasing, budget for clothing. Unfortunately, nowadays, neither the mass of the society is ready for changing the mindset towards sustainability nor there are signs of alternatives for fashionable, cheap garments.
So, fast fashion model, with some adjustments, will be with us for a long time.