Why Forever 21 is struggling to maintain its spot on fashion street

Eight years and three partnerships later the American fast-fashion retailer has hit a fresh hurdle in the country. What went wrong?

Early this week, Aditya Birla Fashion and Retail (ABFRL) announced that it was downsizing Forever 21. "Assumptions have changed for the Forever 21 business," Ashish Dikshit, managing director of ABFRL's Madura Lifestyle business said in an investor call. Store resizing and a new store model would need to be in place for the brand he added. What has gone wrong with the American retail brand that entered the country around the same time as Zara (2010) and way before H&M (2015)? Inefficient inventory management and despite spending eight years in the country, a failure to understand the price-value equation are the causes for its downfall say analysts.

This is not the first time that the fate of Forever 21 hangs in balance, nor is India the only county where the brand is under siege. The company is fighting financial and legal battles in various countries and, in India, ABFRL is its third partner, after Sharaf Group and DLF Brands.

Forever 21 entered the country in 2010 with the Dubai-based Sharaf Group's retail venture. However the store shut down soon and in 2013, the retailer tied up with DLF Brands. Speaking to the media at the time, the company had said that it wanted to open 35 stores in five years in India.

But the partnership soon ran out of steam. And in 2016, ABFRL stepped in. The Birla Group signed a deal with Forever 21 to buy the offline and online rights to the brand. The group had said that it wanted to build the brand as a large independent business which tied in with the American retailer's plans for India, to be the largest women's wear brand in the country. However even this alliance is now under pressure. Why did the brand slip?

"Inventory management is difficult in Forever 21. They send a lot of slow movers and it becomes difficult to clear left overs," says Deepak Agarwal, former CEO of DLF Brands. Having worked with the brand closely he says that there are operational issues holding back its growth in India. Unlike Zara and H&M, the business is not organised. Globally too the retailer faces similar criticism. According to several analysts' reports, the American retailer has grown too fast, trying to scale up from a single Los Angeles store to over 700 stores in too short a time.

For ABFRL, the brand was meant to lead its foray into fast fashion for women, which is also one of the fastest growing segments in the country. However it has said the Rs 230 million losses in fast fashion in 2016-17 were mostly because of Forever 21. Of this, Dikshit told analysts, about Rs 150-160 million is a one-time inventory markdown after rationalising the business. The group has reduced the sizes of Forever 21's older stores and will now focus on opening new but smaller ones. Dikshit also said that many of these stores were inherited by ABFRL from previous partners DLF Brands and Diana Retail, indicating perhaps that the current management was not to be held responsible for the downhill slide of Forever 21.
 
"Our internal assumptions for growth were very high in this business, but the profitability requires deeper correction and we realised that we had built up a lot of inventory which we needed to know what do with it," Dikshit added.

How does one explain the declining fortunes of Forever 21 against that of rising star H&M in the country? Many say that the entry of H&M has in fact hastened the decline of the brand.

H&M India posted an 87 per cent growth in its sales for the period December 1, 2016 to November 30, 2017, sales revenue worth Rs 9.36 billion in 2016-17 compared to Rs 4.84 billion in 2015-16. H&M India currently operates 29 stores across the country and has said it would open 50 stores in India with an investment of Rs 7 billion by 2020.

Forever 21 suffers because it lacks a steady model for the country.

"Whenever the promoter changes, the business gets a hit. Compared to Forever 21, Zara and H&M have executed the business very well," says Abneesh Roy, senior vice president at Edelweiss Securities. They have not understood the Indian customer unlike newer entrants he believes.

Roy says Forever 21 may be offering low prices, but the customer is same for all the fast fashion chains. "They may be offering 15 to 20 per cent lower prices, but customer also looks for price value equation" he said.

Jaydeep Shetty, CEO of fashion chain Mineral says that the problem may be that Forever 21 has set its sights on a very narrow band of customers. While this may work in global market, in India it limits the brand's growth possibilities. Both H&M and Zara cater to customers between 16 and 40 years but Forever 21 caters to age group of 12-22 years. "The 12-22 age group is difficult to cater to as their thinking is different. Besides, other fast fashion chains offer much better quality," Shetty adds.

Said an ABFRL spokesperson, "ABFRL acquired a network of twelve Forever 21 stores last year. A few of these were quite large (about 15,000 sq ft) and were not profitable.  After evaluating the performance of these stores, we have closed four and rationalised the size of a few others.  We are now expanding the network with stores in the range of 7,000-10,000 sq ft. In just one year after acquiring the business, we have doubled the store network by opening 12 new stores in this period."