Some of you may have heard of  Fast Fashion, the practice of quickly bringing  designs from the runway to stores. This strategy helped upstarts like ZARA, supplant some of the most-established leaders of apparel retail. The strategy has now been emulated by many others like Uniqlo, H&M, Forever 21, etc.  Today, the strategy is recognized as being more responsive to customer trends, but it is often derided for its inefficiency.  When ZARA started out many practitioners were puzzled by many counter-intuitive choices in the design of this business model– production in high cost locations, super expensive air freight and logistics, limited sales, etc.  As a consequence of all these expenses, practitioners expected  ZARA’s products would have to be much more expensive than traditional retailers to cover the  high production and logistics costs.  But as anyone who has been to a ZARA store knows, its products are actually  more affordable than those sold in department stores.  How could ZARA pull this off? At the heart of Fast Fashion lies the same risk-return trade-off that drives each of the other renaissance innovations that we have talked about.

The fast fashion model stipulates that the design-production-sales business-cycle be made as short as possible. In particular, ZARA brought the cycle down to a month from about 16 months in the traditional business model for apparel retailers.  To do so it had to produce locally, which saved on shipping time but  was  much more expensive. Further, this required  use of airfreight, and shipping small quantities all of which increased  logistics costs. With these  high costs,  it is reasonable to expect that fast fashion firms would price their products higher than regular retailers. But, pioneers like ZARA actually could be profitable while selling at much lower prices than their competitors!

What outsiders did not fully understand was that in many trend-influenced retail industries, the main drain on profits is not the costs of production or logistics, but it is the risk of making bad bets on fashion trends. Betting on a dud means loads of unsold inventory, massive discounting and lost opportunities to sell popular products. At the same time being behind the curve, and not carrying the  latest trends means many customers walking out unsatisfied. So while the fast fashion model significantly increases the production and logistics costs, it can significantly reduce the incidence and consequence of these bad bets.

Think about it in the following way–   If you had a fast fashion business model, then your design  bets need to be made only a few weeks in advance of sales, whereas in the traditional model these need to be made almost a year in advance. In the same way as you may be better at predicting what you will be doing  in a week’s time than  in a year’s time, fast fashion firms are much better at predicting what customers want rather than firms with the traditional model.  Essentially, because they are predicting what will sell in a few weeks, rather than predict what will sell in a year or so. This reduces the incidence of having styles that don’t move or  shortages of hot-selling styles. It turns that in apparel retail targeted to the young trendy customers, it is worthwhile to incur some of the extra logistics and production costs to gain this advantage in matching supply with demand.

Fast fashion has changed the landscape in the apparel retail industry and at  the heart of it lies the risk-return trade-off. In the  case of fast-fashion it meant reducing per product margins but also reducing all the demand-supply mismatches on account of risks.