US fast fashion sales are forecast to grow at an 11% CAGR through 2020

US fast fashion sales are forecast to grow at an 11% CAGR through 2020

The popularity of fast fashion retailers such as Forever 21, H&M and Zara has changed the way consumers shop for value on a global basis. And according to new research, continued expansion of these concepts is likely to put more pressure on speciality retailers in the US - particularly those in the teen space.

With their winning combination of on-trend fashion and low price points, fast fashion retailers are likely to continue to gain market share in the highly fragmented, highly competitive global apparel market, a new report suggests.

Add to this a very rapid design process which is highly integrated with the companies' massive supply chain infrastructure, and "the opportunity for fast fashion retailers is massive in the US," according to the research by the Cowen Group. 

Its 'Fast Fashion Headwind Will Grow For Retailers - Ahead of the Curve Series' notes that four of these global retailers - H&M, Uniqlo, Zara, and Forever 21 - generated a combined US$48bn in global sales during 2013.

This accounted for just 3.4% of the global apparel market, leaving huge room for growth.

"We estimate 2013 market share at only 2.4%, as the largest player, US-based Forever 21, continues to expand and the three international brands are just beginning to ramp square footage growth in the US, creating significant potential for additional market share gains," the report's authors note

Cowen said it sees potential for US fast fashion sales to grow at an 11% CAGR through 2020, driven by square footage growth. This estimate assumes that the four core players are able to maintain 2013 levels of sales activity as the store count expands at a double-digit rate.

This would result in a 4.2% share of the US apparel market by 2020 - a 77% increase in aggregate over the next seven years.

Shopping habits
The popularity of fast fashion is being driven by two key factors: the "extremely inexpensive" prices of garments that will potentially only be worn only a few times, and the vast array of merchandise in the stores.

Most specialty apparel retailers do not supply what shoppers are looking for, the report found, whereas the choice available in fast fashion stores enables shoppers to be more individual in the way they dress.

"The concepts have exacerbated a multi-decade deflationary trend in apparel pricing in both women's and men's offerings," the authors noted.

"The core of fast fashion's strategy is to quickly turn low-priced apparel and accessories to entice consumers to consistently update their wardrobe in line with rapid and sometimes unpredictable fashion trends. Competitive pressure from these concepts is likely to increase over the next several years as they continue to grow their store bases and e-commerce platforms."

Fast fashion leaders
H&M, the world's second largest fashion retailer, is proving to be one of the biggest threats to speciality retail in the US.

The company, which operates around 305 US stores, has been rapidly gaining market share with sales growing at a 19% CAGR since 2011. In the US, it generated sales of $2.1bn last year - accounting for 9% of global sales.

The company has targeted 10% to 15% annual store growth globally, with 375 new stores planned for 2014. The US and China are likely to be key areas of focus, with the brand's online presence likely to boost awareness.

Forever 21's wide variety of merchandise at low price points has helped it achieve sales of $3.7bn, according to Forbes. The company operates around 600 stores globally - including 468 in the US - and has grown units at a 7% CAGR since 2007.

Cowen is modelling Forever 21 to grow its store base by around 60% through 2020.

Japanese casual clothing brand Uniqlo, meanwhile, has had less success than H&M and Forever 21 in the US, but is now beginning to expand. It currently operates around 17 stores in the country - a small fraction of the 2,500 stores it operates globally - and has a target of 200 US stores by 2020. It also sees potential for up to 1,000 over time.

Price differentiation
Fast fashion price points are not only "dramatically below" most mall-based apparel retailers, but have also altered the competitive environment by putting permanent pressure on merchandise margins.

"On average, merchandise margin has declined 130 bps since 2010," the authors note. "Merchandise margin compression has been particularly significant in the teen retail sector, as Aeropostale, American Eagle Outfitters, and Abercrombie & Fitch have all been hurt by increased promotional activity and market share losses to fast fashion."

Cowen suggests this category may face "insurmountable headwinds" as survey results indicate shoppers' preference for fast fashion is "extremely high".

"Our focus groups suggest that the desire to continue to shop at fast fashion concepts may continue to put significant pressure on this group from a top-line, margin and ROIC perspective, and we continue to forecast lower returns going forward."

Cowen also notes that as cheaper fast fashion concepts proliferate, the need to operate brick and mortar locations may also decline as the consumer increasingly shifts spending online.