Forever 21’s Bankruptcy: Lessons for the Fast Fashion Industry
“To Our Valued Customers,
Today, Forever 21, Inc. voluntarily filed for bankruptcy protection under chapter 11 of the U.S. Bankruptcy Code.”
By the end of the year, Forever 21’s stores will be removed from the streets of Canada and the United States as well as across Europe and Asia. The fast fashion retailer will close up to 178 stores in the US and 350 globally. What plunged Forever 21 into $500 million of debt? Let us revisit the life of the retailer who once dominated the fast fashion industry – right from the start.
In 1984, South Korean immigrants Jin Sook and Do Wan Chang opened a 900-square-feet clothing store in Los Angeles with $11,000 of savings. Their mission was simple: to sell trendy clothing at low prices. Then named Fashion 21, the store appealed to young Korean-Americans and generated $700,000 in the first year of operations. Recognizing consumers’ growing appetite for fast fashion – cheap and trendy clothing with a short life cycle – Jin Sook and Do Wan capitalized on the trend, opening new stores every 6 months.
This success was soon replicated in stores across the United States and motivated the couple to expand internationally. Building on their rapid growth, the couple approved 400 designs a day, launched a website in 2003, and a men’s line in 2006. In 2014, CEO Do Won Chang announced his most ambitious goal – to double the company’s global retail footprint to 1,200 stores by 2017. Sales peaked a year later at $4.4 billion and Forever 21 became one of the largest tenants of Simon Property Group, the biggest American shopping mall operator. It may not have been clear then, but the same ingredient for success – rapid brick-and-mortar expansion – introduced a strategic flaw that ultimately lead to the former fashion giant’s downfall.
A company’s strategy must follow the trend. While demand for shopping rose, the method for shopping has changed. Added convenience and optionality of online shopping have pulled consumers away from traditional in-store retailers in favour of the new online experience. Survey statistics show that US millennials make 60% of their purchases online. Yet rather than strengthening its online presence, Forever 21 opted for physical store expansion. Two problems arise with this strategy. First, operating numerous stores within one geographic location cannibalizes store-to-store sales. Intensifying competition from H&M and Zara aggravates the situation. Second, contracts between Forever 21 and landlords place a substantial strain on the company’s cash flow. That the stores are both large in numbers and size further limits the company’s financial flexibility. With multistory buildings taking up as much as 162,000 square feet, almost 30% of revenue was spent on rent. Lastly, in the pursuit of quantity, Forever 21 began to compromise on quality and lost touch with its customers.
If Forever 21’s business model epitomizes the fast fashion business model, then does its fall suggest the demise of the fast fashion industry? If the answer is yes, then are H&M and Zara at risk?
In 2010, H&M launched Conscious – a collection which comprises garments with over 50% of sustainable materials, such as organic cotton and recycled polyester. The H&M Foundation is researching methods for hydrothermal recycling machines to recycle cotton and polyester blend into new fibers. By 2030, H&M aims to use recycled or otherwise sustainably sourced materials for all garments and aims to become “climate-positive” by 2040. To capitalize on E-commerce, H&M has expanded to 50 countries and continues to roll out its digital platform globally.
Zara has also responded to the changing environment. Zara might be the world’s largest retailer, producing 12,000 new designs a year, but its parent company Inditex has announced a $4 million project with MIT to recover fibers from used clothing. Inditex further pledges to have all the cotton, linen, and polyester it uses to be organic, sustainable, or recycled by 2025. Alongside its sustainability initiatives, Inditex plans to have a full online catalogue by 2020.
The retail landscape is changing. Consumers’ preference for online shopping and sustainable fashion have diminished the power of traditional fast-fashion retailers. Forever 21’s recent bankruptcy exemplifies the consequences for businesses who fail to adapt to shifting consumer demands. While H&M and Zara are making visible strides toward a more sustainable and internet-savvy future, more can still be done – such as 3D design, 3D prototyping, and further web and mobile development. Although fast fashion still has a future, retailers must keep up with global sustainability initiatives and online market developments to survive in this increasingly competitive environment.
At the end of Forever 21’s bankruptcy letter, the company writes:
“Once we complete a reorganization, Forever 21 will be a stronger, more viable company that is better positioned to prosper for years to come.”
But will Forever 21’s “reorganization” involve greater attention to sustainability and the online market?