Harmonie's Look on Fashion

Archive for December 2nd, 2010

I recently moved to Barcelona and I have been reading lots of articles about Spanish fashion. Many Spanish brands are currently playing on a worldwide set and offering new business models to the world of fashion.

Inditex Group

source: http://www.hablandodebolsa.com/2010/03/dividendo-inditex.html

The Inditex Group is one of the world’s largest fashion retailers, welcoming shoppers at its eight store formats Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe boasting 4.780 stores in 77 countries. Inditex was founded in 1965 and its headquarters are located in La Coruña in Spain. In 2009, Zara contributed to 63.8% of Inditex’s sales (1) which makes it a inevitable player of the fashion business.

The example of Zara

Zara is the most successful example of a Fast Fashion retailer so far (2). Indeed, Zara is often quoted has a highly fashionable brand with styles that are trendy and even fashion forward. If we look a bit further into the organization of Zara, we will understand that the success factors of Zara highly depend on its rigorous and ingenious supply chain organization.

Zara is totally centered to the market (3). At Zara, everything starts from the customer and ends back to the customer. Zara identifies customer needs thanks to a continuous stream of information from stores (one of the main advantages of owning a retail channel) and fulfills those needs thanks to clear segmentation and product differentiation. To maximize the customer satisfaction, the production (of Zara and its suppliers) must be able to adapt itself to trends changes taking place during a season. Zara considers the fashion item as a perishable product which must be thus sold at most 4 weeks after its availability in store (4). Time then becomes one of the most important variables and everything possible is operated to reduce the time between the design of the product and its availability to the customer.

The competitive advantages of Zara are numerous: shops receive new products several times a week, the customer is so incited to come in shop regularly and not to hesitate on his purchases because the article will not be available next time; the new trends arrive in shop slowly so that the consumer becomes used to it and the company can answer to any evolution of the market in 2 weeks (5). Zara launches approximately 10 000 articles per year on the market (6).

Zara’s strategy includes features that are not common within the fashion industry (7):

Regular new design and rapid replenishment: 40,000 new designs are produced annually and 10,000 of them are actually selected for production. It leads to a total of 300,000 SKUs every year, including colors and sizes range (8).

Latest couture creation resemblance: Zara manages to make its garments resemble couture but then beats high fashion houses in the time to market: it takes 15 days from idea to appearance in stores compared to 3 to 5 month for H&M, Zara’s most comparable competitor.

– New product in limited supply: Zara makes a virtue of stock-outs because it encourages its customers to buy right away and at full price: 85% of the garments are sold without markdown. Customers are also more likely to visit the store often (17 times a year compared an average of 4 times for competitors) and then be exposed to more of the items.

No advertising: Zara deliberately runs very little advertising in order to keep its marketing costs low: 0,3% of sales compared to 3 to 4% for competitors.

Moreover, the 300 designers sit right in the midst of the production process so that they work next to the market specialists as well as procurement and production planners. Large circular tables play host to impromptu meetings, a prototype shop has been set up, which encourages everyone to comment on new garments (9). This proximity increases both the speed and the quality of the design process. Designers can quickly check initial sketches with colleagues, market specialists (former store managers most often) can provide quick feedback about the look of the new designs, and procurement and production make preliminary estimates of manufacturing costs and available capacity (10).

There is a big difference between the design team at Zara and H&M. While H&M offers lines designed by famous designers, such as Stella Mac Cartney or Sonia Rykiel and celebrities such as Madonna or Kylie Minogue, Zara’s design team gathers young, hungry, freshly out of fashion school designers (11). Designers must be humble enough to accept feedback from the team and share credit for winning designs (12).  To fine their inspiration, stylists and designers use information about market trends, TV series, museums, other fashion brands and browse fashionable sensitive places such as nightclubs, universities and “fashion center” (13).

Production is organized by type of product. Zara produces the “risky” products and the products presenting a big specificity in-house. 60% of Zara’s merchandise are produced in-house while H&M has 900 suppliers and no factories (14). The firm relies on contract manufacturers (mostly in Turkey and Asia) to produce items with longer shelf lives such as jeans and tee-shirts but it accounts for only one eighth of the dollar volume. Zara is so vertically integrated that it makes 40% of its own fabrics (15). About 50% of the clothes arrive undyed to allow the firm to respond to fashion adaption within a season.

Finally, the pricing policy of Zara is different compared to the practices of the sector (16). Instead of fixing its prices according to the costs and to the margin wanted, Zara identifies the price that the consumers are ready to pay (psychological limit) and the price of comparable products at the competitors (competitive limit). The final price of the product thus takes into account these two criteria. Raw materials and suppliers are then identified to produce the product with the price and the margins expected (17).

Zara’s future

“The holy grail for the strategist is to craft a sustainable competitive advantage that is difficult for competitors to replicate” (18).

Zara’s current limitations are linked to its Spain centric, just-in-time manufacturing model (19). Indeed, the firm remains hostage to anything that could create a disruption in the region. Zara is also susceptible of financial vulnerabilities as the Euro has strong value relative to the dollar. As low-costs manufacturing regions often have currencies that are pegged to the dollar, Zara’s Spain centric costs rise at higher rates compared to competitors. Lastly, transportation costs are rising and may disturb the profit margin of the retailer.

Luxury companies can take back some lessons from Zara’s organization. It is interesting to see that Zara gets its inspiration from runway shows and is actually able to put the garments on shelves earlier than the actual Fashion House from which the inspiration comes. Zara’s production facility in Spain can be a model for more high-end fashion houses that wish to put their items on shelves earlier, keep a certain control of the production and make exclusive fabrics. The main concern will be to achieve a sufficient volume so that this kind of organization is worth implementing and profitable.

Spain located Mango is seen as another leading fashion company. It will be worth another post very soon! Stay tune!


(1) http://www.inditex.es/en/shareholders_and_investors/investor_relations/annual_reports

(2) Burns L.D., Bryant N.O. (2007) “From Spinning Machine to Fast Fashion” in The Business of Fashion: Designing, Manufacturing, and Marketing, Fairchild Publications Inc, New York, pp.32

(3), (4), (5), (6) Mazaira A., Gonzàlez E., Avendano R. (2003) “The role of market orientation on company performance through the development of sustainable competitive advantage: the Inditex-Zara Case” in Marketing Intelligence & Planning, vol. 21, issue 4, MCB UP Ltd.

(7) Gallaugher J.M. (2008), Zara Case: Fast Fashion from Savvy Systems, in http://www.gallaugher.com/Zara%20Case.pdf published in 9/13/2008

(8), (9), (10) Ferdows K, Lewis M.A., Machuca J.A.D (2005), Zara’s secret for Fast Fashion, in Harvard Business Review, HBS Archive, published in 2/21/2005  http://hbswk.hbs.edu/archive/4652.html

(11), (12) Gallaugher J.M. (2008), Zara Case: Fast Fashion from Savvy Systems, in http://www.gallaugher.com/Zara%20Case.pdf published in 9/13/2008 (last consulted on April 5th, 2010)

(13) Mazaira A., Gonzàlez E., Avendano R. (2003) “The role of market orientation on company performance through the development of sustainable competitive advantage: the Inditex-Zara Case” in Marketing Intelligence & Planning, vol. 21, issue 4, MCB UP Ltd.

(14), (15) Gallaugher J.M. (2008), Zara Case: Fast Fashion from Savvy Systems, in http://www.gallaugher.com/Zara%20Case.pdf published in 9/13/2008 (last consulted on April 5th, 2010)

(16), (17) Ferdows K, Lewis M.A., Machuca J.A.D (2005), Zara’s secret for Fast Fashion, in Harvard Business Review, HBS Archive, published in 2/21/2005 (last consulted in April 5th, 2010) http://hbswk.hbs.edu/archive/4652.html

(18), (19)  Gallaugher J.M. (2008), Zara Case: Fast Fashion from Savvy Systems, in http://www.gallaugher.com/Zara%20Case.pdf published in 9/13/2008 (last consulted on April 5th, 2010)

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