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"
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.
