The fast fashion industry is so fast that some of us might not realize that one of the most successful companies, Forever 21, is filing bankruptcy. How? Let’s take a look at the history of the company.
Forever 21 was built by two immigrants who barely spoke English, Do Won Chang and Jin Sook Chang, in 1984 (Ciment, 2019). They invested US$11,000 to open Fashion 21 (now: Forever 21) (Russell, 2019). Forever 21 has been adopting economies of scale as its business model, in which it advantages from manufacturers by buying a huge amount of clothes at a discounted price. Its business model enables them to sell fast fashion clothes at a cheap price (Ciment, 2019).
A year after the launch, through its business model, Fashion 21 successfully earned US$700,000 in sales (Russell, 2019). It spread all over the USA, opened a new store every six months (Russell, 2019). 2015 was the year of glory for Forever 21, where it earned US$4.4 billion through global sales (Ciment, 2019). At this year as well, Forever 21 aimed to earn US$8 billion by 2017 and open 600 additional stores by 2018 (Ciment, 2019)!
It seemed like Forever 21 will forever be one of the largest fast-fashion companies. But what causes the downfall of Forever 21?
While other fast fashion companies such as Zara and Pull & Bear were focusing on integrating their business model with technology (to create e-commerce or online shop), Forever 21 was still focusing on its brick and mortar (Stern, 2019). Its strategy led to the escalation of its rent expenses, while other companies have been cutting their rent expenses through e-commerce (Mensik & Peltz, 2019).
Forever 21 thought that creating more huge stores will attract more consumers, without considering the current fashion trends and changes in its industry (Coleman-Lochner & Ronalds-Hannon, 2019). As an impact of its strategy, Forever 21 forewent its competitive advantage, which was a unique style at a cheap price. Since 2015, it has been producing an unsatisfying style of clothes (Ciment, 2019). This made its consumers choose its competitors, considering that its competitors offer a more satisfying quality of products at a similar price as Forever 21 (Ciment, 2019). As a result, in 2018, Forever 21’s sales dropped to approximately 25 percent (Mensik & Peltz, 2019) and closed more than 7,500 stores in 2019 (Peltz, 2019).
What should have Forever 21 done to prevent this?
As a company, Forever 21 should understand its consumers. In particular, the reason(s) why consumers choose Forever 21 over its competitors. As mentioned above, consumers value Forever 21’s ability to provide a quality of trendy fashion, while offering it at a low price. Forever 21 should have focused on cutting its expenses (in this case, rent expenses) to maintain its low price-fair quality business model (Mensik & Peltz, 2019). The solution for this is to focus on its online base store, stop (or reduce) the expansion of its brick and mortar stores, and provide products that are up to date with the current fashion.
Bibliography
Ciment, S. (2019, October 1). How Forever 21 went from a fast-fashion powerhouse to bankruptcy and a troublesome future. Retrieved October 1, 2019, from Business Insider: https://www.businessinsider.nl/forever-21-history-success-to-bankruptcy-reports-2019-9?international=true&r=US
Coleman-Lochner, L., & Ronalds-Hannon, E. (2019, September 30). Forever 21 fashion chain goes bust, adding 178 stores to retail apocalypse. Retrieved October 1, 2019, from Los Angeles Times: https://www.latimes.com/business/story/2019-09-29/forever-21-fashion-chain-files-for-chapter-11-bankruptcy-protection
Mensik, H., & Peltz, J. F. (2019, July 14). Where did Forever 21 go wrong? Retrieved October 1, 2019, from Los Angeles Times: https://www.latimes.com/business/la-fi-forever21-bankruptcy-rumors-malls-20190714-story.html
Peltz, J. F. (2019, September 30). Why Forever 21 filed for bankruptcy: Big stores, small crowds. Retrieved October 1, 2019, from Los Angeles Times: https://www.latimes.com/business/story/2019-09-30/forever-21-bankruptcy-fashion-retail
Russell, C. (2019, August 30). What Went Wrong With Forever 21? Retrieved October 1, 2019, from Forbes: https://www.forbes.com/sites/callyrussell/2019/08/30/what-went-wrong-with-forever-21/#1856e2883e59
Stern, N. (2019, September 30). Forever 21 Lands In Bankruptcy After Years Of Undisciplined Growth. Retrieved October 1, 2019, from Forbes: https://www.forbes.com/sites/neilstern/2019/09/30/forever-21-chapter-11-shows-its-true-age/#3c0b360776e2
Hey Adiana, this is an interesting blog post that highlights the changing structure of doing business. I also agree with your opinion, as mentioned in the last sentence of your article. According to Rao et al. (2000), online platforms reduce customers’ price sensitivity as they can make quality information more accessible. Due to that, businesses can charge higher prices on their products. It would have been great if the company adopted the “click-and-mortar stores” strategy sooner to compete with other fast-fashion retailers. Forever 21 could have generated a little more revenue to withhold their dying brick-and-mortar stores and close some of it while continuing their business. Unfortunately, it may be already too late for them. It is just unsettling to see that the once “hip” Forever 21 is nothing more than a business case now.
Dear Adiana,
Thank you for your interesting post.
I would like to note that the firm is not out of business due to filing bankruptcy and that it wants to restart business before the critical holidays. In other words, it can still adopt the e-commerce strategy. However, I doubt that this strategy will save the firm on the long term. The rationale behind this is that if a firm is unable to notice such a big shift in the market, it will also be the last mover when the next shift occurs, which is a significant competitive disadvantage.
All the best,
Romaana
Hi Romaana!
thank you for the comment. I’ve also read the recent news about how they are trying to stay on the business and i agree with you that it will be hard for them to survive in that industry.
Hi Adiana, Thank you for this blogpost which considers a very recent event. Your blogpost helped me to understand what I actually saw happening myself the past years. I remember that they had a beautiful and huge store in Antwerpen of 5000 m² on three floors and another big store of 4500 m² at a high traffic spot in Amsterdam. I was shocked to find out that both were permanently closed in 2016 and 2018, respectively. These stores were like heaven on earth for people who love to shop, but these 2 locations of course imply very high rental costs. Offering low-priced clothes means that they would need to sell very high quantities in order to offset these fixed overhead costs. As you mentioned, they should’ve focused more on their online business to remain a healthy business model, which clearly wasn’t the case now.
This story also reminds me of the short-lived Dutch adventure of the department store chain Hudson’s Bay. It opened the first stores in the Netherlands in September 2017 and had plans for at least 20 department stores. In various cities, the Canadian giant took place in prominent buildings that were previously owned by the bankrupt V&D. From the beginning Hudson’s Bay wanted to build a bond with a young audience. That is why two years ago they used popular young YouTubers and Instagrammers to recruit staff and create awareness. The company was targeting “millennial minded” people, but the luring of millennials did not go well. Hudson’s Bay proved to be too expensive for the target group, forcing the department store chain to lower prices and sell cheaper items. The end result was an unclear strategy that Dutch consumers also did not understand.
Hence, these two examples show the importance of a well thought out business model which clearly indicates what value will be created for customers and how this will be captured. I am curious to see which new brands will enter the market.