A Look Inside the System

The fashion industry is built on an intricate web of relationships between brands, retailers, suppliers, producers, and consumers. There are many ways to connect consumers with product, and each method has its advantages and disadvantages. The practices of buying and selling merchandise have evolved over time – how did we arrive at the current landscape of the fashion industry? Why do some brands sell direct (via their own stores or ecommerce sites) and others rely on wholesale partnerships (with large retailers like Nordstrom or Macy’s)? What makes fast fashion so different, and why has this model created such turmoil for traditional brands and retailers?

“Wholesale is a dream for design-driven brands, since it allows them to focus on the design and product, while offloading the selling to an often influential third party. Brands that really want to own the relationship with the customer…often won’t be as design-driven since they have many other skills to master, from customer acquisition to ecommerce to customer service.” –Loose Threads

Over the past 50 years, large department stores have been critical for designers – especially for those just starting out. Not only do major retailers help brands reach a wider audience, but they also serve as catalysts of the design process. In production, many designers receive lofty minimums from their factories: 500 yards of material or 1,000 pieces for example. If a designer can’t reach the factory’s threshold, they run the risk of not being able to produce any goods at all – if they do, they’ll have to pay an upcharge and cut into their margins. When a department store places an order to supply product for their hundreds of stores, meeting these minimums is no longer such a daunting task.

And so begins the push and pull relationship between brands and retailers. Ideally this would be a true partnership, yet there is usually an underlying difference in the degree of need: who can most easily walk away from the relationship? This player wields a significant amount of power. Department stores know what they bring to the table, and until a brand becomes such an established part of that retailer’s business that they see a need to protect it, it is difficult for a brand to do much other than acquiesce.

When retail buyers walk into a showroom, they know what styles and silhouettes have been working for them and what trends they are supposed to be buying into for the next season. The process of building an assortment – pulling in pieces from each brand’s collection to present in their own store – is, surprisingly, not a very creative process at all. The conversations leading up to an order are dominated by numbers, as in:

“What is the penetration of style X to the whole?”

“Do we have enough of a selection under X price point? Over?”

Etc. etc.

Each addition to the assortment is viewed as a percent to the total. Individual merit can easily be overlooked with this perspective that merely focuses on what is most salable, what will be most profitable: it is usually the most design-driven, fashion-forward pieces that do not make it to production because they (by nature) are not safe. I do not mean to demonize business or suggest that profitability should not be a concern; in fact, profitability is essential for any brand that wishes to remain viable. But there is a real risk in the war between profit and creativity: dollar signs tend to water down fashion to the point that it is no longer exciting, where design lacks the kind of leadership that would compel us – inspire us – to follow its direction. This sentiment echoes throughout the scathing reviews of recent fashion week presentations…

“…it looked like most designers and fashion houses have given up their role altogether, ditching the pursuit of genuinely new ideas for mere product design. I mean bland, predictable, repetitive product: something that really does not deserve the catwalk, but that will easily sell.” –BoF

Selling via department stores can quickly become a double-edged sword: yes, this vehicle helps launch a designer’s brand to new heights, but once inside the system you are also subject to its demands.

“American department stores mostly operate a traditional wholesale model, which exposes them to enormous inventory risk. As a result, buys can often be watered down, leading to a lack of differentiation and personality, eroding their position in the marketplace. Designers often complain that department stores encourage them to create product similar to what is working elsewhere for other brands, further leading to a sense of homogenization.” –BoF

Now, department stores are waking up, realizing they need to reinvent the way they buy product to fill their stores. It is risky to lock up your dollars months in advance of product deliveries: who knows which trends will take off and which ones will tank? As a retailer, the last thing you want is to be sitting on a lot of the wrong merchandise. This means markdowns, which in turn means lower margins and less money to spend on the next season.

“Retailers are afraid of making a statement. We’ve been looking at relatively the same trends for the past five years.” –Gabriella Santaniello, retail analyst at A Line Partners

Skinny jeans, anyone? We finally saw the pendulum shift as this Spring ushered in the return of flares, but it certainly took long enough to get here. The reason you’re now seeing off-the-shoulder blouses and dresses everywhere? Easy: strength in numbers.

Anyway, back to our retail dilemma: instead of using their entire budget up front, buyers are being challenged to leave dollars open so they can react in season – similar to the way fast fashion operates. Example: if I have $100k to spend for the Fall season, maybe I only write orders for $80k during market (which typically occurs in early Spring). When this product hits my sales floor in August, I’m going to track sales and buy back into styles that are selling particularly well – using that $20k reserve I so prudently set aside.

What has to happen for this system to work? Well, as a retailer I’m relying on the assumption that my vendors will have extra stock in my best sellers. As a vendor (brand) I want to be able to satisfy these in-season orders: to do so, I have to take on the liability of purchasing stock above and beyond the orders I receive from my retailers.

Since neither of us knows what will sell 6-8 months from now, we rely on trend-forecasters, runway shows, little birds – anything that gives us a hint as to what consumers will want next season. In reality, everybody is guessing. Sometimes you get it right, sometimes you miss the mark. The problem is the modern consumer is changing drastically, their desires becoming much more difficult to anticipate.

“Bombarded by digital messages, stressed financially and overwrought emotionally, there’s almost nothing left of the traditional shopper who fits neatly into demographic norms. The preconceived notions that brands and merchants have used for decades to understand their customers and coax them to purchase are gone. Forever.” –WWD

Nobody actually wants to assume this risk: the vendor doesn’t want to sit on the extra stock and the retailer doesn’t want to lock up their dollars before the season actually starts. Everybody is trying to shift some of the risk to the other side of the table; fast fashion has figured out how to mitigate this risk while still catering to the customer’s whims. They leverage the allure of scarcity, encouraging consumers to buy without having to take a significant inventory position up front. If the demand proves genuine, they produce more. If a trend doesn’t gain traction at retail, they can easily move on to try something else.

“Inditex [Zara’s parent company] thrives in a fashion environment without clear trends. While others may have bet on looks that never took off, the pioneer of “fast fashion” has the design and logistics operation to respond ad hoc to fickle customer tastes.” –WSJ

If we’re talking about which player has the most clout, the most negotiating power in conversations about risk, it most certainly is not the garment factory in a third-world country that desperately needs the orders from a large brand or retailer. No, this player barely gets a seat at the table – and that’s why this system is still standing. It’s rickety, but it’s standing.

Let’s return to the quote above – about wholesale being ideal for design-driven brands – and talk about what that means for a fast fashion retailer. These companies are vertically integrated, meaning they own all of those operations that other brands would outsource via wholesale accounts (marketing, customer service, etc.). Being spread this thin means it really isn’t possible for design to be their primary focus, yet Zara, H&M, and Forever 21 are known for churning out on-trend merchandise faster than anyone else in the market. If we stop to think about this logistically, it is no wonder that their business is based on runway knockoffs – they simply don’t have the resources to dedicate to being creative.

Fast fashion is business. It’s volume, it’s margins, it’s growth – it’s completely systematic. Why we call it fashion is a mystery – nothing in the history of fashion suggests that the process of designing or selling clothing should be fast.

How are traditional department stores supposed to compete with fast fashion? Now there’s an interesting question. You’ve got brands who focus on design trying to get into department stores to reach more customers, but the department stores are competing with retailers who have much more flexibility to adapt their assortments in season and roll with the waves of consumer sentiment. The department stores push back on the brands for more homogenous (safe) product and in turn bore us to tears because we see the same product everywhere we look.

It’s a system, that’s for sure. I never said it was a good one.

If one thing is guaranteed, it’s the fact that this system will continue to evolve. Where is it heading next?