Uniqlo, H&M and Zara: Retail’s Favored Long-Distance Runners – Forbes

This column debuted on the Forbes platform seven years ago with a three-part series on the future of fashion retailing. The series featured three companies that were flourishing by breaking rules and reinventing the business. How have they done since? Were they, in fact, the future of retailing?

Back in 2012 the economy was still fighting its way back from the depths of the Great Recession. Then there was Amazon (NYSE:AMZN). In the years since, an astonishing number of brands, both venerated and hot—from Macy’s (NYSE: M) to Forever 21—became endangered species or succumbed to extinction, leaving behind hollowed-out malls and a so-called retail apocalypse.

The 2012 series focused on three global leaders: Uniqlo, a subsidiary of the Japanese conglomerate Fast Retailing Co., Ltd (FRCOY); H&M (Hennes & Mauritz AB), the Swedish clothing retail giant; and Zara (Inditex ITX-U.TI), a fast-fashion house owned by a Spanish family and the largest of the group. I chose them because each had diverged from the prevailing model for fashion retailing—scouring the globe for new fashions, making huge commitments based on the products that seemed most likely to be winners, and then waiting for the results.

Uniqlo, H&M, and Zara were thriving by ignoring the prevailing “race to the bottom” on pricing and by embracing lessons learned from other industries—especially technology—to build long-term competitive advantages. 

At Uniqlo, founder and president Tadashi Yanai adopted an approach from the modern auto industry. He identified styles within product categories that wouldn’t quickly go out of fashion, differentiated those styles for Uniqlo, and then set up the supply chain that could deliver them to the consumer—vertical integration.

Like the tech industry, Uniqlo pursued a “planned obsolescence” strategy. Yanai’s approach aimed to drive consumers to update their wardrobes based on changes the company identified in the culture and how we live, changes which could be uniquely exploited. That meant long product development cycles and style basics that appealed to a large consumer base. 

Today Uniqlo is the world’s third-largest fashion retailer (ranked by revenue), ahead of Gap, Inc. (NYSE: GPS) and close behind H&M.

In 2012, H&M was also tapping into technology in a big way. The company built a global IT infrastructure, connecting stores with corporate logistics and procurement systems and central warehouses. The IT systems were integrated with design and product development. Executives had visibility into the entire process, from product design to sales. H&M also manufactured some of its newer styles closer to the company’s prime markets in Europe to offer faster-fashion collections.

Inditex brand Zara did the same, but its effort was full bore. Instead of subcontracting manufacturing to Asia, Zara built more than a dozen highly automated factories in Spain where robots worked around the clock cutting and dyeing fabrics and creating unfinished “gray or greige goods,” the foundations of final products. That made it possible to deliver affordable cutting-edge styles almost simultaneously with the latest high street trend collections. 

Like Uniqlo, Zara married technology with automaker principles. Their factories use the “just-in-time” inventory approach pioneered by Toyota Motor Company.

Based on revenue, today Zara is the largest of the three by a wide margin, and is the top-ranked fashion retailer in the world based on total profits, according to McKinsey & Co.’s 2019 Retail and Consumer Goods forecast.

As 2020 dawns, the future of fashion retail—the elements of success—seem just as clear as they did in 2012, and then some. Seven years ago, Mickey Drexler, former CEO of J. Crew, complained to a CNBC reporter, “There are too many retailers.” He was right. Since that time, like the auto industry over the past century, fashion retailing has been consolidating. 

In its 2019 State of Fashion report, McKinsey & Co. observed, “There’s a shrinking group of ‘superwinners’ in the fashion world.” McKinsey noted that in 2010 the top 20 fashion companies accounted for 70 percent of the value created in the industry. Today that number is 97 percent. 

Among the casualties have been niche brands, hot Shark Tank-style fads, and troubled retail legends that venture capital groups—short-termers—invested in, financially engineered, and then sold off as soon as they had made a profit. That’s okay if you’re in the money business, but successful, sustainable fashion retailing is clearly a long game. 

A possible element in the outperformance of these three companies may be the fact that they are all owned and controlled by founders and families, not Wall Street.

They also share something else in common—slow but steady topline growth. As measured by annual revenue reported in their native currencies (yen, krona, and euro), Uniqlo, H&M, and Inditex have all realized compound annual growth rates of roughly 10 percent a year between 2012 and 2018 (the most recent annual figures available). That’s not fast money, but it is sustainable, suggesting that another seven years from now, all things being equal, they will still be leading in the fashion retail race.