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retail

@ the speed of fashion

By Devangshu Dutta

The middle-aged mother buys clothes at the Zara chain because they are cheap, while her daughter aged in the mid-20s buys Zara clothing because it is fashionable. Clearly, Zara is riding two of the winning retail trends - being in fashion and low prices - and making a very effective combination out of it. Much talked about, especially since its parent company's IPO in 2001, often admired, sometimes reviled, but hardly ever ignored, Zara has been an interesting case study for many other retailers and fashion brands around the world. We set out to understand what are the winning elements in Zara's business model, and probably only scratched the surface of the key to their success. Here's the quick-n-dirty on Zara's recipe for growth.

Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated performers in a soft retail market in recent years. When Inditex offered a 23 per cent stake to the public in 2001, the issue was over-subscribed 26 times raising Euro2.1 billion for the company. What makes Inditex so tasty? Well, for a start, it seemed to show higher profit margins than

comparable retailers, and secondly, the trend seemed sustainable. Good bet for most investors.

The Awkward Factor in the Profitability Formula

Buy low, sell high. Buy on credit, sell on cash. Retail profitability often seems like a no-brainer.

If you sell at X dollars and buy at Y dollars, as long as your operating and financial costs are lower than the gross margin

the difference between X (selling price) and Y (cost), you should be making money. And what with retailers running around with gross margins of 50-60 per cent (that is more than half of their retail price), making money should be no problem, right?

Wrong. In highly perishable goods such as fashion

are susceptible to seasons, gross margin is meaningless if the

product does not sell as planned. In simple terms, you

more money if you sell more, even at a lower margin 30 per

on sales of Rs. 100 is better than 60 per cent on Rs. 10. Given the unpredictability in fashion, it is quite likely that you will end

up selling a large proportion of your products at a discount. For

many retailers, 35-40 per cent of the

sold at hefty discounts is quite the norm.

Imagine fashion clothing to be like vegetables, or bread. On the first day it looks very appetising and has lots of buyers. By the

i.e.

products that

make

cent

total merchandise being

Amancio Ortega Gaona, the founder of Inditex, thought that consumers would regard clothes as a perishable commodity just like yogurt, bread or fish to be consumed quickly, rather than stored in cupboards, and he has gone about building a retail business that provides “freshly baked clothes”.

a retail business that provides “freshly baked clothes”. case STUDY s e c o n d

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second and third day it starts to look stale, but customers may still pick it up, maybe at lower prices. By the time a week is over, the retailer is probably better off giving the bread away just to clear up space.

Working with him in the last few years, Inditex Chief Executive José María Castellano is quoted as saying, ''This business is all

about reducing response time. In fashion, stock is like food. It goes bad quick.''

Zara, which contributes around 80 per cent of group sales, concentrates on three winning formulae to bake its fresh fashions:

Short Lead Time = More fashionable clothes

Lower quantities = Scarce supply

More styles = More choice, and more chances of hitting it right

Short Lead Times: Keeping Up With Fashion

By focussing on shorter response times, the company ensures that

its stores are able to carry clothes that the consumers want at that

time. Zara can move from identifying a trend to having clothes in its stores within 30 days. That means that Zara can quickly identify and catch a winning fashion trend, while its competitors are struggling to catch up. Catching fashion while it is hot is a clear recipe for better margins with more sales happening at full

prices and fewer discounts. In comparison, most retailers of comparable size or even smaller, work on timelines that stretch into 4-12 months. Thus, most retailers try to forecast what and how much its customers might buy many months in the future, while Zara moves in step with its customers.

A

very large design team based in A Coruña in North West Spain

is

busy throughout the year, identifying the prevalent fashion

trends, and designing styles to match the trends. Trend identification comes through constant research not just traditional consumer market research, but a daily stream of emails and phone calls from the stores to head office. Unlike other retailers, Zara's machinery can react to the report

immediately and produce a response in terms of a new style or

a modification within 2-4 weeks. Many other retailers have

such long supply chain lead times that for them it would seem

a lost cause for them to even try and respond to a sales report.

Reducing Risks

By reducing the quantity manufactured in each style, Zara not only reduces its exposure to any single product but also creates an artificial scarcity. As with all things fashionable, the less its availability, the more desirable the object becomes. When Zara opened its first store on London's Regent Street, shoppers are said to have browsed without shopping, thinking that they would come back to buy during a sale. Then the store assistants explained that the styles were changed every week, and the style liked by the customer would very likely not be available later. Subsequently, Regent Street became one of Zara's most profitable stores and more stores opened in the UK.

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The added benefit of lower quantities is that if a style does not Ownership and Control of Production work well, there is not much to be disposed when the season-end

For one, most other retailers (like the American chain Gap and

the Swedish retailer Hennes & Mauritz) completely outsource per cent of its products, roughly half the levels of competitors. their production to factories around the world, many of them in

Leadership in Numbers

Thirdly, instead of more quantities per style, Zara produces more styles, roughly 12,000 a year. Thus, even if a style sells out very quickly, there are new styles already waiting to take up the space.

Zara can offer more choices in more current fashions than many of its competitors. It delivers merchandise to its stores twice a

week, and since re-orders are rare the stores look fresh every 3-4

days. Fresh produce, moving in step with the fashion trend

updated frequently the ingredients are just right to create the

sweet smell of success.

But how does Zara achieve its three key success factors, which would be a nightmare for most other retailers: of producing small quantities of numerous styles in short time spans? Let us look at the mechanisms that enable Zara to deliver on these parameters as well as some unique aspects of the retailer's business model.

Zara's success is as much a result of its history and location, as its counter-intuitive business strategies. While it may not be possible for another company to exactly duplicate the conditions under which Zara grew and flourished, we can certainly try and learn from its experiences, its processes and its business structures.

If you thought that it is not possible to produce all this success in

low cost Asian countries. In contrast, it is estimated that 80 per cent of Zara's production is carried out in Europe, much of it within a small radius of its headquarters in Spain. In fact, almost half of its production is in owned or closely-controlled facilities. While this gives Zara a tremendous amount of flexibility and control, it does have to contend with higher people costs, averaging 17-20 times the costs in Asia.

sale does happen. The result is that Zara discounts only about 18

Counter-intuitively Inditex has also gone the route of owning capital-intensive manufacturing facilities in Spain. In fact, it is a vertically integrated group, with up-to-date equipment for fabric dyeing and processing, cutting and garment finishing. Greige (undyed fabric) is more of a commodity and is sourced from

(undyed fabric) is more of a commodity and is sourced from Spain, the Far East, India,

Spain, the Far East, India, and Morocco. By retaining control over the dyeing and processing areas, Inditex has fabric- processing capacity available “on demand” to provide the correct fabrics for new styles. It also does not own the labour-intensive process of garment stitching, but controls it through a network of subcontracted workshops in Spain and Portugal.

Supercharged Product Development

Design and product development is a highly people-intensive

process, too.

every month is managed by a design and development team of over 200 people, all based in Spain, each person in effect producing around 60 styles in a year (or 1-2 styles a week).

With new styles being developed and introduced frequently, each style would provide only around 200,000-300,000 of retail sales, a far lower figure than other retailers or brands, and certainly not “cost-efficient” in terms of design and product development costs. But obviously, this higher cost of product development is more than adequately compensated by higher realised margins.

In addition, the entire product development cycle begins from the market research. This combines information from visiting university campuses, discos and other venues to observe what young fashion leaders are wearing, from daily feedback from the stores, and from the sales reports. This has meant a significant

The heavy creative workload of 1,000 new styles

and

the same kind of set-up as other retailers, and that it also

has to

cost something, you would be absolutely correct on both

counts.

Zara follows a structure that is more closely controlled than

other retailers, and pays further by having the various business elements in close proximity to each other, around its headquarters in Spain.

most

in close proximity to each other, around its h e a d q u a r

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investment in information technology and communications infrastructure to keep streaming up-to-date trend information to the people making the product and business decisions.

At the leading edge of research are the sales associates and store managers in Zara stores, who zap orders on customised handheld computers over the Internet to Zara headquarters based on what they see selling. And not just orders, but ideas for cuts, fabrics or even a whole new line. They draw upon customer comments, or even a new style that a customer might be wearing that could be copied for Zara's stores. Traditional daily sales reports can hardly provide such a dynamically updated picture of the market.

React Rather Than Predict

What sets Zara apart from many of its competitors is what it has done to its business information and business process. Rather than concentrating on forecasting accurately, it has developed its business around reacting swiftly.

Here's a flavour of what a typical retailer or brand might do. Say, around a certain time, designers may start looking at fashion trends, and start designing a look for Winter 2004. Information and inspiration comes from forecasting agencies, trade shows, and various other places. Over a period of 3-5 months they develop the ideas into physical samples. These are also simultaneously costed. Sales budgets and stock plans are developed based on what is going on in the business right then (roughly one-year ahead of the targeted style). At various times during this “seasonal” process, there are decision-making meetings, where styles are accepted, rejected or changed, pricing and margin decisions taken and orders finalised.

Since multiple decisions factors are involved there are several meetings where a buyer / merchandiser, a designer, a technologist, a sourcing specialist and others may get involved together. No doubt, many calendars and travel schedules have to be synchronised for this to happen smoothly.

Based on a host of factors, the orders might then be placed with vendors in one or more countries around the world. Typically vendors may take a few weeks to two months to procure fabrics, have them approved by the retailer, and then produce a number of samples, and only once all approvals are finished, put the style into production.

From beginning to end, the process of defining a concept to receiving goods in the retail store might take anywhere from 9 to 12 months for a typical retailer. This one-year advance decision- making on what merchandise and how much to stock, is a bit

view mirror!

Amazingly, it seems to work 60-65 per cent of the time.

like driving a car at speed by just looking in the rear

Zara, on the other hand, largely concentrates its forecasting effort on the kind and amount of fabric it will buy. It is a smart hedge for one, fabric (raw material) mistakes are cheaper than finished goods errors, and secondly, the same fabric could be turned into many different garments. In fact, for an extra degree of flexibility Zara buys semi-processed or un-coloured fabric that it colours up close to the selling season based on the immediate need.

up close to the selling season based on the immediate need. As far as finished garments

As far as finished garments are concerned, rather than forecasting, it just quickly produces the least amount possible of what is hot with consumers, and moves to the next hot style fast. With its range of clothes constantly being updated, one or two slow-selling items are unlikely to hurt profits. Customers are also more likely to visit its shops regularly to see new stock.

With that edge, and a super-fast garment design and production process, it takes to the market what its customers are looking for.

Quick-Bake Recipe: Well-Mixed Ingredients

Garment styling for Zara actually starts from the email or phone call received from the stores. Thus, from the beginning Zara is responding to an actual need, rather than forecasting for a distant future.

Based on the store demand, Zara's commercial managers and designers sit down and conceptualise what the garment will look

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like, what fabric it will be made out of, what it will cost and at well as daily sales numbers, using the information to create what price it will sell. new lines and modify existing ones thus, designers have access to real-time information when deciding with the

The designer then actually sketches the garment out, details the specifications and prepares the technical brief. Since fabrics and trims are already in Zara's warehouse, sampling takes very little time. Approvals are equally quick, since the entire team is located in the same place.

As soon as approvals are received, instructions are issued to cut the appropriate fabric. The cutting is done in Zara's own high- tech automated cutting facilities. The cut pieces are distributed for assembly to a network of small workshops mostly in Galicia and in northern Portugal these 350 workshops between them employ some 11,000 apparently grey-economy workers. None of

these workshops are owned by Zara. The workshops are to manage thousands of fabric and trim specifications, design provided with a set of easy to follow instructions, which enable specifications as well as their physical inventory, gives Zara's them to quickly sew up the pieces and provide a constant stream team the capability to design a garment with available stocks, to Zara's garment finishing and packing facilities. Thus, what rather than having to order and wait for the material to come takes months for other companies, takes no more than a few days in. for Zara.

Finally, Zara's high-tech distribution system ensures that no style sits around very long at head office. The garments are quickly

cleared through the distribution centre, and shipped to the stores, merchandise from Zara's manufacturing plants to the 400+

arriving within 48 hours. Each store receives deliveries twice a week, so after being produced the merchandise does not spend

more than a week at most in transit. 60,000 items of clothing an hour. Zara's merchandise does not waste time waiting for human sorting.

Information Technology Keeps It Boiling

Information and communications technology is at the heart of

Zara's business. Even while manufacturing in Europe, Zara manages to keep its costs down. None of its assembly workshops are owned by the

Four critical information-related areas that give Zara its speed include:

commercial team on the fabric, cut, and price points of a new garment.

Standardisation of product information different or incomplete specifications, and varying product information availability typically add several weeks to a typical retailer's product design and approval process, but Zara “warehouses” the product information with common definitions, allowing it to quickly and accurately prepare designs, with clear cut manufacturing instructions.

Product information and inventory management being able

Distribution management: its State-of-the-art distribution facility functions with minimal human intervention. Approximately 200 kilometres of underground tracks move

chutes that ensure each order reaches its right destination. Optical reading devices sort out and distribute more than

Keeping Costs Down

company. Most of the informal economy workers the workshops employ are mothers, grandmothers and teenage girls looking to add to their

household incomes in the small towns and villages where they live. Last year the average monthly salary of a Spanish industrial worker was about 250,000 pesetas - $1,300 a month, excluding the state's 30.8 per cent charge for social contributions. In contrast, according to reports, the workshops working for Inditex may or may not pay the social charges. According to one estimate, the seamstresses probably get something less than half the average industrial wage, maybe $500 a month. These are around 5-6 times typical Indian or Chinese wages, and yet offer the flexibility beyond what Asian factories can, which has a tremendous impact on ratio of full-price merchandise sales.

Further, in terms of marketing costs, Zara relies more on having prime retail locations than on advertising for attracting customers into its stores. It spends a meagre 0.3 per cent of sales on advertising compared to an average of 3.5 per cent of competitors according to the company, choosing highly visible locations for its stores renders advertising unnecessary.

Inventory Quick decisions Control Fabrics from A HQ regional managers collect and analyse the feedback.
Inventory
Quick decisions
Control
Fabrics
from
A HQ regional managers collect
and analyse the feedback.
stock
Dyeing/Finishing
Commercial team sits with
designers to use the
information to create new
lines and tweak existing ones
-deciding with the
commercial team on the
fabric, cut, and price points
of a new garment
(if required)
Production
Fleet to stores Line in Stores
Fleet to
stores
Line in Stores

Close watch on trends & buying behaviour

Market research on university campuses, discos & other venues Feedback from the stores • Sales
Market
research on
university
campuses,
discos & other
venues
Feedback from the stores
• Sales report
• Qualitative comments

Distribution

Collecting information on consumer needs: trend information flows daily, and is fed into a database at head office. Designers check the database for these dispatches as

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Apart from designing to the fashion-of-the-day, Zara's strategy of producing low volumes per style and changing products quickly in its stores enables it to cut down on the discounts as well. Only about 18 percent of Inditex clothing doesn't work with its customers and must be discounted. That's half the industry average of 35 percent. Zara also has two clearly time-limited sales a year rather than constant markdowns.

Lastly, since it spends effort on producing what are current fashion trends, it spends its “design” effort on interpreting rather than creating afresh. In fact, Inditex has been constantly alleged to have knocked-off top designers' ranges, thus spending less on product development and design.

They “have a premier look because they're often copies from the top designers”, according to one industry observer.

However that may be, Zara delivers fashion when it is hot, and at a fraction of the price charged by designer brands. And consumers are certainly voting with their feet and wallets.

and at a fraction of the price charged by designer brands. And consumers are certainly voting

Acceptability of style

(or volume of sales)

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Setting a Trend or Responding Early to One?

That' s an easy question to start with. Others invest in “setting a trend”; Zara doesn't. It just responds to them very quickly. Remember, we are talking about following the innovators, not about being one. This needs a capability to understand design, but an even stronger capability to be a “stylist”- that is, re- creating, rather than creating first.

Yes, there are successful design-oriented retail businesses that set fashion trends - they are very creative, but typically small. The capability to create new design trends, and the capability to distribute that design in large volumes quickly and profitably, typically don't exist in the same company.

For those who want to be large and profitable rather than niche and profitable, the mantra is to “follow early”. And, yes, unpleasant as it may sound, “knock-offs” (re-interpreting someone else's design) are a fact of life.

But can Indian fashion brands successfully re-interpret trends? The answer would be a loud “yes” - that is what most of them do, anyway. The key is: do you know how to do it early enough, have the capability of growing it quickly to a certain scale, and then dropping it to catch another trend?

Certainly you need to invest in market research. Not having an MR agency doing consumer surveys and giving you research reports, but actually “feet on the street” - your own people who can spot trends, and communicate them to people who can interpret the trends into styles that fit into your look for your consumers.

Trends are visible on individuals who adopt “looks” early. The extra flare, the strap going thinner - if you are trained to observe, you can. In a fashion cycle, there are always innovators who pick the trends up first, and early adopters who quickly follow.

Early Early Majority Late Majority Adopters Laggards
Early Early Majority Late Majority
Early Early Majority Late Majority
Early
Early

Early

Majority

Late
Late
Early Early Majority Late Majority

Majority

Adopters

Early Early Majority Late Majority Adopters Laggards

Laggards

Innovators

Time

Have designers who can identify fashion-forward people -

innovators - and identify what kind of styles they are wearing which can spread in the larger population. If you can identify

who are the innovators in your segment, you can follow the

up to part of the early majority level. At some point remember

companies,

many others, who will quickly follow. Then margins become low, and profitability becomes even lower, because there is much more competition.

also to drop it. Because after that there will be other

the

trend

Growing the scale is a tough part, because most Indian brands don't have a market reach that is wide and deep enough to achieve quick volumes. The distribution channels are also built in multiple layers, each of which influences order-placement, and therefore quantities and lead-time.

order-placement, and therefore quantities and lead-time. For those who want to be large and profitable rather

For those who want to be large and profitable rather than niche and profitable, the mantra is to “follow early”. And, yes, unpleasant as it may sound, “knock-offs” (re-interpreting someone else's design) are a fact of life.

Contrastingly, Zara not only creates the merchandise, but sells in its own stores. The people who decide the product styling and those who decide the distribution sit in the same office. Anything that is not seen to reach a requisite level of volume is not ordered. So that is a strategy

which Indian brands with captive distribution can follow (those with own-managed stores, franchise-managed but company-stocked stores, or shops-in-shop), not those which sell by booking orders from retailers.

Doing it Fast Needs Close Control

The other thing about Zara - while it follows, it does so very quickly. It's merchandise hits the stores 15 days after being designed. How can an Indian brand do things equally quickly, when fabric lead times can vary from 30 days to 60 days (mill made)? And when apparel production lead times can be 10-30 days?

Well, for one discussions and decision-making takes up a lot of that time - what to sell, where to buy the fabric form, whether the specifications are being met etc. Zara gets around this by having various business functions sitting together at the headquarters, and also having a culture (or structure and process) of having people talk to each other. (It's shocking how many companies just don't have the culture where different functions are constantly in touch, despite sitting a few feet from each other.)

don't have the culture where different functions are constantly in touch, despite sitting a few feet

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In Zara's case, the sales & marketing people who are receiving trend feedback are regularly talking to the designers and the merchandisers, and the production scheduling is closely coordinated as well. There is not much time wasted on approvals.

Secondly, even if everything else is fine, production capacity may or may not be available at that specific time. There may be another customer's order that may be handled on priority. The work-around for this is to have your own production capacity, or captive production capacity owned by someone else (i.e. contracted production capacity). It is expensive, but the cost of lost sales can be higher. This can work both for garment capacities as well as for fabric capacities - one could take a position by “leasing” a fixed number of loom-hours and this is feasible in not just the Indian powerloom sector which is very flexible, but also in the mill-made sector. This is not new to India - several companies have worked on this principle, including Zodiac.

companies have worked on this principle, including Zodiac. Thirdly, what do you do to cut fabric

Thirdly, what do you do to cut fabric lead time which is the biggest chunk? Buying a capacity reduces only part of the lead time. Zara buys fabric in advance, in accordance with the forecast trends. Much of it is in greige form this gives the flexibility to

colour or print the fabric to the desired effect, as and when it needed. By buying relatively standard qualities from specified vendors, the lead-time of deciding the vendor and approving

quality can be reduced drastically.

possible only when the fabric is in stock.

Also, for printing and processing the greige, again Zara

its own capacities - this allows it to schedule and prioritise according to its business needs rather than being hostage to someone else.

However, remember that only being vertically integrated will not solve the problems. There are enough vertically integrated Indian companies where the spinning department does not know or care what the scheduling needs of the weaving department are, let alone any knowledge of garments! This culture needs to change.

is

The famed 15-day lead-time is

operates

The needs must flow from the finished product backwards, rather than being dictated by the raw material. Zara was not a spinner first and it did not integrate forward; it built a garment business and then integrated backwards. Therefore, everyone is clear which end of the business pays the bills.

Keeping It Together is As Important

Just sitting close together in one place is fine with a small team of a few people, doing

one place is fine with a small team of a few people, doing a handful of

a handful of styles. As the

business grows, keeping in touch needs more than a shout across the room.

This is where information technology comes in. The only problem

is that for most companies, IT seems like an investment without

returns, and they just don't invest. Many others who do spend on IT may leave the actual definition to the vendor, and the buying to an “EDP manager” who has very little understanding of the business as it is, or a vision of where it could go! So they end up buying something that is not enough, too much or just incorrect reinforcing the perception of investment without

return.

Those who do understand what pieces of IT platforms they need, what can afford, and how to prioritise and guide the effort, will find success. Here is the formula:

Invest in the right software, hardware and people

Update them frequently (including training the people)

Spend enough, but just enough not too much nor too little

Identify your critical areas, and draw up a conscious roadmap or blueprint for how you will invest in upgrading your IT infrastructure. Keeping track of sales information, product information, controlling capacities and production scheduling, managing distribution - all of these are areas that IT can help tremendously in. My guideline for IT implementation would be:

First pick an area that is hugely important in terms of improving sales or saving costs - this may be putting a sales update and analysis package, or an inventory management system. Whatever it is, it should be something that impacts your current business model hugely.

Put something in place that gets you some return quickly - you and your organisation will feel more confident about further investments; then go step-by-step down the prioritisation list.

Try not to fall into the trap of re-inventing the wheel - if someone has already developed something and it fits 70% of your needs then customise, don't re-develop.

case

case Thirdly, while styling of women's clothing does change as frequently in India as elsewhere, the

Thirdly, while styling of women's clothing does change as frequently in India as elsewhere, the low cost of custom tailoring allows the consumer

to update her wardrobe on budget.

face facts, Indian consumers pay double of what

they would be if their garment price/income ratio were the same in Europe and the US.

Indian ready-to-wear brands make clothing affordable to more Indians? After all, that is one of the cornerstones of Zara's business philosophy.

Can

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Zara has not built its IT infrastructure in a year or two what we are seeing is a product of several years of consistent and constant investment, one functional area after another. And they must have had their share of failures. Indian brands will need to do the same, without expecting that IT will help them create a large and profitable business instantly.

Innovative products Higher Customer focus Topline -7 Lower “lost-sales” Lower Product Cost Lower ex-factory
Innovative products
Higher
Customer focus
Topline
-7
Lower “lost-sales”
Lower
Product Cost
Lower ex-factory costs
Reduced development costs
Reduced quality rejections
Lower
Lower inventory and WIP
Financial
Performance-based decision support
NOTE: Benefits will vary for different organisations, process areas or business environments.
© Creatnet
Value-Chain Profitability

Higher team productivity Reduced overheads Synchronise processes

LLoowweerr

Management

CCoossttss

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Indian Market Realities Differ

While emulating the internal elements and back- end strengths exist among Indian companies to re-create a Zara, we have to acknowledge that its current market context is different from India. Zara exists in a market where “fashion” - the rise and decline of the desire for a specific look in a season or less - is a fact of life. Secondly, there is a large population of consumers who can afford to change their wardrobe with changing styles every season - this can help to build scale. Thirdly, the cost of custom tailoring is very high in that market.

By contrast, the Indian ready-to-wear market is dominated by menswear that has a longer fashion-change cycle than womenswear. In the menswear cycle carry-overs are not as much of an issue. Fashionability is not as much a fact of life, for most consumers. In fact, most consumers are willing to wait several months for the sales, to off-season merchandise that they may end up wearing only the next year.

Zara's not the only successful retail model in the world there are many other business models from which to learn. By all means, pick elements from different retailers. After all, it is a time honored practice for successful retailers to wander into other stores, and find out what they could or should be doing from Sam Walton in Arkansas to many Indian retail CEOs.