- 1 -© Minder Chen, 1993-2011

Chapter 3: Zara: Fast Fashion from Savvy Systems

A Zara store in Manhattan

- 2 -© Minder Chen, 1993-2011

Why Study Zara?• To understand and appreciate :

– The counterintuitive and successful strategy of Zara

– The technology, which has made all of this possible

- 3 -© Minder Chen, 1993-2011 2-3

- 4 -© Minder Chen, 1993-2011

Latest Fashion

• ZARA · Fall / Winter 2011 - TRF - Young http://youtu.be/pyMQ3eOwwx0

• "TRF" is short for Trafaluc- offered by Zara for the youth/teenage

• http://www.youtube.com/user/zara#p/u/4/fm0TpEMKDFI

• (Store in Sydney)

- 5 -© Minder Chen, 1993-2011

Humble beginning: Amanciao Ortega Gaona • At age of 13, worked as a gofer in a shirt store• In 1963, he started his own lingerie production firm. • In 1972 he founded Confecciones Goa, S.A., the first garment-making factory of Inditex• 1975, he started Zara

– When a German wholesaler suddenly canceled a big lingerie order in 1975, Amancio Ortega thought his fledgling clothing company might go bankrupt. All his capital was tied up in the order. There were no other buyers. In desperation, he opened a shop near his factory in La Coruña, in the far northwest corner of Spain, and sold the goods himself. He called the shop Zara.

- 6 -© Minder Chen, 1993-2011

Fashionable But Not Pricy• In the early 1960s Ortega became the manager of a

local clothing shop, where he noticed that only a few wealthy residents could afford to buy the expensive clothes. Thus he started producing similar items at lower prices, purchasing cheaper fabric in Barcelona and cutting out pieces by hand using cardboard patterns. Ortega then sold his items to local shops; he used the profits to start his first factory in 1963 at the age of 27.

- 7 -© Minder Chen, 1993-2011

Impacts of Amanciao Ortega’s Earlier Experiences• When Amanciao Ortega was 13 years old he worked as a

delivery boy for a shirt maker who produced clothing for the rich. He later worked as a draper's and tailor's assistant. In seeing firsthand how costs mounted as garments moved from designers to factories to stores, Ortega learned early on the importance of delivering products directly to customers without using outside distributors. He would later employ such a strategy with great success at Zara, attempting to control all of the steps in textile production in order to cut costs and gain speed and flexibility.

Read more: Amancio Ortega 1936— Biography - Early career, The zara phenomenon, Inditex http://www.referenceforbusiness.com/biography/M-R/Ortega-Amancio-1936.html#ixzz1bfL4MMA6

- 8 -© Minder Chen, 1993-2011

Inditex• Inditex, one of the world’s largest fashion distribution groups,

has more than 5,000 stores in 77 countries. In addition to Zara, the largest of its retail chains, Inditex has seven other formats: Pull &Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe.

• Its unique management model, based on innovation and flexibility, and its vision of fashion – based on creativity and quality designs, together with the capacity to react quickly to market demands – has enabled it to enjoy rapid international expansion and an outstanding reaction to its various commercial concepts.

• The Inditex Group is made up of more than 100 companies operating in textile design, manufacturing and distribution.

- 9 -© Minder Chen, 1993-2011

OEM ODM OBM

BRANDING

Demand Chain

(Supply Chain)

Creative Conceptualization

R&DODM

OEM

OBM

- 10 -© Minder Chen, 1993-2011

Net Worth• Net Worth $31 B As of March 2011

• The richest person in Spain

• The #2 richest person in Europe

• The #7 richest person in the world

- 11 -© Minder Chen, 1993-2011

Went Public in 2001• In May 2001, a particularly tough period for initial public

offerings, Inditex sold 25% of its shares to the public for €2.3 billion.

• Inditex's sales—70% of which come from Zara.

• Zara's sales and net income have continued to grow at an annual rate of over 20%.

• Ortega's owned 59% share of the company.

Sales in 2000• Inditex $2.43 billion• H&M $3.2 billion• Gap $13.6 billion

- 12 -© Minder Chen, 1993-2011

Gap versus Inditex at a Glance€12.5 billion in global sales 2010

1 euro = 1.3948 US dollars2010 €1.73bn ($2.45bn) of net profit

- 13 -© Minder Chen, 1993-2011

Zara in Australia 2011

- 14 -© Minder Chen, 1993-2011

Apple Beijing Store

- 15 -© Minder Chen, 1993-2011

Apple vs. Zara

Jobs fostered an approach to product design that evoked haute couture as

much as high-tech.

What is the similarity?

- 16 -© Minder Chen, 1993-2011

Zara’s Positioning A. “Armani at moderate prices!”

B. Fashions are more “Banana Republic,” prices are more “Old Navy.”

C. Look like high fashion but are comparatively inexpensive.

D. Cheap Chic• Price

• Fashion

• Quality

• Customer segmentation

- 17 -© Minder Chen, 1993-2011

ZaraZara as a

"fashion imitator" companyand low cost products.

Trends setter?

Instead of setting the trends, Zara follows them.

2-17

- 18 -© Minder Chen, 1993-2011

Zara Positioning

2-18

The Zara brand is well regarded among the core 25- to-35-year-old consumers?

- 19 -© Minder Chen, 1993-2011

What Is Fashion?

Fashion is the imitation of a given example and satisfies the demand for social adaptation. .

The more an article becomes subject to rapid changes of fashion, the greater the demand for cheap products of its kind.

— Georg Simmel, “Fashion” (1904)

Classic

Fad

Trend

- 20 -© Minder Chen, 1993-2011

Fashion Diffusion

60s-70s

http://www.eurbanista.com/the-history-of-fashion-diffusion-in-pictures/

- 21 -© Minder Chen, 1993-2011

Innovation

"Zara is possibly the most innovative and devastating retailer in the world."

-- Louis Vuitton Fashion Director Daniel Piette

Apple Commercial http://www.youtube.com/watch?v=WyGT2F74p_A&feature=related

- 22 -© Minder Chen, 1993-2011

Zara as a Rule Breaker• Contract Manufacturing (Outsourcing, offshore outsourcing)?– factory workers in Spain make an average of $1,650 a month, vs. $206

in China's Guandong Province – 34% manufacturing is outsourced to Asia, and 14% to parts of

Europe (mainly Italy and Turkey), those tend to be the more basic items. The high-fashion stuff, 49% of what it sells, is cut and finished in “proximity” (Spain, Portugal and Morocco), though some sewing is done by small local cooperatives. [ H&M 75% to Asia][[CheckCheck label]]

• Marketing? (Budget)– 0.3% vs. 3.5% of revenue

• Batch Size?– Zara produces in small batches which creates a sense of scarcity

with consumers. (Buy now or never)– Fail products% (10% vs. 1%)

- 23 -© Minder Chen, 1993-2011

Pros and Cons of Contact Manufacturing• Costs

• Controls/Coordination Use IT for centralized planning & decentralized execution

• Reduce a single point of failure?

• Risks

– Sweatshop

– Environmental issues

– Quality

- 24 -© Minder Chen, 1993-2011

Outfit Clashes 撞衫

http://news.xinhuanet.com/english2010/entertainment/2010-06/22/c_13363544.htm

- 25 -© Minder Chen, 1993-2011

Zara as a Rule Breaker• Markdown?

– Markdown legend (?)

– 50% vs. 15%

• Frequency of new products arrival & store layout? – Ship twice a week (Z-Day)

– Like walking into a new store every two weeks (with store layout changed – directed from the Cube)

• Out of stock (Good or Bad)? – Encourages customers to visit often(# of store visit per year 3 vs. 17)

• Store product mix decision– Zara retail store managers, not headquarters, determine their own

store’s product mix.

- 26 -© Minder Chen, 1993-2011

Markdown

Industry average markdown ratio is approximately 50%, while Zara ration is about 15%.

- 27 -© Minder Chen, 1993-2011

Zara as a Rule Breaker• Store Ownership? (Rent vs. Own)

• Location of warehouses/distribution centers? – Spain

– Get merchandise to European stores within 24H hours, flying goods via commercial airliners to stores in the Americas and Asia in 48H.

– Some clothes it has made in China are shipped to Spain and then back to shops in China.

• Design Team (Star Designer?)– Rotation (why?)

– Cross-functional teams

- 28 -© Minder Chen, 1993-2011

The Cube

- 29 -© Minder Chen, 1993-2011

Shipping of Clothes from Distribution Center• Clothes are ironed in advance and packed on hangers, with security

and price tags affixed.

• More than 2.6 million items move through the distribution center each week, See pictures at http://images.businessweek.com/ss/06/08/zara/source/1.htm

- 30 -© Minder Chen, 1993-2011

Co-location leveraged at Zara

The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary

Designer

Marketing Specialist

Production PlannerBuyer

http://www.innovel.net/?cat=6

- 31 -© Minder Chen, 1993-2011

The Apparel Lifecylce

• Watch the BBC news video below!

• What is the risk faced by Zara?

http://www.fashionnetasia.com/en/IndustryNews/BusinessResources/Detail.html?id=1891

- 32 -© Minder Chen, 1993-2011

Fashion Reconnaissance• Spotting trends

everywhere from the street to movies to couture fashion shows and,

• Information from its customers to keep its merchandise fresh.

- 33 -© Minder Chen, 1993-2011

Results• Zara has higher manufacturing costs than

rivals.

• Inditex gross margins are 56.8 percent compared to 37.5 percent at Gap.

- 34 -© Minder Chen, 1993-2011

Information and IT• Zara Store

– Hard data: POS data

– Soft data: Ask customers their preferences (PDA)

– Firm data: Nonsale data What is this called in e-commerce?

• Design/Production Team– fabric is cut and dyed by robots (laser cutting)

• Not mentioned specifically: – ERP, SCM, CRM, e-commerce web site

- 35 -© Minder Chen, 1993-2011

Rapid-fire Fulfillment

Ferdows, K., M.A. Lewis, J.A.D. Machuca.

“Rapid-fire fulfillment”,

Harvard Business Review, 82(11), 2004.

- 36 -© Minder Chen, 1993-2011

Ten Fingers: Both Hands

• “You need to have five fingers touching the factory and five touching the customer.”

• Translation: – Control what happens to your

product until the customer buys it.

– Do everything possible to let one hand help the other.

- 37 -© Minder Chen, 1993-2011

Vertical Integration

5 fingers on production & 5 fingers on customers

- 38 -© Minder Chen, 1993-2011

Man’s Department (ZARA store in Almere, The Netherlands)

- 39 -© Minder Chen, 1993-2011

Zara Has A Self-Reinforcing System ..

- 40 -© Minder Chen, 1993-2011

Communication Loops•Close the communication loop: •Customer Store Manager/Staff Market Specialists (i.e., Fashion Buyer)Designer Production Staff Buyer (Procurement Specialist) Subcontractor Warehouse Managers/Distributor

- 41 -© Minder Chen, 1993-2011

Fast Fashion• Just-in-Time Quick Response Fast Fashion

• Information Technology

• Push vs. Pull

• Reactive Capacity

• Fast Fashion Competitors– Forever 21

– Uniqlo

– Renner (Brazilian)

- 42 -© Minder Chen, 1993-2011

Just-In-Time• Zara's factories use sophisticated just-in-time systems,

developed in cooperation with

• Toyota,

• that allow the company to customize its processes and exploit innovations. (Flexible Manufacturing)

• For example, like Benetton, Zara uses

• "postponement" • to gain more speed and flexibility, purchasing more than

50% of its fabrics undyed so that it can react faster to midseason color changes.

- 43 -© Minder Chen, 1993-2011

Postponement Strategy

• Operations reversal at Benetton: Single product Style with 4 colors choices

Zara: Roughly half of the cloth arrives undyed!

- 44 -© Minder Chen, 1993-2011

Production Planning

2-44

- 45 -© Minder Chen, 1993-2011

Capacity Utilization

• For Faster Response,

• Have Extra Capacity on Hand

Capacity Utilization

Wai

tin

g T

ime

- 46 -© Minder Chen, 1993-2011

Zara Global Presence• Zara welcomes shoppers in 78 countries to its

network of 1.557 stores in upscale locations in the world's largest cities.

• The retailer's international footprint proves that national borders are no hindrance to a shared fashion culture.

- 47 -© Minder Chen, 1993-2011

Inditext

“There's no such thing as borders when it comes to sharing a single fashion culture.”

- 48 -© Minder Chen, 1993-2011

Global PresenceSpain: 335 stores (159 with Zara Kids)France: 115 stores (4 with Zara Kids)Italy: 87 stores (12 with Zara Kids)China: 77 storesJapan: 68 storesUnited Kingdom: 65 stores

Germany: 64 storesPortugal: 61 stores (21 with Zara Kids)Mexico: 51 storesRussia: 51 storesGreece: 48 stores (6 with Zara Kids)United States: 48 storesPoland: 33 storesBrazil: 31 storesSouth Korea: 30 storesTurkey: 29 storesBelgium: 27 storesSaudi Arabia: 24 storesCanada: 19 storesIsrael: 19 storesNetherlands: 18 stores

- 49 -© Minder Chen, 1993-2011

- 50 -© Minder Chen, 1993-2011

- 51 -© Minder Chen, 1993-2011

Fifth Avenue Flagship Store• Earlier this year, Inditex spent $324 million on a New York

property slated to become its new global Zara flagship store. The purchase of the National Basketball Association's old store on Fifth Ave. is the country's most expensive real-estate transaction, measured in dollars per square foot.

• In another recent deal also at 666 Fifth, Japanese clothing retailer Uniqlo agreed to pay $300 million over 15 years, in one of the most expensive leases ever in New York.

- 52 -© Minder Chen, 1993-2011

Why Going Online? • When the economy was at it’s worst, online

retail sales were the one area that either grew or didn’t suffer as much from the downturn. Not having an e-commerce operation at this point is inexcusable for a global retailer.

- 53 -© Minder Chen, 1993-2011

- 54 -© Minder Chen, 1993-2011

Zara Online Strategy• The bottom line: Inditex is counting on online sales

rather than store expansion to power sales at its Zara chain and trump rival H&M in the U.S.

• Inditex’s annual online sales will be €1.4 billion ($2 billion), or 7 percent of group sales by January 2014.

• And Gap, which has sold goods online for more than a decade, gets 9% of its sales online (now).

Read more: http://online.wsj.com/article/SB10001424053111903895904576546651628934210.html#ixzz1bZd2uqxM

- 55 -© Minder Chen, 1993-2011

Why Is Zara Late for the E-Commerce Party?

• Zara cited sourcing and logistics for their lack of online presence until now.

• The fashion retailer also reported that their clothes sell quickly, making it difficult to offer them online.

- 56 -© Minder Chen, 1993-2011

Online Start-Up Costs• "It basically follows the same model as our regular

store expansion," Mr. Isla says of the online rollout. "For us to enter a new country has a very small cost because, with our twice-a-week delivery model we have few start-up costs. We don't need large logistical infrastructures, marketing departments or big central operations. The model allows us to have a light structure, and that applies to online as well."

Read more: http://online.wsj.com/article/SB10001424053111903895904576546651628934210.html#ixzz1bZbsLbaD

- 57 -© Minder Chen, 1993-2011

Costs of US Online Initiative • Inditex spent €24 million over the past two years

in preparation for its online launch in the U.S. and it has high hopes for online demand.

• Some 200,000 people have downloaded the Zara application for Apple Inc.'s iPhone or iPad from the U.S., according to the company.

Read more: http://online.wsj.com/article/SB10001424053111903895904576546651628934210.html#ixzz1bZdM1Bet

- 58 -© Minder Chen, 1993-2011

http://www.zara.com/webapp/wcs/stores/servlet/product/us/en/zara-us-W2011/119504/605502/STRIPED%2BSHIRT