The R&D Tax Credit Aspects of Domestic Fast Fashion
Fast-Fashion
Fast fashion is a process that certain companies
follow within the fashion industry to produce affordable and
fashionable clothing for customers. Within fast fashion, since clothing
is manufactured so quickly, retail locations are provided with
specific, customer-targeted clothing articles every day or every few
days. Fast fashion gives a wider socio-economic range of consumers the
option of purchasing the newest and trendiest clothes at a more
affordable price compared to purchasing designer clothes which look
similar but are sold at a far more expensive price.
There are two key elements contributing to the
success of "fast fashion": price, and a continuous supply of fresh,
popular garments. As such, success requires an interesting combination
of artistry and humility on the part of the product designer, as well
as a clever and discreet eye for emulating others’ work. Certainly some
companies have been subject to lawsuits over the years for alleged
intellectual property infringement. Still, the major players in the
industry march on. Behind the scenes, a faster supply chain from
product ideation through delivery is imperative. The era when it was
acceptable to manage twelve (12) to eighteen (18) month product
lifecycles is over. Consequently, it is in a company’s best interest to
have a good demand forecast engine to help decide how much of a
particular item to make and/or buy for shoppers.
The amount of clothing that individuals purchase has
increased over the years, partially due to cheaper retail prices. With
the availability of cheaper apparel, people are able to afford more
items and are inclined to purchase more. Individuals from the United
States purchased an average of 40 clothing items per person in 1991,
while an average of 63.7 clothing items were purchased in 2013.
These facts illustrate how the fashion and retail market has changed
over the years as well as how businesses were able to increase their
amount of sales.
The
Research & Development Tax Credit
Enacted in 1981, the federal Research and
Development (R&D) Tax Credit allows a credit of up to 13 percent of
eligible spending for new and improved products and processes.
Qualified research must meet the following four criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost of
supplies, cost of testing, contract research expenses, and costs
associated with developing a patent. On December 18, 2015 President
Obama signed the bill making the R&D Tax Credit permanent.
Beginning in 2016, the R&D credit can be used to offset Alternative
Minimum Tax and startup businesses can utilize the credit against
$250,000 per year in payroll taxes.
Fast
Fashion
Fast fashion is a contemporary term used by fashion
retailers to express that designs move from catwalk quickly to capture
current fashion trends. Fast fashion clothing collections are
based on the most recent fashion trends presented at Fashion Week in
both the spring and autumn of every year. Emphasis is on
optimizing certain aspects of supply chain logistics for these trends
to be designed and manufactured quickly and inexpensively to allow the
mainstream consumer to buy current clothing styles at a lower price.
This philosophy of quick manufacturing at an affordable price is used
in large retailers, including Zara, H&M, and Uniqlo.
Fast fashion particularly came to the forefront
during the height of Vogue’s "boho chic" aesthetic in the
mid-2000s. This has developed from a product-driven concept based
on a manufacturing model referred to as "quick response", which was
developed in the United States in the 1980s, and moved to a
market-based model of "fast fashion" in the late 1990s and first part
of the 21st century. Several global companies believe the concept
of fast fashion is a successful method to run their business.
Notably, Zara has been at the forefront of this
fashion retail revolution and their brand has almost become synonymous
with the term. However, there were other retailers who worked with the
concept before the label was applied, such as Benetton. Fast fashion
has also become associated with disposable fashion because it has
delivered designer product to a mass market at relatively low prices.
Fashion is always changing and trends rarely extend
for a lengthy period of time. As trends and clothing styles change,
customers don’t have to worry about spending a significant amount of
money on clothes that will only be worn for a short amount of time. One
reason why fast fashion has been successful is because companies are
normally in control of the whole process from start to finish. Rather
than buying clothes from manufacturers, businesses are directly
involved with designing, manufacturing and shelving clothes.
With the availability of new technology, such as
advanced computer and analytic systems and manufacturing equipment,
companies are able to complete an entire process of developing a
product in a more efficient manner and faster amount of time. The use
of updated and modern technology allows for the accurate decision on
what design should be produced, the quantity of a design and the
efficiency in the amount of clothing that can be manufactured.
Zara
Inditex is one of the world’s largest fashion
retailers who is responsible for creating Zara, as well as several
other retail businesses. Established in 1975 with headquarters based in
Spain, Zara is a popular retail company that has store locations all
over the globe and is well-known for utilizing a fast fashion business
model. In 2015, their sales and profits significantly rose by 15% from
2014 which goes to show that this business model has been successful
for the brand.
A large reason why Zara is so successful is due to
the small amount of clothing produced for each design. Since new styles
are made every so often, Zara doesn’t have to follow long term fashion
trends. Designs can be completed within 4-5 weeks and existing garments
can be altered within 2 weeks. The company analyzes short term trends
which make it easier for analysts to determine if a trend will be
successful or not. Due to Zara being in charge of their own
manufacturing they can decide to increase or decrease their operations
to meet customer demands. Each week Zara responds in real-time to
customer preferences as they emerge.
Zara is able to introduce new clothing designs at a
rate of approximately every two weeks, which provide customers with a
total of approximately 11,000 distinctive items each year. Zara’s owns
a large distribution center referred to as “The Cube” which is where a
majority of significant activities occur for their supply chain
activities. All of Zara’s business activities end up reverting back to
The Cube, including ordering raw material from suppliers, creating new
sketches and designs, production of garments, and sending apparel to
the stores and receiving feedback data from customers.
"The Cube"
Zara’s supply chain involves a constant movement of
information. Zara’s headquarters contain teams who are responsible for
obtaining a large amount of information on new fashion styles and
trends. Major teams consist of design, sales, and procurement and
production planning who work closely with one another to create and
produce new clothing lines. Designers from the design team collaborate
with one another and examine newly developed sketches for potential
products. Sales personnel are responsible for communicating with store
managers and obtaining customer feedback of new designs. Procurement
and production planners create estimates for manufacturing costs and
capacity.
Ultimately, all of the teams work in conjunction to
analyze design prototypes in order to choose a final design. Throughout
the entire process, certain tools are utilized to develop the proposed
designs and analyze and keep track of large quantities of collected
data. Computer aided design (CAD) systems are used to assist in
choosing the appropriate colors and textures for garments.
The specifications of each design are sent directly
to equipment within Zara’s factory and bar codes are used to track the
pieces of material and determine to which store they are delivered.
This team-oriented approach rapidly reduces cycle response times and
allows for distribution to local stores at a phenomenally improved.
H&M
H&M is a recognized Swedish-based apparel
retailer which focuses on high fashion and low price strategy, and
operates retail stores in over sixty one (61) countries. Another
pioneer of fast fashion, H&M is known for quickly adopting new
apparel trends. H&M focuses on investing in responsiveness to
customer feedback and desired fashion trends in order to strengthen the
brand name and promote sustainability.
Whereas Zara offers apparel that is aimed towards
adults, H&M offers clothing for all ages, including infants,
children, and adults. This brand provides a range of clothing options
for individuals of any age, widening H&M’s market opportunity. With
a wider range of customers, utilizing the method of fast fashion allows
this company to provide a variety of affordable clothing to their
customers.
Founded by Erling Persson as Hennes & Mauritz in
Sweden in 1947, H&M has mainly engaged in sale of clothing and
cosmetics. Due to its retail size and international scope,
logistics are extremely integral to H&M's operational approach of
creating the ideal product in the necessary quantities and routing
those items to the optimal retail sales location. As both an
importer and retailer, H&M must monitor every step of the supply
chain, and update the information technology required to support
continuous, efficient operation thereof.
Rather than maintain its own factories, H&M
outsources production to independent suppliers in Europe and
Asia. The benefit of Asian-based production is a massive
reduction in costs, while the European producers usually provide much
more rapid manufacturing-to-market response, which allows H&M to
deliver more popular items quickly to the American and European
markets. H&M also employs a unique distribution technique,
which provides different options based on market region and item
demand.
In normal production, the clothing items are
delivered directly to the central warehouse located in Hamburg,
Germany, and then distributed to stores as requested by
management. However, if the item is being produced for a specific
regional market and consumer segment, the H&M system allows the
products to be re-routed directly to specific stores in order to meet
local demand in a timely fashion.
H&M’s supply chain is supported by an advanced
IT system that connects all of their stores, production offices,
administrative offices and headquarters in real time. Central inventory
management software is utilized as well to keep track of inventory
allowing H&M to analyze the trends and sales of their clothing. At
H&M’s headquarters, more than one hundred (100) designers work on
analyzing current fashion trends and then four hundred (400) other
designers work on creating H&M designs for these fashion trends.
Due to fast fashion's nature, H&M's inventory
turnover is extremely rapid. Generally, the value of an
individual garment depreciates 0.7% per day, resulting in a 7% loss of
value every ten (10) days. As such, the faster the item sells,
the higher the gross profit margin that will be realized for that
item. Utilizing demand trends on a store-by-store level,
H&M's central logistics system can track sales of each item through
ICT (information and communication technologies) in order to avoid a
sales backlog from excessive production, and, resultantly, a decline in
gross margin realized per item sold.
Additionally, H&M also utilizes flexible
procurement as the core of its supply chain management. H&M's
buyers procure new designs and items on a monthly basis rather than
once or twice per year as the traditional fashion model would
dictate. Relying heavily on internal ICT, H&M monitors
purchasing and sales in tandem, and each retail location can monitor
others' sales and product allocation, allowing replenishment whether
via new product or transfer of existing product. Essentially,
H&M utilized ICT to create a closed-loop feedback system which
links sales, inventory, procurement methods, and product capacity
metrics to promote complete transparency and encourage sales by
reallocating and replenishing product as necessary.
Certain high-fashion designs are made in a smaller
quantity so that in the event that these items aren’t as popular there
won’t be a surplus of apparel in inventory. The Company operates twenty
(20) sourcing offices which work with numerous suppliers around the
world to ensure that products are sold at a fair price and delivered
within a certain amount of time. The time it takes to produce products
differs depending on the location; it can take 2-3 weeks in Europe
whereas it can take up to 3-6 months in Asia.
Uniqlo
Based in Japan, Uniqlo is another company that is
seen as a brand that utilizes the concept of fast fashion. Although the
company offers basic fashion styles to customers, all their clothes
provide low-priced comfortable clothes that are made of innovative
materials. Uniqlo holds concept meetings each year to discuss upcoming
developments and design concepts for clothing lines. The R&D
department researches popular styles and analyzes new materials to for
future designs and then work on modifying prototypes to develop the
final designs.
Uniqlo can afford to sell their high quality items
at a low cost by directly working with material manufacturers and
securing large orders of materials. After working with R&D
personnel, the merchandising team has to plan the product lineup and
decide the volume of each clothing item that should be produced.
Through quality and production control, customer concerns are taken
into account to implement future product improvements. The company
invests in high quality materials and is involved with a large amount
of research and design.
One of their most popular clothing lines is HeatTech
where the R&D team researched innovative materials to create a
lightweight heat retaining fabric. Uniqlo spends a significant amount
of their time working with Toray Industries who produces the synthetic
fiber to ultimately improve the material for their HeatTech line.
Conclusion
The concept of "fast fashion" and the supporting industries are
uniquely qualified to take advantage of the economic benefits of the
R&D tax credit. Specifically, this area incorporates both
structural design of garments and the information technology systems
necessary to track and supply consumer demand in a manner designed to
maximize gross margin return. Additionally, logistics means and
methods become essential to deliver efficient processes. As such,
nearly every aspect of the "fast fashion" industry, aside from retail
sales, represents development of new or improved products and
processes. In the increasingly competitive and fast paced fashion
industry, the R&D tax credit is an added economic boon that should
be maximized by every fashion-oriented company seeking to increase its
economic stability.