Emma Nakagawa Hofmann

Cost Theory in Fast Fashion

Introduction
With fast fashion, clothing brands have rejected the seasonal model of dressing in
favor of a near-constant stream of new designs. The term fast fashion refers to the rapid
turnover of low-cost garments in the global clothing industry (Choi, 2014). Stores like Zara,
H&M, GAP, Uniqlo, and Abercrombie & Fitch receive new merchandise every week and
retailers want consumers to feel drawn to novelty and to shop recreationally.
Where people once shopped seasonally for items that were built to last, they now shop
on impulse and buy trends. It is often said that the U.S. is a place where the luxuries are cheap
and the necessities are expensive (Tungate, 2015). Many people are spending less money for
more items of clothing than ever before, enabled by the giant fast fashion industry. In her
book Overdressed, Elizabeth Cline writes: In 1930, the average American woman owned an
average of nine outfits. Today, we each buy more than 60 pieces of new clothing on average
per year. (Cline, 2013) This clothing is sold for low prices to tempt bargain-hunting
shoppers. My research question is what is the cost of fast fashion in terms of the economy and
the environment? The plan of the paper is to explain the cost theory, and relate it to the
economy of fast fashion.

Background
The leader of the fast fashion industry is Zara, owned by the Inditex textile company.
Zara/Inditex began in 1963 as a dressmaker. Twelve years later, its first retail store opened in
Spain and by 1984, the company was so successful that it opened its first logistics center, a
10,000-square meter facility (Bruzzi and Gibson, 2013). The company then expanded to
Portugal, the U.S. and France and began incorporating more brands. By the 1990s there was
rapid expansion to other markets, including Mexico and Greece and Zara had honed its model
of rapid design and production in response to trends and customer demand. Inditex went

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public in 2001 and in 2004; the company inaugurated its 2000th store (OShea, 2014). By
2010, the company was up to 5,000 stores and in fiscal year of 2014; Zara netted $19.7 billion
in profit. Inditex sales rose 8% last year and its founder is Spains wealthiest man (Leob,
2015).

Empirical Data and Cost Theory Analysis

The success of the fast fashion model depends on low production costs. This is why
many fast fashion companies end up outsourcing their labour to hire low-paid workers,
working in unsafe conditions. The harsh working conditions and degree of severity of the
treatment of the workers was showed clearly in the documentary we watched about Chinese
garment factory workers (Peled, 2005). In addition to low wages, the fast fashion business
model depends on speed (Brooks, 2015). While fast fashion retailers stock reliable basics,
their trendier items are rapidly replaced in response to fashions mood and customers thirst
for novelty (Choi, 2014). This is something I have learned working as a retailer in the fast
fashion industry. Today, the economics of clothing is all about volume.

Cost Theory
In the cost theory, companies must balance revenues and costs so as to maximise
profits, and factors of production are priced at opportunity cost. In terms of labour, firms pay
a wage for labour service, and capital can be rented but it is often owned. Firms often times
carry inventories like stock or SKUs (stock keeping unit) so that sales never stop and there is
always something to sell. This inventory must be calculated carefully and be financed by
working capital. A demerit to keeping lots of stock is that it requires space, which leads to
cost for the firm.

Emma Nakagawa Hofmann

In the Cost Theory, there are three types of cost. These are total cost, average cost, and
marginal cost. Total cost, is the sum of the fixed and variable costs. Fixed costs are associated
with the fixed factor, things that cannot be changed, such as rent. Even if a store is not selling
anything, they will still need to pay rent for their store. Variable costs are associated with
variable factors, things that can be changed, such as labour and raw materials. These are costs
that change depending on the output of production. Average cost is the total cost divided by
the quantity of output or the sum of the average fixed and average variable cost. Marginal cost
is the incremental cost that is yielded from producing one extra unit of good. All of these
graphed with the x-axis as output and the y-axis as cost, looks like the following graph below.

Source: (Tragakes, 2011)

In the cost theory of the firm, the short run is when labour is the only unit that can be
changed. In the long run, all costs are variable. In the fast fashion economic market,
companies like Zara have reached the long run equilibrium point where there is no longer
many opportunities for cost reducing substitutions. In the long run, minimum cost can be

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found for each level of output. This graphed out is called the long run average cost curve and
looks like the following.

Source: (Tragakes, 2011)

In the beginning, the long run average cost curve is falling due to economies of scale,
which arises from increased opportunities for specialisation and division of labour, falling
R&D costs, bulk buying, and cheaper financing. With economies of scale, a firms scale of
production leads to lower average costs per unit produced but after a certain point, the long
run average cost curve starts to rise due to decreasing returns to scale, which arises from the
difficulties in managing and controlling large enterprises, no further opportunities to change
machinery, and the limit to discounts associated with large scale purchases. In some
industries, there is a flat section between the economies of scale and diseconomies of scale,
and this is referred to as constant returns to scale.

Emma Nakagawa Hofmann

The greatest way firms such as Zara cut costs is through technical innovation and cuts
in labour costs. Because loss through technical advancement is rare, technical change almost
always causes the long run average cost curve to fall. However with labour, better education
causes productivity of labour to rise. Companies like Zara may depend on producers in far-off
labour markets for the production of basics, but for items they need more quickly they often
turn to near-shore or even on-shore production (Faster, Cheaper, Fashion, 2015). This is how
Zara is able to go just two to three weeks between the time an item is designed and the time it
hits stores. This short time scale leads to less unused inventory for retailers because their
production is more flexible and responsive. Items reach stores when customers want the
fleeting trend they represent, not months later (Kapferer and Bastien, 2012). There are many
other factors that prevent firms from further cutting costs, which causes a slowdown in
productivity and growth. A few examples include pollution and crowding out.

Fast fashion Backlash

Fast fashion has gained enemies among those who fault the economic model for its
impact on wages and the environment. One famous campaigner against fast fashion is Livia
Firth, consultant, activist and wife of the actor Colin Firth. Livia Firth recently referred to fast
fashion business as creating an evil system. Citing the 16-hour workdays of garment
workers in Bangladesh, Firth told CNN, The fast fashion companies are like drug pushers:
they go to these countries promising to lift millions out of poverty, they get the business, and
then once they start production in that country they start pushing prices down. (Untold,
2015)
It is not just the wages that have some analysts troubled. According to some estimates,
the clothing industry is second only to the oil industry as a polluter. Between the carbon
emissions resulting from the production of so much clothing and the pollution from dyes and

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chemicals used for synthetic fabric, fast fashion is anything but green (Morgan, 2015). Part of
this has to do with the prevalence of cotton in the disposable fashion industry, because cotton
is one of the worlds thirstiest crops. According to ecowatch.com, it can take more than 5,000
gallons of water to manufacture a T-shirt and a pair of jeans (Jin and Gupta, 2012, pp. 193211).
Some brands have responded to the criticism of fast fashion by offering greater
transparency about wages, factory conditions and the environmental impact of the clothing
they sell. One pioneer in this space is Everlane, the online-only retail company that offers
what it calls radical transparency, with photos and locations of factories listed on the
companys website. Back in 2013, Everlanes CEO told entrepreneur.com that the company
had made $12 million and expected that number to triple in 2014 (Choi, 2013).
Other companies are responding to activists environmental concerns. Levis launched
a line called Water<Less. The company says the jeans in the line use up to 96% less water
in the production process and that the line had 13 million products in Levis spring 2012
collection, resulting in water savings of 172 million litres (Minnie et.al., 2011). However as
we watched in the documentary during class, the jeans being produced in the Chinese
factories were being made with very negative effects on the Chinese workers (Peled, 2005).

Conclusion
Despite its critics, fast fashion is still a strong economic performer. Zaras customers
visited the retail chain an average of 17 times in 2012. And fast fashion sales are by no means
limited to brick-and-mortar locations. In the first half of 2015 alone, British fast fashion retail
site boohoo.com experienced a 35% jump in revenue (Anguelov, 2016). If the goal of a
business is to maximise profits for the shareholders, then fast fashion companies are

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succeeding. Only time will tell whether consumer spending patterns return to the buy more,
buy better model of the last century.

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