(This blog is based on the article "Fast Fashion: Business Model Overview and Research Opportunities" to appear in Retail Supply Chain Management: Quantitative Models and Empirical Studies, 2nd Edition, Springer, New York, NY.)
In a previous blog we looked at online sources to determine which retailers are fast fashion and which are not. Here we provide a more quantitative answer. Fast fashion can be defined as a business model that combines four elements: (i) fashionable clothes mostly for consumers under 40; (ii) affordable prices in the mid-to-low range; (iii) quick response; and (iv) frequent assortment changes. These last two elements are particularly important from an operations and supply chain perspective and we postulate metrics to measure their effectiveness.
Since the purpose of quick response is to reduce markdowns and stockouts, its effective implementation should lead to a better gross margin and less inventory. Therefore, an appropriate metric to measure the effectiveness of quick response is the gross margin return on inventory (GMROI), which is defined as the ratio between the gross margin and the average, where both quantities are measured at the aggregate firm level. Note that he GMROI metric is largely used among retailers but several other ratios could serve the same purpose. For instance, Hausman and Thorbeck (2010) use Operating Income/Inventory as a markdown/stockout performance metric.
Measuring the dynamic assortment capability is less straightforward. Ideally, one would want to monitor and keep track of the product assortment on display at the stores, but collecting this data is impractical. Instead, we resort to the retailers' online stores in the USA. Indeed, for the top specialty apparel retailers in our previous blog we considered the "new arrivals" in the Women's section and counted the number of weakly new product introductions, i.e., how many new products had become available in a given week (we ignored differences in color and sizes). Finally, we took the average count over a 2-month period. The results are shown in the figure below.
The figure confirms that H&M and Zara stand out in terms of quick response (higher GMROI) and their dynamic assortment capabilities (high number of weekly product introductions). In fact, fast fashion retailers roughly introduce twice as many new products than traditional retailers like Gap and Uniqlo. Moreover, their GMROI is 50% better (roughly 4.0 versus 6.0). For TopShop and Forever 21 we don't have their GMROI because they are private, but we did confirm that their number of weekly new products was on par with Zara and H&M, if not higher.
Finally, it's interesting to see how these retailers make the product introductions over time. The figure
below shows that Zara is remarkably constant introducing roughly 120 new products in the Women section per week. In contrast, its main competitor H&M introduced many products at the beginning and then had smaller "boosts" throughout the season.