The Devil Wears Zara: Threat of Climate Change from Fast Fashion is Heating Up

Inditex, the world’s largest fashion retailer, pioneered the fast-fashion business model with its streamlined, agile supply chain operations. But can it disrupt the industry to counteract the hidden costs of its impact on climate change?

 

Fast-Fashion, Slow Risk Mitigation

Season after season, Inditex has delighted consumers by passing on the benefits of its compressed production cycle in the form of just-in-time, hot-off-the-runway-style clothing at a fraction of runway prices. Inditex’s Zara brand offers 24 new clothing collections per year and delivers inventory to stores twice per week to cater to consumer demand [1][2].

Across the apparel industry, consumption is predicted to increase by 63% to 102 millions in 2030 with demand driven by developing markets [3]. Despite continuous improvements in its supply chain, even the largest fashion retailer still relies heavily on suppliers using low-tech production systems that have adverse effects on the environment contributing to climate change. Per a McKinsey study, “making one kilogram of fabric generates an average of 23 kilograms of greenhouse gases” [4]. Clothing production most significantly contributes to greenhouse gas (CO2) emissions resulting from:

  1. Material processing and production that is heavily reliant on fossil fuels
  2. Waste disposal in landfills or incinerators [5]

 

Beyond the reputational risk, Inditex faces the risk of increased material and energy costs that could directly impact its profit margins. Furthermore, potential governmental regulations on its key inputs could be detrimental to operations [5]. These risks will only be exacerbated by increased production. As a global industry leader, it is in Inditex’s best interest to mitigate these risks and adapt its model for sustained growth.

Rising to the Challenge, Ideally Faster than Sea Levels

Inditex has initiated efforts to combat its own impact on the environment, but the results these initiatives raise doubts about scalability. Pablo Isla, the company’s CEO and HBR’s Top-Performing CEO for 2017, stated the company’s public commitment to tackling environmental issues in a recent HBR interview and specifically highlighted that “all our stores will be eco-efficient, to use 40% less water consumption, 20% less energy consumption” [6]. This may feel like a drop in the bucket as the retail industry increasingly shifts from brick-and-mortar to online.

The company has laid out a Strategic Environmental Sustainability Plan 2016-2020 with elements to improve reduction of GHG emissions listed below [2].

Raw Materials

  1. Promote use of fibers that are more energy efficient.
  2. Pioneer commercialization of recycled textiles that are on par with quality of new materials.

Production

  1. Collaborate with various sector organizations to share and adopt best practices in energy management.
  2. Contribute to the 2030 Sustainable Development Goals (SDGs) put forth by the UN:
  3. “Corrective Action Plan” to advise suppliers not in compliance with its targets and allows for 6-24 months to achieve compliance [5].

Logistics

  1. “Green to Pack” program leverages thinner packaging to allow for more packages to be loaded onto one shipment, requiring fewer shipments [2].

Waste

  1. “Closing the Loop” upcycling initiative with a focus on circular economy by distributing clothing collection bins in store.
  2. Collaborating with various research universities and business organizations to develop innovative materials and technologies that allow for recycling of textile waste.

Catwalk the Talk

Inditex is still hindered by a lack of standardized, quantifiable metrics to measure progress towards increased transparency, GHG reductions and associated costs at each step of the supply chain. It may benefit from adopting an Environmental Profit & Loss (EP&L), a tool developed by Kering to improve visibility, measurability, and comparability of its supply chain and can serve as basis for dialogue and accountability with suppliers and other stakeholders [7]. Metrics from the EP&L can also be factored into performance evaluations of senior management.

Better integration of suppliers into internal control systems supports transparency. In 2016, Inditex’s internal team made 619 on-site factory visits to offer advice to non-compliant factories, yet 1,367, or one-fifth, of its active factories were only within 51-70% compliance of its own environmental standards, consistent with the prior year [2]. This suggests that there is an opportunity for Inditex to be more stringent in its auditing and training of suppliers. To truly move the needle, Inditex must adopt a 100% renewable energy policy and may need to move to a system-wide zero tolerance policy among suppliers for less than 100% environmental compliance.

Inditex could further champion second-life retail through buy-back programs, entering the sharing economy via clothing libraries (think Rent-the-Runway type subscription wardrobe services), and offering services to extend garment life similar to Patagonia. The risk of cannibalization, decreases in purchase frequency, or further negative environmental impact from shipping should be evaluated before implementing these recommendations.

How might the other two SCM megatrends, isolationism and digitization, play a role in Inditex’s sustainability efforts? Would they help or hinder progress?

How important is it for Inditex to communicate its environmental efforts to consumers? Can Inditex shift consumer behavior and convince them to pay a premium such efforts?

Perhaps Inditex’s fashion forecast should be “green”house gas is the new black.

(Word count: 781)

 

References

[1] “Looking Good can be extremely bad for the planet.” The Economist, April 8, 2017. https://www.economist.com/news/business-and-finance/21720200-global-clothing-production-doubled-between-2000-and-2014-looking-good-can-be, accessed November 2017.

[2] Inditex, 2016 Annual Report, https://www.inditex.com/en/investors/investor-relations/annual-reports, accessed November 2017.

[3] “Pulse of Fashion Industry 2017,” Global Fashion Agenda and The Boston Consulting Group, Inc., May 2017, https://www.copenhagenfashionsummit.com/wp-content/uploads/2017/05/Pulse-of-the-Fashion-Industry_2017.pdf, accessed November 2017.

[4] Nathalie Remy,Eveline Speelman, and Steven Swartz. “Style that’s sustainable: A new fast-fashion formula,” October 2016, https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/style-thats-sustainable-a-new-fast-fashion-formula, accessed November 2017.

[5] Duygu Turker and Ceren Altuntas. “Sustainable Supply Chain Management in the fast fashion industry: An Analysis of Corporate Reports,” April 14, 2014, European Management Journal.

[6] McGinn, Dan, “2017’s Top-Performing CEO on Getting Product Right,” October 24, 2017, https://hbr.org/ideacast/2017/10/2017s-top-performing-ceo-on-getting-product-right, accessed November 2017.

[7] “Environmental P&L,” Kering, http://www.kering.com/en/sustainability/epl, accessed November 2017.

 

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9 thoughts on “The Devil Wears Zara: Threat of Climate Change from Fast Fashion is Heating Up

  1. There are firms in almost every industry that have created environmental initiatives, but in many cases, those initiatives are poorly communicated to customers. If a firm’s customers aren’t aware of the firm’s environmental aspirations, doesn’t believe the they are sincere, or sees them as short-lived tactics to gain goodwill, the firm and the initiatives will not be successful. For this reason, marketing has emerged as one of the most influential elements in the push towards environmental sustainability. “The goal of sustainability in a marketing strategy is to attain competitive advantage through a position that is desirable, different and defensible.” With this in mind, sustainability initiatives should be formulated in such a way that profits can still be earned even after having a reduced impact on the environment and society. [1] In the case of Inditex, the ability to identify and effectively communicate meaningful long-term sustainability goals to its customers is essential in being able to have the desired impact without suffering financially. If the initiatives are in line with customer sentiment, then the firm will be able to pass some of the cost of those initiatives on to its customers without negatively impacting sales.

    1. Thrust for sustainability in marketing strategy. (2014, May 27). The Financial Express Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1528424027?accountid=11311

  2. I don’t necessarily think that a company needs to communicate its sustainability initiatives to customers, particularly if it’s a brand like Zara. I’m not sure that people think of Zara and think sustainability – there are other brands that have made that connection much stronger from the outset (LL Bean, for example). I’m also not sure if sustainability is going to influence people’s buying patterns.

    Zara is a fast fashion business. They want people to purchase and change out their clothes often, but a better way to think about this would be by having people replace their clothing rather than stockpile. I’m thinking of what Madewell does by giving a discount to buyers who bring in an old pair of jeans when buying a new one. This makes people think differently about buying new clothes. You’re not adding to your closet, but rather swapping something out. It’s still fast fashion, companies get the chance to recycle fabric and use it in new products and it builds loyal customers who feel like they’re getting a deal by swapping clothes. You get to keep your fast fashion consumer while building on sustainability efforts.

  3. You asked the question: “How important is it for Inditex to communicate its environmental efforts to consumers? Can Inditex shift consumer behavior and convince them to pay a premium such efforts?”
    Unfortunately I don’t think that marketing Zara’s sustainability initiatives is going to make a significant impact on consumer behavior or allow the company to charge a premium for such efforts. Zara’s customer promise lies in creating an affordable ‘fast fashion’ product. Their products come in and out of style quickly and they are priced so that a lower income consumer can constantly replenish their wardrobe without spending their entire paycheck on it. In this way I believe that Zara’s current customer promise directly competes with the environmental initiatives they hope to achieve.

    The most promising part of Inditex’s Strategic Environmental Sustainability Plan is their proposal to “pioneer commercialization of recycled textiles that are on par with quality of new materials” combined with the initiative to upcycle with collection bins in-store. In this way they can focus on staying true to the customer promise by creating fast (disposable) fashion products and encourage their customers to donate it back for use in future garments. This plan has the promise of keeping customer loyalty while still reducing overall environmental impact.

  4. Reading this essay reminded me of our discussion in the IKEA case – and the conflict between profitability through growing sales of a fashion brand and sustainability of the business. As Lauren and Christine mentioned above, I don’t think that Zara’s existing customers would care about their sustainability efforts or would be willing to pay a premium for sustainably produced products. Additionally, I don’t think it’s in Zara’s best business interest to reposition their brand and make higher quality items that last longer, like Patagonia, since this approach would increase costs and will likely dramatically decrease sales.

    Since Zara’s business model and customer promise are hinged on customers regularly changing out their clothes, I see the most potential for meaningful impact in initiatives that collect older clothing items and keep them out of the landfill. This initiative could be accomplished through different approaches, such as a subscription clothing service similar to StitchFix, collecting clothing items in clothing bins placed in stores, or pre-paid shipping for customers purchasing new products online to send in any old items. I think Zara can recycle these items and / or donate products that are in good condition to people in developing markets, where, coincidentally, Zara has majority of its manufacturing capacity, thus taking advantage of established distribution chain.

  5. Thanks for the interesting take on this aspect of the growth of fast fashion Consuelo. It does seem that the environmental impact of fast fashion is not top of mind for consumers, and I’m not convinced this will change; as Alona points out, the customer promise is cheap, trendy clothing that can be replaced often. Could Zara be chasing the goal of reducing its carbon emissions with no discernible benefit to itself? I’m curious if you see a scenario in which Zara is best served by focusing on its core business and either waiting for governments to put a price on carbon or for public pressure to mount to the point that they’re forced to buy carbon credits to offset their emissions. While it’s possible that either of those remedies would entail higher short-term costs than if they were to gradually transition to a “greener” business model, the value of delaying action could be more than worth it in terms of profits.

    Please note this isn’t to detract from the moral imperative to be a good global citizen, and of course in an ideal world we’d have zero pollution and there would be no tradeoffs. But in this case I think the range of options is worth considering; for example, could Zara reallocate the money it’s spending (and profits it’s forgoing) to make itself “greener” to a different cause such as land conservation, public health, vaccinations, or any number of other initiatives that would have a greater impact on aggregate welfare than marginally reducing global greenhouse gas concentrations? I think it’s at least worth considering before firms incur great expense to reduce emissions due to regulatory or consumer pressure.

  6. Thanks for the interesting read, Consuelo! Similar to Alona, I immediately thought about our IKEA discussion when reading this case. Not only does fast fashion inherently imply that customers are more likely to only use the clothing for a limited amount of time (and thus increase textile waste), but also that Zara aims to sell lower priced clothing at a higher volume — increasing waste through higher transportation costs and increased packaging. Can Zara’s business model of selling a high volume of cheap, fast fashion clothing possibly be reconciled with promoting sustainability? Similar to IKEA, I think Zara can do as much as it can to leave the smallest environmental footprint within the constraints of its business model.

    I agree with others that Zara should not reposition its brand to be longer lasting clothing (e.g., Patagonia) as its main value proposition to customers is on-trend clothing; however, I disagree that Zara’s customers do not care about their sustainability efforts. Zara’s customer base is millennials who increasingly care about these issues and are voting on companies with their dollars. There are lot of fast fashion companies in the market and this could be part of Zara’s competitive edge. Albeit, I agree, this should not be their main focus.

    Zara should not switch to a subscription clothing business as it would fundamentally change its business model, requiring a very different logistic and customer service process. In addition, the quality of the clothing would need to be significantly higher given handling by several clients and there would be as much (or more) wasted transportation costs. Finally, subscription based offerings do not aim to provide the same customer promise for on-trend clothing but rather designer items or “classics” — if they did, they would produce the same amount of waste through continual replacement of inventory.

  7. I believe that, in the end, this is same question we have with other first class HBS and in Ikea´s Case. Is it possible to make a positive difference at the same time you are making a lot of money? I am a strong supporter that both objectives can (and must be) be pursued simultaneously. In this sense, Zara is making a lot of money and the fact that they are also looking for mechanisms to be sustanaible does not nothing ut help to the brand.
    As discussed in IKEA, Zara is trying to be sustainable and the fact that they earn a lot of money does not discredit their efforts with the environment. At the end of the day, people will still need to buy clothes. I prefer a company that takes care of the environment to earn a lot of money than a company that does not do it.

  8. My biggest question after reading this interesting article is: does Zara really stand to benefit from being environmentally conscious? Although the stats you present do seem egregious, the consumers do not really think about it, and I do not see a clear argument that the costs to Zara currently from this supply chain model are greater than the costs it would take to implement sustainability initiatives. As Alona mentioned, Zara is not likely to re-brand and market their sustainability efforts to pass on these costs to their customers. Although Zara should operate ethically as a company, the financial benefits, either long or short term, are less obvious to me. My feeling is that this is a fast fashion industry problem, not a unique Zara problem – and Zara would not stand to benefit by attempting to tackle this issue alone.

  9. As discussed during our class on IKEA, there are many contradictions between the efforts large companies make to reduce their negative environmental impact while maximizing sales and profits. Personally, I do believe that the companies are motivated mostly by the latter. But, I do believe that in order to achieve high profits in today’s environment and in order to stay relevant to their younger segment companies need to make sustainability a key part of their strategy. Therefore, I fully agree with your suggested recommendation and I actually think it’s worth taking the hit in the short term as I believe that sustainability will be a hygiene factor to gain basic customer good will in the mid-term perspective.

    As to one of the other megatrends and the effects that digitization can have on sustainability I do think it’s a trend that facilities sustainability efforts. For instance, digitization of the supply chain through for instance RFID tracking increases transparency and enables retailers to monitor materials and supplies through the SC. Benefits of RFID tied to sustainability also include reduced waste by better inventory management and faster identification of defected materials.

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