Fashion Retailing: The Market Is Almost Saturated
UNTIL NOW, EUROPEAN, AMERICAN AND JAPANESE RETAIL GIANTS HAVE CONVENIENTLY SLICED THE WORLD MARKET AND RESPECTED EACH OTHER'S HOME BASE. SOON THERE WILL BE AN OUTRIGHT WAR OF EVERYONE AGAINST EVERYONEby Nicola Misani, Dept. of Management and Technology, Universita' Bocconi
Translated by Alex Foti
The market data released by Inditex in March 2014 show a halt to the hitherto unstoppable growth of the fashion retailer. The Spanish giant behind Zara has posted operating profits for €3.1 billion, more than H&M, Gap, and Fast Retailing, the leading followers. But for the first time since 2008, profits did not increase over the previous year. Other red flags were the slowdown in point-of-sale expansion (Inditex added only 331 shops last year; it did worse only in 2003) and the standstill in China (only 61 shops added; in 2013 the number had been double).
Prophets of doom had forecasted Inditex's slowdown as early as 2000. However, since then the retailer has doubled the number of countries served, quintupled sales, and multiplied by a factor of six the number of its stores, now totaling 6,300 all over the world. This time around, the question is whether the market is saturated or not. However, metropolises like London, New York or Shanghai, where the stores of Zara, H&M, Gap, and Uniqlo stand by each other in pitched competition, are not representative of the rest of the world, which is partitioned in well-defined spheres of market influence. The European sales of Inditex account for 2/3 of its turnover: it has fewer stores in the US than it has in Ukraine, and it sells more in Spain than in the whole of Asia. Similarly, Uniqlo Japan is generating 60% of the sales made by Fast Retailing. Looking at the EU, H&M makes 45% of its sales in Northern Europe and Germany, so that its Dutch turnover equals its Chinese turnover. And 4/5 of Gap stores are located in North America.
This kind of geographic concentration depends in part on the respective history of the above brands, all of rather recent origin, which have thus expanded near the country of birth. It also reflects the logic of collusion with rivals over market turf and selling prices.
Today, the possibilities of additional growth lie in either tapping emergent markets (China especially) or in an outright aggression of competitors. There are early signs of the latter scenario. H&M has recently announced it intends to raise its sales from $1.5 to $4 billion by 2020. But it's Fast Retailing that is planning another Japanese market invasion of the US. Over recent months it has opened stores along the two coasts at breakneck speed, and wants to open another hundred points of sale within two years. It plans to make $10 billion in the US by 2020, an amount equal to its current world sales. One cannot image Gap standing still in the face of such a challenge. Fast Retailing has also started to probe the German market, where it has opened its first store.
Then there are the smaller players. Benetton and Abercrombie & Fitch are seeking to breathe new life in worn-out formulas. Emerging rivals are proposing new styles, such as the Mediterranean colors of Desigual's garments or the younger fashion of Forever 21. Other retailers, like Mango, are lowering prices, in a war over margins with Inditex. The clang of battle hovers over the perennial challenges faced by fashion retailers, which must manage complex and dispersed supply chains, run thousands of stores all over the world and closely follow the near-daily fluctuations in consumer taste. We are used to considering IT the apex of corporate innovation, but if you compare the handful of products in Apple's product mix with the 30,000 new models churned out by Inditex each year, perhaps the home of innovation lies in La Coruña rather than in Cupertino.
