1. No category

Chapter 3: Zara: Fast Fashion from Savvy Systems
A Zara store in Manhattan
© Minder Chen, 1993-2011
-1-
Why Study Zara?
• To understand and appreciate :
– The counterintuitive and successful strategy of Zara
– The technology, which has made all of this possible
© Minder Chen, 1993-2011
-2-
© Minder Chen, 1993-2011
- 2-3
3-
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)
© Minder Chen, 1993-2011
-4-
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.
© Minder Chen, 1993-2011
-5-
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.
© Minder Chen, 1993-2011
-6-
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
-7© 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.
© Minder Chen, 1993-2011
-8-
OEM ODM  OBM
OBM
Creative
Conceptualization
ODM
R&D
BRANDING
OEM
(Supply Chain)
© Minder Chen, 1993-2011
Demand Chain - 9 -
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
© Minder Chen, 1993-2011
- 10 -
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
© Minder Chen, 1993-2011
- 11 -
Gap versus Inditex at a Glance
€12.5 billion in global sales 2010
2010 €1.73bn ($2.45bn) of net profit
© Minder Chen, 1993-2011
1 euro = 1.3948 US dollars
- 12 -
Zara in Australia 2011
© Minder Chen, 1993-2011
- 13 -
Apple Beijing Store
© Minder Chen, 1993-2011
- 14 -
Apple vs. Zara
What is the
similarity?
Jobs fostered an approach to product design that
evoked haute couture as much as high-tech.
© Minder Chen, 1993-2011
- 15 -
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.
• Price
D. Cheap Chic
• Fashion
•
•
© Minder Chen, 1993-2011
Quality
Customer
segmentation
- 16 -
Zara
Zara as a
"fashion imitator" company
and low cost products.
Trends setter?
Instead of setting the trends,
Zara follows them.
© Minder Chen, 1993-2011
- 17 - 2-17
Zara Positioning
The Zara brand is
well regarded among
the core 25- to-35year-old consumers?
2-18
© Minder Chen, 1993-2011
- 18 -
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)
© Minder Chen, 1993-2011
Trend
Classic
Fad
- 19 -
Fashion Diffusion
60s-70s
http://www.eurbanista.com/the-history-of-fashion-diffusion-in-pictures/
© Minder Chen, 1993-2011
- 20 -
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
© Minder Chen, 1993-2011
- 21 -
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][[Check 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%)
© Minder Chen, 1993-2011
- 22 -
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
© Minder Chen, 1993-2011
- 23 -
Outfit Clashes 撞衫
http://news.xinhuanet.com/english2010/entertainment/2010-06/22/c_13363544.htm
© Minder Chen, 1993-2011
- 24 -
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.
© Minder Chen, 1993-2011
- 25 -
Markdown
Industry average markdown ratio is approximately 50%,
while Zara ration is about 15%.
© Minder Chen, 1993-2011
- 26 -
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
© Minder Chen, 1993-2011
- 27 -
The Cube
© Minder Chen, 1993-2011
- 28 -
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
© Minder Chen, 1993-2011
- 29 -
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
Buyer
Production
Planner
Marketing Specialist
Designer
http://www.innovel.net/?cat=6
© Minder Chen, 1993-2011
- 30 -
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
© Minder Chen, 1993-2011
- 31 -
Fashion Reconnaissance
• Spotting trends
everywhere from the
street to movies to
couture fashion
shows and,
• Information from its
customers to keep its
merchandise fresh.
© Minder Chen, 1993-2011
- 32 -
Results
• Zara has higher manufacturing costs than
rivals.
• Inditex gross margins are 56.8 percent
compared to 37.5 percent at Gap.
© Minder Chen, 1993-2011
- 33 -
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 ecommerce?
• Design/Production Team
– fabric is cut and dyed by robots (laser cutting)
• Not mentioned specifically:
– ERP, SCM, CRM, e-commerce web site
© Minder Chen, 1993-2011
- 34 -
Rapid-fire Fulfillment
Ferdows, K., M.A. Lewis, J.A.D. Machuca.
“Rapid-fire fulfillment”,
Harvard Business Review, 82(11), 2004.
© Minder Chen, 1993-2011
- 35 -
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.
© Minder Chen, 1993-2011
- 36 -
Vertical Integration
Design/
Production/
Logistics
Store
Customer
5 fingers on production & 5 fingers on customers
© Minder Chen, 1993-2011
- 37 -
Man’s Department (ZARA store in Almere, The Netherlands)
© Minder Chen, 1993-2011
- 38 -
Zara Has A Self-Reinforcing System ..
Leverage
Your Assets
Close
communication/
information loop
Stick to a
rhythm
© Minder Chen, 1993-2011
- 39 -
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
© Minder Chen, 1993-2011
- 40 -
Fast Fashion
•
•
•
•
•
Just-in-Time  Quick Response  Fast Fashion
Information Technology
Push vs. Pull
Reactive Capacity
Fast Fashion Competitors
– Forever 21
– Uniqlo
– Renner (Brazilian)
© Minder Chen, 1993-2011
- 41 -
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.
- 42 © 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!
© Minder Chen, 1993-2011
- 43 -
Production Planning
2-44
© Minder Chen, 1993-2011
- 44 -
Capacity Utilization
Waiting Time
• For Faster Response,
• Have Extra Capacity
on Hand
Capacity Utilization
© Minder Chen, 1993-2011
- 45 -
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.
© Minder Chen, 1993-2011
- 46 -
Inditext
“There's no such
thing as borders
when it comes to
sharing a single
fashion culture.”
© Minder Chen, 1993-2011
- 47 -
Global Presence
Spain: 335 stores (159 with Zara Kids)
France: 115 stores (4 with Zara Kids)
Italy: 87 stores (12 with Zara Kids)
China: 77 stores
Japan: 68 stores
United Kingdom: 65 stores
Germany: 64 stores
Portugal: 61 stores (21 with Zara Kids)
Mexico: 51 stores
Russia: 51 stores
Greece: 48 stores (6 with Zara Kids)
United
States:
48
stores
© Minder Chen, 1993-2011
- 48 -
© Minder Chen, 1993-2011
- 49 -
© Minder Chen, 1993-2011
- 50 -
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 realestate 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.
© Minder Chen, 1993-2011
- 51 -
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.
© Minder Chen, 1993-2011
- 52 -
© Minder Chen, 1993-2011
- 53 -
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
© Minder Chen, 1993-2011
- 54 -
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.
© Minder Chen, 1993-2011
- 55 -
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
© Minder Chen, 1993-2011
- 56 -
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
© Minder Chen, 1993-2011
- 57 -
http://www.zara.com/webapp/wcs/sto
res/servlet/product/us/en/zara-usW2011/119504/605502/STRIPED%2
BSHIRT
© Minder Chen, 1993-2011
- 58 -