Zara: Can Competitors Match Its Fast Fashion Model?

Patricia Kowsmann wrote a terrific article about Zara today.  Zara, as many of you know, is a highly successful Spanish apparel retailer.  In the article Kowsmann explains how quickly Zara can bring a new design to the retail floor, ready for customer purchase.  Here's an excerpt:  

A black, high-collar women’s wrap coat, fastened with a metal ring, was hung out for sale one recent morning at Zara’s flagship store in New York.  “Customers asked for hardware this season,” the manager said, holding out the ring. That kind of feedback, he added, can inspire a new style that reaches his store within weeks.  This coat took 25 days.

Recall that I blogged about The Gap's troubles several days ago.   The Gap finds itself in trouble for several reasons.  One cause of the company's problems is its inability to cope with fast fashion competitors such as Zara.  Kowsmann's article points out that many competitors, including the Gap, have emulated Zara's strategy of bringing manufacturing closer to its retail stores.  This supply chain strategy enables Zara to move more quickly and to adapt more easily to changing customer preferences.  However, Kowsmann explains that simply matching the location strategy that Zara has employed for its manufacturing facilities won't provide the winning formula for many of these retailers. Why?  Here's Kowsmann:

But experts say it would be hard for competitors to replicate the Inditex model without a more thorough overhaul of the way they design, manufacture and distribute their products.  The Spanish retailer’s rivals might move production closer to home, but they “just don’t have an organization set up to react quickly to what is trending,” said Liz Dunn, founder of Talmage Advisors, a retail consulting firm.

In short, Zara's competitive advantage does not come simply from its sourcing strategy.  It entails an entire integrated system of activities.  The New Yorker's James Surowiecki once wrote about the company, and he explained this very point.  Zara has a whole package that is very hard to imitate.  Placing factories closer to stores may have some benefits, but that doesn't mean these rivals can match Zara's fast fashion success.

Controversy for Jessica Alba at The Honest Company

Source: Wall Street Journal

By now, you all know the story of actress-turned-entrepreneur Jessica Alba.   Four years ago, she co-founded The Honest Company.   The firm aimed to provide families with eco-friendly products such as diapers and cleaning supplies that would not be harmful to children. The Honest Company enjoyed remarkable success, skyrocketing to a valuation of $1.7 billion as of August 2015. Now the Wall Street Journal reports that the firm may have some problems with one of its products. The newspaper explained: 

One of the primary ingredients Honest tells consumers to avoid is a cleaning agent called sodium lauryl sulfate, or SLS, which can be found in everyday household items from Colgate toothpaste to Tide detergent and Honest says can irritate skin. The company lists SLS first in the “Honestly free of” label of verboten ingredients it puts on bottles of its laundry detergent, one of Honest’s first and most popular products. But two independent lab tests commissioned by The Wall Street Journal determined Honest’s liquid laundry detergent contains SLS.

The company has objected to these conclusions.   Here is where it gets very interesting.   The Honest Company showed the Wall Street Journal a certificate from its supplier, indicating that the laundry detergent had zero SLS content.  The supplier, Earth Friendly Products LLC, told the newspaper that they obtained the document from their supplier, Trichromatic West Inc.  The Wall Street Journal contacted that chemical supplier.  Here is what the firm told the newspaper: 

"Trichromatic told the Journal the certificate wasn’t based on any testing and there was a 'misunderstanding' with the detergent maker. It said the 'SLS content' was listed as zero because it didn’t add any SLS to the material it provided to Earth Friendly and 'there would be no reason to test specifically for SLS.' It said the product in question 'was fairly and honestly represented' to its customer. Honest said it didn’t deal directly with Trichromatic and declined to comment further on the certificate. Earth Friendly reiterated that it relied on Trichromatic to test the ingredient." 

What's the lesson here?  Companies need to have visibility deep into their supply chain.  They need to understand precisely how their product is being manufactured and provided to them.  Such visibility proves especially important if a firm is making claims to consumers about how healthy, eco-friendly, organic or otherwise "good for you" those products are.   A company selling to end users cannot simply rely on its direct supplier to monitor and control other suppliers effectively.   If there's ever a good lesson for every supply chain professor to teach, here's one that certainly fits the bill.  

Vertical Integration at Amazon

The Wall Street Journal reports today that Amazon will be moving aggressively to expand its in-house logistics capabilities.  Here is the lead of the article:

Amazon.com Inc. is taking to the air with a fleet of planes, part of a broader effort to reduce its inflated shipping costs. The Seattle retailer plans to shuttle merchandise around the U.S. using as many as 20 Boeing Co. 767 aircraft it will lease from Air Transport Services Group Inc. News of the deal sent the air-cargo transportation company’s shares soaring as much as 24% on Wednesday.

Does this vertical integration strategy make sense?  Let's start with the first sentence of the Wall Street Journal article.  Will the move reduce costs for Amazon?  One would find it hard to believe that Amazon can move goods around the country more efficiently than UPS and FedEx.  Clearly, they cannot match the efficiency of those established players at the moment.  One does not save money simply by doing something in-house.  Some managers think you save because you eliminate the profit margin earned by the supplier (UPS and FedEx in this case).  However, that is not the case because you must invest heavily in new assets in order to conduct this activity within the firm.  Moreover, you may not be as effective at conducting this activity as your supplier.  Thus, it's not clear that profits will automatically improve.

Why then would they pursue vertical integration?  There may be other valid reasons.  First, they may be trying to offset supplier power in this case. In other words, building an in-house capability gives them negotiating leverage with big players such as UPS and FedEx.   Second, UPS and FedEx may be worried about investing in assets specific to Amazon.   Economists call this situation the "holdup" problem that arises when transaction-specific assets are in place.  If UPS and FedEx invest in assets that are unique to Amazon, they may find themselves in a poor negotiating position vis a vis Amazon.  Thus, Amazon may have to invest in these assets because their partners are reluctant to do so.  Finally, Amazon may make their entire supply chain more efficient through closer integration of their ordering, fulfillment, and delivery services.   Conducting delivery in-house may enable that closer integration and perhaps some resulting efficiency.   

In the end, it will be interesting to see how the vertical integration strategy plays out.  Once again, though, Amazon will have more latitude than most publicly traded companies, because investors have proven to be quite patient with them.   Most publicly traded firms would have a hard time justifying this type of vertical integration strategy, which may take some time to pay off.  Amazon will likely have the time to develop this strategy and realize the efficiency gains over time.  

Abercrombie to Reposition Hollister Stores: Will it Work?

The Wall Street Journal reports today that Abercrombie and Fitch plans to reposition its Hollister chain of apparel stores.    Abercrombie has been struggling lately, after many years of success.   The flagship brand has seen a substantial drop in sales, and Hollister has experienced problems as well.  Hollister same stores sales decreased by 14% last year.  Now Abercrombie apparently plans to reposition Hollister as a "fast fashion" brand in the mold of Zara and Forever 21.  Fast fashion retailers do not place big bets on bold new cutting edge fashions.  Instead, they assess fashion trends, and they move very quickly to "follow" the hottest apparel industry developments.   Fast fashion firms do not place huge bets.  Instead, they build an agile supply chain, and as a result, they are able to cut their losses quickly on fashion misses and move to pursue trends that are more promising.  

Can Abercrombie reposition Hollister successfully?  They might be able to do so, but it will require rethinking the ENTIRE VALUE CHAIN for the company.   They will need to rethink how store operations work, the structure of the supply chain, the merchandising strategy, the way they market and price their products, etc.   Changing only one, or even just a few, of these items will not enable a successful transition to a "fast fashion" model.   Companies that have succeeded in fast fashion have rethought the entire way of doing business in the apparel retailing industry.  Abercrombie will have to do the same. 

TJX: Myths about off-price retailing

USA Today has an in-depth feature on TJX today. TJX is the off-price retailer that operates the Marshalls, TJ Maxx, and Home Goods retail chains. The firm's CEO tackles some myths about her firm's strategy in this article. Meyrowitz explains that the firm does not sell mostly prior season merchandise purchased from liquidators. Here is an excerpt:

"In a rare interview, TJX CEO Carol Meyrowitz explained how conventional wisdom is wrong when it comes to T.J. Maxx and Marshalls. Meyrowitz, 57, has been with TJX for almost 30 years, rising from a buyer in 1983 to CEO in 2007. During that time, the chain has turned into a retail powerhouse, with more than 1,700 stores — nearly as many as Target. She says 85% of what the stores sell is from the same season and same year it was designed for, and 85% is purchased directly from manufacturers. Much is identical to what the brands sell in department stores, she insists. Less than 5% is irregular."

What's interesting is the brands appear to have perpetuated the myth about off-price retailing. Many branded manufacturers do not want to acknowledge publicly that they are selling the same goods at full price in department stores at the same time that these goods are for sale at Marshall's. It seems to me Meyrowitz runs a risk with this interview. Exposing these myths may attract more shoppers to her stores, but it may not thrill her suppliers. They like the myth. If the truth becomes well-known, and TJX attracts more upscale shoppers, it may decrease willingness to pay and margins for the branded manufacturers' products.