Chapter 3: Zara: Fast Fashion from Savvy Systems

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Chapter 3 Zara Fast Fashion from Savvy Systems
Medium quality fast fashion clothing at
affordable prices.
A Zara store in Manhattan
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Why Study Zara?

• To understand and appreciate
• The counterintuitive and successful strategy of
  Zara
• The technology, which has made all of this
  possible

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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/zarap/u/4/fm0TpEMKDFI
  
• (Store in Sydney)

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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.

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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.
  

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Impacts of Amanciao Ortegas 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/biogra
  phy/M-R/Ortega-Amancio-1936.htmlixzz1bfL4MMA6

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Inditex

• Inditex, one of the worlds 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.

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OEM? ODM ? OBM
OBM
Creative Conceptualization
BRANDING
ODM
RD
OEM
(Supply Chain)
Demand Chain
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Net Worth

• Net Worth 31B as of March 2011
• The richest person in Spain
• The 2 richest person in Europe
• The 7 richest person in the world

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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 sales70 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 HM 3.2
billion Gap 13.6 billion
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Gap versus Inditex at a Glance
12.5 billion in global sales 2010
1 euro 1.3948 US dollars
2010 1.73bn (2.45bn) of net profit
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Zara in Australia 2011
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Apple Beijing Store
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Apple vs. Zara
What is the similarity?
Jobs fostered an approach to product design that
evoked haute couture as much as high-tech.
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Apple
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Zaras Positioning

• Armani at moderate prices!
• Fashions are more Banana Republic, prices are
  more Old Navy.
• Look like high fashion but are comparatively
  inexpensive.
• Cheap Chic

• Price
• Fashion
• Quality
• Customer segmentation

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Zara

• Zara as a "fashion imitator" companyand low
  cost products.
• Trends setter?
• Instead of setting the trends, Zara follows them.

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Zara Positioning
The Zara brand is well regarded among the core
25- to-35-year-old consumers?
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What Is Fashion?
Trend

• 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
bellwether
Fad
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Fashion Diffusion
60s-70s
http//www.eurbanista.com/the-history-of-fashion-d
iffusion-in-pictures/
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Fashion vs. Art

• Steve Jobs philosophy of aesthetics reminds me
  Mona Simpson of a quote that went something
  like this
• Fashion is what seems beautiful now but looks
  ugly later
• art can be ugly at first but it becomes beautiful
  later.
• http//www.nytimes.com/2011/10/30/opinion/mona-sim
  psons-eulogy-for-steve-jobs.html?_r1

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Apple vs. Zara

• Zara 12000 styles a year.
• Apple 10 or so product lines, very focus.

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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?vWyGT2F74p_Afeaturerelated
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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. HM 75 to AsiaCheck
  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)

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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

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Labor Costs

• Zaras factory workers in Spain make an average
  of 1,650 a month, vs. 206 in China's Guandong
  Province. But the company saves time and money on
  shipping.

http//www.businessweek.com/magazine/content/08_42
/b4104066866245.htm
I began working in Bangladesh's garment industry
at the age of 12, making just 3 a month.Kalpona
Akter
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97 of clothes are not made in the United States.
http//whereamiwearing.com/curriculum/
How many people does it take to make a pair of
Jeans? http//www.youtube.com/watch?vqHev86ELF2w

http//shopfairtrade.wordpress.com/2011/09/29/wher
e-does-your-shirt-come-from/
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High Cost of Cheap Fashion

• http//www.npr.org/2013/05/02/180557959/ethical-fa
  shion-is-the-tragedy-in-bangladesh-a-final-straw
• Garment factory fire Bangladesh, April 2013 death
  toll reached more than 400.
• CSR pressure aims to force firms to meet a
  triple bottom line that considers not just
  profit but working conditions and impact on the
  environment.
• http//www.forbes.com/sites/howardhusock/2013/05/0
  2/the-bangladesh-fire-and-corporate-social-respons
  ibility/

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http//www.cnn.com/2013/05/02/world/asia/banglades
h-us-tshirt/index.html?hpthp_t1
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Outfit Clashes ??
ultimate fashion faux pas -- wearing the same
dress as someone else. www.Dressregistry.com
Prevents Same-Dress Embarrassment
As any fashionista can tell you, its not just
being in fashion that matters, its being in
fashion when few others are.
http//news.xinhuanet.com/english2010/entertainmen
t/2010-06/22/c_13363544.htm
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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 stores product mix.

Zara Thrives by Breaking All the Rules
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Markdown
Industry average markdown ratio is approximately
50, while Zara ration is about 15.
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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

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The Cube
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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/sourc
  e/1.htm

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The quick change artist

• Zara's ability to quickly bring the latest
  designs to its stores rests on its unique
  business model.
• Zara's design team monitors fashion trends and
  store sales. Based on this they come up with
  1,000 designs a month.
• They send these out for manufacturing around the
  world.
• Completed designs are shipped back to Spain.
• Local store managers in each country tell the
  Zara head office in Spain what the store needs
  and how much.
• The design team then flies or trucks out
  consignments for each of Zara's over 1,608 stores
  based on local needs and trends. A store gets
  consignments twice a week.

http//www.forbes.com/2010/07/29/forbes-india-zara
-business-model-tweak.html
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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

Production Planner
Buyer
Marketing Specialist
Designer
http//www.innovel.net/?cat6
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Zara Headquarter
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The Apparel Lifecylce

• Watch the BBC news video below!
• What is the risk faced by Zara?

http//www.fashionnetasia.com/en/IndustryNews/Busi
nessResources/Detail.html?id1891
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Fashion Reconnaissance

• Spotting trends everywhere from the street to
  movies to couture fashion shows and,
• Information from its customers to keep its
  merchandise fresh.

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Results

• Zara has higher manufacturing costs than rivals.
• Inditex gross margins are 56.8 percent compared
  to 37.5 percent at Gap.

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Information and IT

• Zara Store
• Hard data POS data
• Soft data Ask customers their preferences (PDA)
• Firm data Nonsale data (clothes abandon at the
  fitting room area)? 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

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Rapid-fire Fulfillment

• Ferdows, K., M.A. Lewis, J.A.D. Machuca.
• Rapid-fire fulfillment,
• Harvard Business Review, 82(11), 2004.

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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.

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Vertical Integration
5 fingers on production 5 fingers on customers
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Mans Department (ZARA store in Almere, The
Netherlands)
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Marketing and Store Locations

• Zara relies more on location of a retail
  establishment rather than advertising to attract
  customers.
• Only .3 percent of sales are spent on advertising
  for the company compared to that of its
  competitors who spend around 3.5 percent.

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Zara Has A Self-Reinforcing System ..
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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

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Customer ? Design

• Inditex Executive President Jesus Echevarria
  stated that Everything is happening in stores.
• From customers to designers. It turns the
  customer into the starting point of the fashion
  chain and not the designer.
• People on the street is the runway that Zara
  studies.

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Fast Fashion

• Just-in-Time ? Quick Response ? Fast Fashion
• Information Technology
• Push vs. Pull
• Reactive Capacity
• Fast Fashion Competitors
• Forever 21
• Uniqlo
• Renner (Brazilian)

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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.

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Postponement Strategy

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

Zara Roughly half of the cloth arrives undyed!
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Production Planning
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Capacity Utilization

• For Faster Response,
• Have Extra Capacity on Hand

Waiting Time
Capacity Utilization
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Attributes Competitors Zara
New Items Designed 2,0004,000 (HM,Gap) 30,000
From concepts to products 35 months (HM), 6 months (Gap) , 9 months (others) 15 days
Manufacturing No factory (HM) 60 produced in house
Batch size Hugh batch size everything is the same (Gap) Small batches Youll never end up looking like someone else.
average markdown ratio approximately 50 15 (85 full price)
of store visit per year 3 17
Marketing /Revenue ratio 3.5 0.3
Failed product introductions 10 1
gross margins 37.5 56.8
IT Investment ¼ of the industry average
Stores 3,076 stores WW with 2,551 in US (Gap) 3,900 stores across 70 countries.
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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.

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

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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.

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Why Going Online?

• When the economy was at its worst, online retail
  sales were the one area that either grew or
  didnt suffer as much from the downturn. Not
  having an e-commerce operation at this point is
  inexcusable for a global retailer.

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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 HM in the U.S.
• Inditexs 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/SB1000142
4053111903895904576546651628934210.htmlixzz1bZd2u
qxM
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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.

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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/S
  B10001424053111903895904576546651628934210.htmlix
  zz1bZbsLbaD

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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/SB100014240531119038
  95904576546651628934210.htmlixzz1bZdM1Bet

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http//www.zara.com/webapp/wcs/stores/servlet/prod
uct/us/en/zara-us-W2011/119504/605502/STRIPED2BSH
IRT
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Prada Fancy Technology Use by IDEO
http//www.ted.com/talks/david_kelley_on_human_cen
tered_design.html Around 354