Fast fashion’s race to the frontiers

Fast fashion’s race to the frontiers
Swedish H&M entered the Ukrainian market in August 2018, opening its first store in Kyiv.
By Clare Nuttall in Bucharest September 13, 2018

On Bucharest’s changing skyline, a colossal building on central Unirii Square has been a constant presence for the last 42 years. Opened by the Romanian dictator Nicolae Ceausescu in September 1976, the Unirea department store was the flagship universal shop in the communist republic which at that time was booming on the back of investments in heavy industry financed by foreign loans. 

Old photographs of the shopping centre show a strip-lit interior bursting with consumer goods, women browsing closely packed rows of fur coats, shelves packed with souvenirs, and lines of briefcases laid out on the floor. It was spread over seven floors, from the 1,000-square metre food hall in the basement to a confectioner’s on the top floor with views across the city. Both were lavishly stocked at the launch, a few years before a debt crisis forced Bucharest to adopt harsh austerity policies resulting in desperate shortages of food and consumer goods. 

Today the building still stands but its exterior is hardly recognisable being covered as it is with giant hoardings that proclaim “Zara”, “Bershka”, “Stradivarius” and other brands from the Spanish Inditex group stable. They fill the department store that is now a rather old fashioned mall, alongside Sweden’s H&M and Turkey’s Koton and LC Waikiki. 

Bucharest's Unirii Square in the communist era and today 

All of these are “fast fashion” retailers, a term coined to describe chains such as Forever 21, H&M, Primark, Topshop and Zara, whose fashions progress from design to manufacturing to the shop floor at lightning speed, compressing processes that once took months into a few short weeks. Their low prices and constantly changing stock caused an explosion in the amount of garments purchased in the West European and North American markets — the number doubled between 2000 and 2014, when it passed the 100bn mark. This sent profits soaring as the increased volume of sales more than offset downward pressure on prices, and turned the owners of fast fashion retailers into multi-billionaires. Inditex founder Amancio Ortega is currently the world’s sixth richest man with a $64.3bn fortune. 

Several of the leading fast fashion brands have been present in Central and Eastern Europe since the early 2000s. They are now “part of the contemporary consumer culture” says Olga Gurova, senior fellow at the University of Helsinki and author of Fashion and the Consumer Revolution in Contemporary Russia, although their main markets remain the more affluent countries of Western Europe and North America. But with a business model based on people buying ever more clothes — and fast fashion retailers are adept at persuading them to do so — the pace of growth achieved after the revolutionary business model was first launched cannot continue indefinitely without further geographical expansion. 

Queues at the opening of H&M's first store in Ukraine in August 2018 (Source: H&M)

“West European markets becoming quite saturated, with the largest fast fashion retailers … showing slow growth or even decline. Naturally these companies are looking to expand to emerging economies in Eastern Europe, Asia or Latin America where their presence is smaller and they can expand and show faster growth rates,” Euromonitor International’s research manager for beauty and personal care, Mantas Kaluina, told bne IntelliNews

Consultancy McKinsey calls 2017 the end of an era, after which “the West will no longer be the global stronghold for fashion sales”. From now on, it anticipates, more than half of apparel and footwear sales will take place outside Europe and North America, as the spending power of the growing middle classes in emerging markets increases. And there is a lot of room for growth: “The average developing-country resident purchases a fraction of the clothing that his or her developed-world counterpart buys each year. Overall clothing sales could rise significantly if developing-country consumers choose to buy more clothing as their purchasing power increases,” McKinsey said in a recent report

Fast fashion to the frontiers
Over the past 15 years, Western fast fashion retailers have moved eastwards, from the EU members of Central Europe southeastwards into the Balkans, and eastwards into Russia and beyond. 

Looking at the number of Inditex and H&M group (including other brands such as Cos and H&M Home as well as the flagship H&M) stores shows a dramatic shift over the past decade. The two groups’ 2007 annual reports showed their stores highly concentrated in Western Europe and developed markets like the US, while they had ventured into a handful of East European markets. Aside from that, their presence in emerging economies was minimal. Ten years later, figures from their 2017 annual reports show almost half of Inditex’s stores (49%) are now in emerging markets — there are dozens in Latin America, East Asia and the Middle East — while 30% of H&M’s stores are now in developing economies. 

The number of stores opened in various East European countries by both Inditex group and H&M broadly corresponds to the GDP figures of those countries, indicating both income and population size are important when making investment decisions. This has resulted in large numbers of stores in the most populous countries in the region, namely Poland, Romania and Russia. Inditex has only a small presence in the tiny Balkan markets and has eschewed Central Asia except for oil-rich Kazakhstan. H&M is even more concentrated in the northwestern part of emerging Europe.

Comparison of GDP and number of H&M and Inditex stores, 2017

Source: H&M and Inditex 2017 annual reports 

Central Europe has been enjoying a consumption-led boom for the past few years that is only just beginning to tail off. While incomes in Central, Eastern and Southeast Europe still lag those in most West European countries, they are steadily converging. Fast fashion is not new to the region, but rising incomes have encouraged retailers to open ever more stores. Expansion depends on a “country’s stability, population size, its purchasing power and competition among other factors,” says Kaluina. 

Inditex doesn’t release sales figures, but H&M’s 2017 annual report shows that while overall sales (in SEK terms) fell by 4% y/y in Q4 2017, with some exceptions (notably China) sales in emerging markets increased. Strong sales growth was reported in Russia (20%), Poland (14%) the Czech Republic and Serbia (11% each). The increase in the number of stores in the region was only partly responsible, as other markets such as China, the UK and the US saw a larger number of store openings but a decline in sales. 

Italy’s Teddy Group, whose largest chain is Terranova, has been the boldest of the Western players in venturing into the heart of Eurasia, with stores as far afield as Bishkek, Ulanbataar and Vladivostok, as well as in Southeast European frontier markets like Kosovo and Moldova. Commenting on its expansion in 2017, the group stressed the importance of Eastern Europe and Central Asia. “Among the routes the new openings have been following in 2017, there are Northern Africa, the Middle East and Central Asia with countries such as Egypt, Saudi Arabia, Qatar, Kazakhstan, Kyrgyzstan … Eastern Europe has also been one of the top areas involved in the expansion of Teddy brands’ network: stores were opened in countries such as Russia, Belarus, Croatia, Serbia, Romania, Poland, the Czech Republic and Slovakia.” 

Asked for an update, a spokesperson for the group told bne IntelliNews that Teddy has opened 12 new shops in Eastern Europe so far this year, and 12 more are expected to be opened before the year is out. “Shops have been and will be opened mostly in Russia but also Slovakia, Poland and Estonia are involved,” the spokesperson said, which “will account for more than 20% of the total of Teddy brands’ new openings of the year”. This is a significant share of international openings, taking into account that around 50% of new openings will be in the group’s home market Italy. Most of the new openings are Terranova stores, but Teddy also plans to open some new Calliope shops, dubbed the group’s “glamour light” brand. 

Expanding to the south and east, these retailers face direct competition from Turkish fast fashion retailers like Koton and LC Waikiki, who were early movers into many of the Emerging Europe markets, especially those in Turkey’s near neighbourhood or those with historical or cultural links to Turkey. According to Euromonitor’s Kaluina, while global retailers like Zara and H&M are expanding around the world, “Turkish chains’ expansion is focused mainly just to Europe and Asia which means they can expand faster”. 

Commenting on the strategies of the Turkish chains, Kaluina adds: “Expansion to established Western and some Eastern European markets is more difficult due to strong competition and way higher costs than in most of Asia. That is also one of the reasons why they expand more quickly to emerging countries. Also being early in new markets before H&M and Inditex puts them in a better competitive position now and in the future. Additionally Turkish chains geographically are closer to Central Asia, the Caucasus and accumulated knowhow working in this region.” 

Another cultural factor is that LC Waikiki in particular has clothes that are modest enough for practising Muslims — for example using thicker fabrics and high necklines — while its bold colours and quirky styles appeal to secular shoppers, as outlined by Bloomberg’s Business of Fashion newswire. This gives the brand an extra edge in the majority Muslim countries of Eurasia and the Balkans. 

While Russia and Romania are prime markets for both Koton and LC Waikiki, unlike the Western chains they have a higher concentration of stores in Southeast Europe and Eurasia than in Central Europe. For example, Koton isn’t at all present in CEE’s largest market Poland, and LC Waikiki has only four stores there. On the other hand, Serbia is among the top five East European markets for both Turkish chains in terms of the number of stores opened. Indeed, LC Waikiki’s newsfeed of recent store openings reads like a roll call of frontier destinations, including Kazakhstani oil towns and cities in Bosnia, Kosovo and Ukraine, alongside destinations in the Middle East and Africa. Nor has it shied away from politically sensitive locations: one recent opening was in Simferopol in Crimea, which was illegally annexed by Russia four years ago. 

The 30-year revolution 
The arrival of the fast fashion chains in the 2000s was just one part of three decades of upheaval in the retail sectors of the former communist space, which started back in the 80s with the loosening of trade restrictions in some countries. Retail in Eastern Europe and Eurasia has gone through an era of intense change since the tightly controlled systems selling goods produced locally and in other socialist states.

Immediately after the fall of communism, there was an explosion of imports of cheap clothes from China and Turkey, first brought across borders by small-scale “suitcase traders” and later channeled through the networks of huge wholesale bazaars that sprang up across the post-communist space.

Old style retail: "Calven Klain" (sic) underpants on sale in Tajikistan's Panjshanbe bazaar

Before the arrival of mass market chains and modern malls, the new ultra-rich class would fly abroad to shop in Western capitals, but for most people putting together a fashionable and stylish wardrobe was a challenge. Romanian vlogger Georgiana Marin of Chicinquest recalls that as late as the 2000s, “I was buying clothes from the shops in my town: they weren’t selling fashion brands, but nevertheless good, quality clothes. I also went to the dressmaker because I couldn’t easily find what was in fashion back in the early 2000s.” 

Another Romanian blogger, Constanta-based Maria of Urbn Style, remembers growing up in the Black Sea town of Mangalia where, she says, “we used to buy clothes from little shops or even bazaars.” Shopping used to be “like going on a treasure hunt … because good priced gems are hard to find.” 

Zara arrived in Bucharest in 2004, three years before Romania joined the EU and when foreign travel was still an unaffordable luxury for many Romanians. “I remember that the first thing I bought from Zara was in 2006 (it was a dress and I still have it) … I had no idea who Zara was — in the whole of Bucharest there was only one Zara shop open. I was very pleased with my purchase, so I became a regular client,” says Marin. 

Maria was also enthusiastic when she discovered Zara and Koton for the first time after moving to Bucharest. “The impact? I, for one, find it easier to go to the mall and shop from the big brands than go walkabout in the city from one little store to another in search of clothes to buy. Maybe because I think the clothes at the mall are of better quality and more modern.” 

In Kazakhstan, Zara’s arrival in 2009 was hotly anticipated by fashion conscious women in the country’s commercial capital Almaty, and reportedly set a record for the largest opening day turnover for any Zara store. Before it and other international chains arrived, there were few options between the cheap, low-quality goods in the bazaars and the tiny expensive boutiques often owned by wives and girlfriends of rich businessmen. Almaty residents would regularly drop in to see the constantly changing stock at Zara, and the Spanish chain became a staple of the Kazakh working woman’s wardrobe. Zara and Inditex’s other brands did so well in Kazakhstan that two years later Inditex bought out franchisee Fawaz Alhokair which had brought them to the Central Asian country. 

But in other countries, shoppers were slower to embrace fast fashion. “Serbs love fashion and big brands and that’s why Turkish and Chinese goods will never be out,” says bne IntelliNews’ correspondent in Belgrade. While she says brands like H&M and Zara are “pretty popular”, most people “would still rather go to Turkish and Chinese stores which sell fake Gucci, LV, DG, Michael Kors [and] adored and beloved Burberry.” What these goods have in common is that the “brand is very visible and that’s what Serbs adore!” 

She notes a change of mentality among the younger generation who would rather shop at, for example, H&M or LC Waikiki than for designer knockoffs. On the other hand, domestic brands haven’t been squeezed out by international fast fashion chains in Serbia yet, while a hangover from the Yugoslavian era is that Slovenian brands are seen as top-quality and are still very popular. 

Wanting more 
An important part of the fast fashion business model in the West, even though retailers may not admit it, is that clothes are so cheap they are seen as literally disposable. There is constant churn as shoppers buy clothes then give or throw them away to make room for new purchases. 

Further east, spending power just isn’t as high. The University of Helsinki’s Gurova says consumers have had time to embrace fast fashion retailers, “but they are not that cheap compared to in Western countries,” especially after a series of recessions and the recent slump in the value of the ruble. 

“It’s important to note that despite more rapid growth in emerging markets most sales revenue and profit are still generated by developed Western markets. In Western markets established fast fashion retailers like H&M or Inditex expand by opening stores of their new brands and investing heavily in online retailing,” says Kaluina. 

“[The] largest players, like H&M and Inditex adapt rapidly and successfully to new trends and market changes,” Kaluina adds. This has resulted, for example, in the expansion of H&M’s premium brand Cos, and Inditex’s Massimo Dutti. “They open larger, more prominent stores or new concept stores in prime locations in Western Europe. For consumers looking for premium goods they expand premium brands (Massimo Duty by Inditex) or launch collections with famous designers (H&M). They tap into the athleisure trend by expanding lines of sports clothing which partially compete with products from sports companies like Nike and Adidas.”

Follow the malls 

Zara and other fast fashion brands are clustered at Astana's landmark Khan Shatyr mall

In addition to lower spending power, emerging markets also don’t necessarily have the infrastructure fast fashion chains require. One aspect is transport infrastructure. Zara, for example, is known for producing small batches of clothes that can then be restocked, tweaked or discontinued depending on demand, and new collections are delivered to all their stores around the world twice a week. The importance of speed raises questions about the logistics of serving large, sparsely populated countries like Kazakhstan or Russia, though to ensure speedy deliveries many fast fashion chains rely on air freight.

A bigger problem than getting the clothes and accessories to stores is finding the stores in the first place. In Russia, Gurova says, fast fashion retailers arrived when new forms of retail space appeared, after which they started to proliferate in the country. “The problem is that fast fashion retailers come to particular retail spaces, and in smaller cities there are not many of them that work in terms of standards for fast fashion retailers,” she adds. 

This means that shopping centres that meet the standards of international retailers all tend to be populated by the same group of brands: the Inditex group stores and H&M, alongside their Turkish competitors like Koton and LC Waikiki, plus local competitors such as Russia’s Concept Club, Gloria Jeans and Sela. As a result, it’s often not obvious to consumers where the clothes they are perusing are coming from, especially as some chains don’t advertise their locality, and the labels in the clothes indicate where they are made rather than designed, points out Gurova. 

From East to West
As the fast fashion business model expands in emerging markets, local companies are also jumping on the fast fashion bandwagon. 

Probably the first high-profile fast fashion brand to venture from East to West was Kira Plastinia, the eponymous brand of the then 15-year-old daughter of one of Russia’s richest dairy producers. Kira Plastinia launched in the US back in 2008, but the venture flopped and was shut down within a year. 

A more convincing debut was made by Polish fast fashion chain Reserved, which opened last year at a 30,000-square foot space in London’s Oxford Street that was once British Home Stores' main department store. Reserved’s first UK store was opened by English supermodel Kate Moss in September 2018. 

Reserved is part of the LPP group that also includes the Cropp, House, MOHITO and SiNSAY brands, and has already expanded from Poland to 20 other countries including fellow East European markets, Germany and China. Built up from scratch over the past 25 years, the Gdansk-based group’s success has resulted in it being dubbed the ‘Polish Inditex’; in 2017 it sold more than 140mn garments and accessories, achieving revenues of almost €1.4bn. The expansion continues; its launch in Israel ended in a stampede as the first 200 shoppers who spent over €48 were offered free tickets to Europe. While Reserved made a loss in its first year in the UK, LPP CEO Marek Piechocki told The Telegraph it still plans to open many more stores in the country in the near future. 

Data from Euromonitor shows Reserved was the fifth largest apparel brand by sales value in Eastern Europe in 2017. Russian players Gloria Jeans, O’Stin and Kari, plus Polish accessories retailer CCC, also make the top 10. 

Probably the biggest competitors to the bricks-and-mortar clothing retailers, however, are their online rivals. In countries like Russia, where a large segment of the population live in far flung towns or rural areas, online is the only way to reach large numbers of potential customers, and even in the big cities malls are underperforming, mostly due to the switch to online purchasing. “Of course there are geographical differences if you look at consumer culture, but one thing that changes the landscape a lot is online shopping,” says Gurova. 

Thanks to the multichannel approach taken by H&M and Zara, for example, as well as online-only retailers like British Asos or Chinese AliExpress, “small cities and remote areas now have access to consumer goods if not from fast fashion retailers directly, from knockoffs or copies to some items that look like products of the fashion brands but are from somewhere else … online retail is growing immensely right now,” she continues. 

It’s similar in Romania where, Urbn Style’s Maria says “online revolutionised shopping … many young girls buy clothes from Asos, H&M, Zara or Romanian Fashion Days and such online stores.” 

"New players such as, ASOS and Missguided are bringing products from design to sale in as little as a week or two—faster than traditional fast-fashion retailers, and even faster than Zara. Fast fashion is turning into ultrafast fashion,” said a 2017 report from Fung Global Retail Research. “Pure-play online fast-fashion retailers are able to continuously refresh and rotate a large part of their assortments to drive customer shopping frequency.” 

Online is in some ways ideally suited to fast fashion retail because it speeds up the process by cutting out parts of the supply chain (i.e., displaying and selling clothes in shops) and makes it even quicker to respond to demand changes. While the expansion of fast fashion stores is continuing in Eastern Europe, in these countries too retailers are combining bricks and mortar with online shops as they feel the squeeze from their online rivals. 

Fast fashion has been turning the clothing retail markets of the CEE and Eurasian countries on their heads in recent years, but this is just one stage in the consumer revolution that has been ongoing for the last few decades. As consumers turn in growing numbers to online retail — lagging Western consumers by a few years — the rapid pace of change within the sector is set to continue.