According to Wesfarmers (ASX:WES) department store boss, Guy Russo, if he can get his model for Target right than Zara and the other international fast-fashion retailers will ‘regret making the trip down under’.
Whilst I applaud his ambition, the world’s second-richest person and founder of Zara, Amancio Ortega, is unlikely to be losing any sleep.
Zara is about as efficient as a fashion retailer can get, owning arguably the industry’s best supply chain.
The company produces around 450 million items per year which it distributes to its network of 2,100 stores in 88 countries in as little as 48 hours in the case of its Australian stores. In total it takes approximately two weeks for Zara to get from the design and manufacturing stage to selling on the shop floor, long before anyone else can release similar clothes. That’s why it can charge a premium.
With the ability to move goods so quickly around the world, Zara is able to minimise excess inventory and sell products at full price at rates higher than its competition.
Target changing its store layout, simplifying its range and offering lower prices is unlikely to prevail against such a machine.
No-one, perhaps even Russo himself, expects Target to actually compete with the likes of Zara, H&M and Uniqlo. Given Target’s recent billion-dollar write-down, there’s a more fundamental issue to resolve before Wesfarmers could even consider such a move.
Target has been performing poorly, with operating profit falling from $381 million in 2010 to around $90 million in 2015. Why Russo would come out with such claims after a performance like that is baffling. If Target were seriously thinking about entering the fast-fashion industry, why give advance warning to its competitors?
Maybe Russo’s success in turning around Kmart has gone to his head to make such proclamations. But the fact is Target is unlikely to ever be a great business. All it needs to be is a less bad one.
Russo would add to his reputation if he achieved that. Instead, he’s bracketed Target with one of the world’s best retailers. And by talking up his ability to take the fight to the fast-fashion giant, he has raised expectations that he might not be able to meet.