Recent Global Trends in the Structure of Industry and the Current Issues Facing Leading International Firms in Fashion Retailing

Recent Global Trends in the Structure of Industry and the Current Issues Facing Leading International Firms in Fashion Retailing

SUMMARY

The fashion industry appears to be very dynamic with constant changes in customer attitudes altering the strategies of international firms and thus the structures of industry. The increase in customers concerned with environmentally issues has

been mirrored as stores offer increasing ranges of eco-friendly products. A similar trend has occurred with relation to ethical shoppers. Companies understand the importance of being seen to be an ethical retailer and so many have invested in overseas management to keep track of suppliers. Different companies have chosen different strategies to help them to overcome current issues in international markets. For instance, Zara has progressed via forward integration, whereas H&M contract work out to suppliers. One strategy that all leading firms have adopted is the use of company websites. They are used to promote online shopping which has increased dramatically recently and it believed to continue increasing for some time. The elimination of quantitative import restrictions in 2004 must also be highlighted since it altered the way some company’s trade. It also allowed developing countries to extend into other branches of the fashion chain other than production. A further apparent trend would be the decrease in expenditure. This is thought to be the result of the current financial state which is causing customers to restrict their spending. The availability of cheap fashionable clothing from discount stores such as Primark may also be to blame for this decrease.

This report deals with ‘mass’ fashion and does not deal with the top end of the market.

CONTENTS

1. Introduction 2. The Fashion Industry as a Chain 3. Recent Global Trends 3.1 Environmental and Ethical Issues 3.2 Expenditure Patterns 3.3 Online Shopping 3.4 Elimination of Quantitative Import Restrictions 4. Leading International Companies and Their Current Issues and Strategies 4.1 Marks and Spencer (M&S) 4.2 H&M 4.3 Zara 5. Conclusions 6. References

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1. INTRODUCTION It is essential that fashion retailers remain flexible to meet the demands from their customers. From ensuring they always have the most update styles, to revising their company strategies to fit in with new attitudes, change is an essential part of business in the fashion industry. Competition in this sector is extremely fierce as large internationally chains battle for customer loyalty. However, although customers play a huge role in the structure of industry the drive companies have to increase profits also results in changes in the structure.

2. The Fashion Industry as a Chain Traditionally retailers would have had to place their orders with supplier’s months ahead of season and 9 months was a standard lead time. This delay was not due to production or even shipping across countries, but lay with the process involved with documentation. This included procedures such as quota approvals and letters of credit for overseas suppliers. (Birtwistle & Moore, 2004)

Now with modern logistics customers expect instant product availability. The development of computer systems have replaced paper work and speeded up the process to make the transition from production through to retail much more efficient.

One change which has occurred in the fashion chain is the location of the production stage. Production has moved abroad to take advantage of the low wages overseas. Both M&S and Next ‘have boosted margins by moving abroad’. (Financial Times, 12th July 2008) However, with wages on the increase in many developing countries, companies are seeking to move once more. For example some companies are moving ‘Into parts of China that are not experiencing the same levels of wage inflation’. (Financial Times, 12th July 2008)

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The flow chart below illustrates the chain which describes the current fashion industry.

Design Research

•The company must conduct research into current fashions to ensure the products they design fit in with trends that the customers will want to buy.

Design

•Designing a product that is suitable for the desired market and relates to current trends. Other important factors will include price of fabric and components, ability to produce in mass and how long it will take to produce the garment.

Sourcing of •Finding the relevant materials at a suitable price and location. raw materials

•Producing garments to design specifications.
Production

Exporting of finished goods

•To the countries in which they will be sold.

•To specific retailers/ branches.
Distribution

Marketing/ Advertising

•To attract customers and also to make use of any brand names the company may have to make the products more likely to sell.

Retail

•The actual selling of the garments to the customer. •The service here is essential as it portrays the companies values to the customer.

•The end of the chain.
Customer

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3. RECENT GLOBAL TRENDS

3.1 ENIVONMENTAL AND ETHICAL ISSUES The public are becoming increasingly aware of their impact on the environment which is why so many stores now offer eco-friendly options. For example, M&S have launched their ‘eco- plan’ A. This is a 5 year plan to reduce the stores impact on the environment. The plan includes: (Marks & Spencer updates on progress of its ‘eco-plan’, Plan A [online], 2008)  Their ‘Wash at 30˚’ campaign, which to date has helped save 50,000 tonnes of 2 a year.  M&S Oxfam clothing exchange, which raised £1 million for the charity.



Increased use of fair-trade cotton, which has increased fair-trade cotton sales by 105%.



Charging for carrier bags, which has reduced usage by 80%.



Opening a store in Shanghai with particular emphasis on this plan. The store is fitted with environmentally friendly wall panelling, water saving toilets and energy efficient light bulbs.

These changes help to present a good corporate image, which may influence a customer’s choice of where to shop. However, the majority of leading companies in fashion retailing are multi-national companies, meaning they operate in a number of different countries across the world. Therefore, differences in opinions may be present in different areas of the world, depending on culture and social influences. The graph on the next page illustrates this diversity in views (TNS, 2008):

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% of Customers that would seek out ecofriendly options

% of Consumers who would seek out environmentally friendly options
100 80 60 40 20 0 UK Italy Country Spain Germany

Figure1- Graph to show how the importance of the environment differs across countries. (Drawn based on information from TNS Global)

The graph illustrates how Italy is the most environmentally aware of the four countries. The vast difference in attitudes mean companies may have to present different lines in different countries. For example, lines featuring organic cotton may be more likely to succeed in Italy. Ethical issues are also becoming increasingly more important to consumers. With most companies contracting out work to suppliers for production it becomes difficult to maintain control. Pressure to exploit low cost labour has arisen as suppliers aim to cut costs in order to secure contracts with leading firms. A recent issue has been exposed relating to ethical issues at Primark. The BBC aired a Panorama documentary ‘Primark on the rack’ relating to an under-cover investigation which was carried out to explore the working conditions of Primark’s employees overseas. Sarah Arnott reported how the documentary caused demonstrations outside Primark’s London branch and how the programme seriously damaged Primark’s image. Primark’s reaction to Panorama’s findings was to axe 3 of its South Indian suppliers for ‘subcontracting the embroidery work to groups using child labour’, claiming they had ‘no option but to drop those factories’. War on Want, the charity

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behind the protest, felt that Primark's response was ‘just a public relations stunt’. (Arnott, 2008) Primark clearly understand how important an ethical business approach is to their company image as they joined the Ethical Trading Initiative (ETI) in May 2006. Primark claims the reason for their success is straightforward. They create simple designs in popular sizes and do not run expensive advertising campaigns. They also work in close partnership with their suppliers and take advantage of economies of scale. Economies of scale relates to the relationship between quantity and cost of goods. Which means that by purchasing in bulk costs can be reduced. (Primark: Ethical Strategy [online], 2008)

3.2 EXPENDITURE PATTERNS Figure 2 shows how expenditure has decreased from February to July 2008. This is likely to be due to the current financial crisis. The increase in unemployment numbers and the decrease in house prices has resulted in people being more careful with their money, so it is not surprising that sales have decreased.

Graph to Illustrate the Decline in Expenditure in Fashion Retailing
16.5 16 Expenditure (£bn) 15.5 15 14.5 14 13.5 13 Feb-08 Mar-08 Apr-08 May-08 Month Jun-08 Jul-08

Figure2- Graph showing the change in expenditure pattern over a 6 month period in 2008. Adapted from (TNS Sales Data [online], 2008)

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3.3 ONLINE SHOPPING Many more people shop online now, making it even more important for stores to offer the option to shop online. Visits to online stores have increased by ‘2.2 per cent year-on-year in March, while high street foot traffic fell 2.7 per cent’. (Experian Footfall citied in Financial Times 2008). Mintel expect that online shopping in the UK and France will triple in the next 4 years. Whilst the growth in Germany may be slower as the use of computers is less. (Financial Times, 2nd April 2008) Possible reasons for this increase:     More trust in websites. Broadband makes it quicker to shop online. Many stores now offer online discounts. People have busier careers so find it more convenient to shop from their computer.

3.4 ELIMINATION OF QUANTITATIVE IMPORT RESTRICTIONS

The elimination of the quantitative import restrictions under the World Trade Organisation (WTO) at the end of 2004 altered the chain involved in the fashion industry. Prior to the elimination of this regulation, if export quotas for a country reached their maximum (e.g. Hong Kong) then clothing assembly would be subcontracted out to developing countries with spare export quota remaining. This often included countries such as Bangladesh that had a poorly educated, low wage, labour force. (OECD, 2004)

The restrictions that were in place discouraged developing countries from creating their own competitive textile industry. However, the removal of such restrictions opened the opportunity for developing countries to expand across the chain. Despite this opportunity many developing countries would have faced problems with lack of knowledge in design, marketing, retail and finance. (OECD, 2004)

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The major change to have resulted from the abolition is that imports from China have increased significantly. This has created a great amount of competition for countries in the European Union and the America and is becoming a cause for concern as it is having ‘damaging effects on the other countries development efforts’. (Financial Times, 29th August 2005)

4. LEADING INTERNATIONAL COMPANIES AND THEIR CURRENT ISSUES AND STRATEGIES 4.1 M&S Marks and Spencer has 912 stores globally which includes 622 UK stores and is recognised internationally for its quality clothing. (M&S: Press

Releases[online], 2008). However, despite M&S being a well known brand for decades the company has hit problems recently. The Financial Times reported how the company’s pre-tax profits in the 6 months to September 27th fell by a third this year ,with a 6% decrease in likefor-like sales in clothing and home ware. Conversely, figures for famous discount store Primark report a 4% increase in the year to September 13 th 2008. With M&S focusing on the entire spectrum of customers and aiming to produce quality clothing at an affordable price the company should be ‘recession-resistant’. (Financial Times, 5th November 2008) This information suggests that customers are turning to cheaper stores to help their money stretch further.

M&S pride themselves on the fact that they have never needed to run advertising campaigns to bring in customers. However, with their recent financial reports M&S have no choice but to accept that times are changing. They are faced with an ageing customer basis and their prices are no match for stores such as Primark. M&S have taken action to ensure their position does not deteriorate further. This has included closing stores, cutting staff and attempting to improve their designs. (Tungate, 2005) .M&S’s strategy has

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also been to reassure its investors on their dividends which has ‘helped the shares outperform in recent weeks’. (Financial Times, 5th November 2008)

4.2 H&M

The Swedish company H&M opened its first store in 1947 and now have 1,000 stores spread across 20 countries. Now sales outside Sweden account for 90% of their annual turnover. (Tungate, 2005)

Jörgen Andersson the marketing director of H&M believes their success has come from their idea that everyone should have equal choice, and that being able to afford designer fashion doesn’t necessarily mean you have style. He commented that their strategy is ‘not just a business idea, it’s a political one’ (Andersson citied in Tungate 2005). The company grew up with a Social Democrat government and so believe their strategy is part of their heritage. (Tungate, 2005)

The company, which sells over 600 million items a year, feel they owe their success to 3 essential factors ‘inventive design, the best quality at the best price, and efficient logistics.’ (Tungate, 2005) Other important factors include design which they stress the importance of individuality in. They believe they do not replicate designs from fashion shows; instead their team of 100 designers travel to absorb new ideas. They select key trends from exhibitions, films, magazines and trade fairs. (Tungate, 2005). Andersson adds ‘We don’t dictate style. Our style is whatever our customers demand’. (Andersson citied in Tungate 2005)

H&M do not actually own any factories for production. The company prefer to have suppliers make their garments and instead have a code of conduct for them to sign. Additionally H&M have computerised stock management to ensure new items arrive in store every day. Both of these management techniques help H&M to maintain control throughout the chain. (Tungate, 2005)
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4.3 ZARA Zara, Inditex’s parent company, opened its first store in 1975 in Spain. And the group now boast 4,000 stores across 71 countries (Inditex:Timeline [online], 2008). The group believe they have expanded so rapidly due to the use of ‘innovative management and logistics techniques’. (The Guardian, 12th August 2008) Inditex’s strategy has been to build up a brand name in a location before branching out with different names. This has allowed the group to return greater profits as they take advantage of economies of scale. Zara have also spent very little on advertising, unlike their Swedish rival H&M, preferring to use their stores which are ‘purpose-built to look like fashion boutiques’ to attract customers. (The Guardian, 12th August 2008)

Another key difference in the strategy of Zara, compared with H&M and other high-street chains, is that 50% of the clothing is made in their own factories in Spain located close to its headquarters (Tungate, 2005). This helps them to maintain control over production, which gives them an advantage as they can easily alter their supply quantities to meet the demands of the customer. This is a good example of forward integration as the company has branched into production. This allows Zara to utilize economies of scope during production as all of their products require similar assembly processes.

5. CONCLUSIONS

The constant demand for new lines means that the fashion industry never has chance to stand still. Customers expect instant availability as soon as a trend becomes apparent so companies have to get the finished product in stores as soon as possible. This is where modern logistics and strong management across the chain become essential.
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As production moves abroad to take advantage of cheaper labour ethical issues are becoming increasingly more important. Companies must ensure that all the workers are being treated ethically including a fair wage, good working conditions and reasonable working hours.

Environmentally concerns are also becoming more apparent. Recently more customers are seeking environmentally friendly options and this is reflected in the increase in eco ranges in stores.

Although expenditure has decreased in recent months due to the current financial crisis, there has been an increase in online shopping. There are many reasons for this, including changes in lifestyles which mean people find it more convenient to shop from their computers.

The changes made to regulations in 2004 also affected the structure of industry, as for the first time developing countries can seek a competitive industry in fashion for themselves instead of just manufacturing the products for the developed world.

Bibliography
Arnott, S. (2008, June 23). Primark faces demonstration after child labour TV exposé [online]. Retrieved November 1, 2008, from http://www.independent.co.uk/news/business/news/primarkfaces-demonstration-after-child-labour-tv-expos-852386.html Birtwistle, G., & Moore, C. M. (2004). Fashion retailing [electronic book]. part 1. Bradford, England: Emerald Group Publishing. Financial Times. (12th July 2008). Financial Times. (29th August 2005). Financial Times. (2nd April 2008). Financial Times. (5th November 2008). Inditex:Timeline [online]. (2008). Retrieved November 16, 2008, from http://www.inditex.com/en/who_we_are/timeline

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M&S: Press Releases[online]. (2008, October 2). Retrieved November 11, 2008, from http://corporate.marksandspencer.com/investors/press_releases/International/02-102008_marksandspenceropensstoreinchina Marks & Spencer updates on progress of its ‘eco-plan’, Plan A [online]. (2008, November 4). Retrieved November 6, 2008, from http://corporate.marksandspencer.com/investors/press_releases/planA/pressrelease_plananovemb er OECD. (2004, October). OECD: A New World Map [online]. Retrieved November 19, 2008, from http://www.oecd.org/dataoecd/43/14/33824605.pdf Primark: Ethical Strategy [online]. (2008). Retrieved November 1, 2008, from http://www.ethicalprimark.co.uk/ethical.html The Guardian. (12th August 2008). TNS. (2008, October 20). British consumers least willing to pay extra for green. Retrieved 11 1, 2008, from http://www.tnsglobal.com/_assets/files/TNS_Market_Research_Green_Purchase_Decision.pdf TNS Sales Data [online]. (2008). Retrieved October 20, 2008, from http://www.retailweek.com/market-data/tillroll-sales/fashion/index.html Tungate, M. (2005). Fashion Brands: Branding Style from Armani to Zara. Kogan Page Limited.

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Marker’s comments Mid- 2.1 Structure, style and presentation: A good structure but I did wonder whether the section on the 3 firms made for more description than analysis. Excellent diagram to show how the fashion chain is structured. Bibliography and references well done. Depth of understanding: Generally good especially on the broad concerns that are affecting the industry and on the end of the MFA. Becomes a bit UKfocused and pins too much on short-term figures rather than medium-term trends. Balance between description and critical analysis: Generally analytical in approach but the section on the 3 retailed becomes descriptive: what are the lessons that come out of this? Answers (possibly) – need for clearer strategy aimed at particular market segments, logistics and IT, branding. Descriptive material has to be used. Quality of research and use of sources: Generally good research but no academic articles. If you’re focusing on particular firms, look for academic articles on then using Google Scholar or journal databases as these will help top deepen the analysis.

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