Inditex/Zara: Fast is the new slow

Inditex(Zara) revolutionized the fashion industry with their fast supply chain. Now there is a new breed of competitors entering the market beating Inditex(Zara) at their own game.

Inditex (Zara, Massimo Dutti, Pull&Bear) has revolutionized the fashion industry with its fast fashion approach to the extent that its founder, Amancio Ortega, became the world’s richest man on August 30 [1]. Rather than producing in low-cost countries such as China and Bangladesh, Inditex has their production centers in countries such as Portugal and Turkey, close to the European market where they are bought by the consumers [2]. The drawback of this supply chain is higher per unit production costs; however, these are outweighed by the benefits of a faster supply chain. Inditex’ most successful brand, Zara, have exploited the advantages of their fast supply chain by:

  1. Reacting faster to trends and by copying competitor collections
  2. Increasing number of collections per season from a few collections per year to more than 20 [3]
  3. Leveraging customer response to their collections to better match supply to demand

This system has been very effective and has fueled Inditex’ rapid growth and profitability over the past decades. Seeing Inditex’ success, fashion brands across the board are changing their supply chain to fast fashion to limit Inditex’ competitive advantage [4]. Even more concerning, there is now emerging a new group of successful fashion brands, often referred to as ultra-fast fashion, including Boohoo, ASOS and Missguided. Boohoo grew sales 51% last year and improved net profit margin to more than 10% [5]. These brands are even producing in the UK to deliver new products in two weeks compared to Inditex’ six weeks, but more importantly they are selling only online [6]. Selling online only gives the ultra-fast fashion brands an edge on the younger customers, however, the long term strategic edge may be even more important. The ultra-fast fashion brand can beat Inditex at their own strengths by:

  1. Shortening the throughput time by selling even before the products are in the warehouse and saving the time to ship products to the store and put them on display
  2. Reacting faster to trends on social media – “If a trend comes, we need to have it on our site in under a week” – Nitin Passi, CEO Missguided [7]
  3. Increasing the number of collections and SKUs to test for customer demand
  4. Measuring customer response more accurately and faster online
  5. Avoiding local mismatches in supply and demand through few centralized warehouses keeping stock rather than each individual store keeping stock

Inditex’ short and mid-term response has been to see online as a new sales channel as customer demand is shifting online. To mitigate the impact of this shift they have increased their investment in their online presence at the expense of store expansions [8]. Their increased focus on online could be seen by the opening of new markets and improving the customer experience by reducing delivery time from 3-5 days to 2-3 days in the UK and adding next day delivery for free on orders above GBP50 [9] [10] [11]. Inditex is also experimenting with their lingerie and athleisure brand Oysho selling on Zalando’s marketplace in Europe, which they potentially could expand to other brands to further increase online sales [12].

However, online is not just another sales channel as the ultra-fast fashion players are posing a real threat to Inditex in the medium term. An adequate response would be to alter their supply chain and business model to compete. Inditex has developed several brands to address different customer targets e.g. Massimo Dutti for classic style and Pull&Bear for younger, edgier style. Similarly, by combining current capabilities with outside talent Inditex is in a great position to develop strong ultra-fast fashion brands to fight off the new competition.

Contrary to Inditex, other fast fashion brands such as Primark have stayed away from e-commerce as customers can only browse products online and not buy [13]. The rationale is not that they do not see the value in online, but rather that the low-priced items cannot cover the high variable costs in e-commerce [14]. Zalando reported in 2016 fulfillment costs of 23% of sales [15]. Inditex does not break out their numbers, but they are likely higher as Zalando has larger orders. On the other hand, Inditex had operating expenses of 35% of sales, driven by the high fixed costs of running their vast store network [16]. As online sales are cannibalizing offline sales, Inditex will increasingly find themselves getting the high fixed costs from operating their stores and the high variable costs from fulfilling online orders.

The key question for Inditex is what to do with their existing brands: Should they embrace online to capture all demand, or should they rather focus on offline to capture demand in a cost-efficient manner?

 

Word count: 777

 

[1] Ginsberg, Leah. The founder of Zara briefly knocked out Bill Gates to become the richest person in the world. (2017, Aug 30). CNBC. https://www.cnbc.com/2017/08/30/zara-founder-amancio-ortega-is-now-the-richest-person-in-the-world.html

[2] Butler, Sarah. Inditex: Spain’s fashion powerhouse you’ve probably never heard of. (2013, Dec 14). The Guardian. https://www.theguardian.com/fashion/2013/dec/15/inditex-spain-global-fashion-powerhouse

[3] Howland, Daphne. Report: ‘Ultra-fast’ fashion players gain on Zara, H&M. (2017, May 22). RetailDive. https://www.retaildive.com/news/report-ultra-fast-fashion-players-gain-on-zara-hm/443250/

[4] Milnes, Hilary. Luxury brands are changing how they operate internally to react faster to customers. (2017, Nov 2). Glossy. http://www.glossy.co/evolution-of-luxury/luxury-brands-are-changing-how-they-operate-internally-to-react-faster-to-customers

[5] Williams-Grut, Oscar. Fast fashion retailer Boohoo grew sales by a huge 51% last year — but shares are falling. (2017, Apr 26). Business Insider. http://www.businessinsider.com/boohoo-2017-full-year-results-revenue-up-51-profits-up-97-2017-4

[6] Wynne, Ophelia. Is British Fast Fashion Too Fast? (2017, May 16). Racked.  https://www.racked.com/2017/5/16/15643246/asos-boohoo-british-fast-fashion

[7] Cocozza, Paula. Faster fashion: ‘If a trend comes, we need to have it on our site in under a week’. (2015, April 7). The Guardian. https://www.theguardian.com/fashion/2015/apr/07/fast-fashion-online-labels-boohoo-missguided

[8] Neumann, Jeanette and Garcia, Ana. Zara Parent Inditex Slows Store Expansion as Online Sales Grow. (2016, Mar 9). Wall Street Journal. https://www.wsj.com/articles/inditex-profit-boosted-by-zara-stores-1457512394

[9] Inditex Annual Report 2016. https://www.inditex.com/documents/10279/319575/Inditex+Annual+Report+2016/6f8a6f55-ed5b-41f4-b043-6c104a305035

[10] Goudie, Brenda. Fulfilment customer experience: Zara. (2013, February). EcommPoint. http://ecommpoint.com/blog/retailer-fulfiilment-roadtest/fulfilment-customer-experience-zara/

[11] Accessed 2017, Nov 13. https://www.zara.com/uk/

[12] Zalando Press Release 2017, June 19. https://corporate.zalando.com/de/newsroom/en/pressemitteilungen/full-access-and-availability-products-weekday-nike-and-tommy

[13] Howland, Daphne. Report: ‘Ultra-fast’ fashion players gain on Zara, H&M. (2017, May 22). RetailDive. https://www.retaildive.com/news/report-ultra-fast-fashion-players-gain-on-zara-hm/443250/

[14] Howland, Daphne. Eschewing e-commerce, Primark is holding out for brick-and-mortar. (2015, Sept 15). RetailDive. https://www.retaildive.com/news/eschewing-e-commerce-primark-is-holding-out-for-brick-and-mortar/405618/

[15] Zalando Annual Report 2016. https://annual-report.zalando.com/2016/fileadmin/user_upload/20170307_zalando2016_geschaeftsbericht_en_mit_schutz.pdf

[16] Inditex Annual Report 2016. https://www.inditex.com/documents/10279/319575/Inditex+Annual+Report+2016/6f8a6f55-ed5b-41f4-b043-6c104a305035

[17] Cover photo. Bain, Marc. Boohoo’s soaring profit shows how fast fashion looks unencumbered by brick-and-mortar stores. (2017, Apr 26). https://qz.com/969319/boohoos-soaring-profit-shows-the-advantages-of-fast-fashion-sold-only-online/

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4 thoughts on “Inditex/Zara: Fast is the new slow

  1. Excellent analysis and insights. While I do think that e-commerce and online is a critical avenue for retailers, I do not think Inditex needs to overhaul its supply chain to compete with the Missguideds of the world. Zara for example has built a strong brand for itself, which attracts customers for the quality of its collections as much as its fast fashion. It also provides a great store experience. And while it is certainly at a lower price point than luxury brands, I am not sure Zara’s customers would shop for clothes every week purely because the collection is being refreshed.

    The other important consideration is price. I would assume the faster your fashion, the lower your unit selling prices. Zara has currently created a niche for itself (along with H&M) where it provides quality apparel for reasonable prices. Lowering these prices to compete with ultra-fast fashion labels could send negative signals regarding quality.

  2. Thank you for your analysis and recommendations. I really enjoyed reading them. I agree with Ninad that Inditex doesn’t need to embrace online to capture all demands and go head-to-head with missguided. It would need Inditex to change their supply chain strategy, which is one of the key reasons why they have been so successful. However, I believe that if they want to expand globally and compete in local markets, they need to establish supply chain globally and replicate their current business models. I also believe that value from improvement in speed of capturing new trends and bring new products online is not that much for Inditex. Their products are great quality with great design at cheap price. These three are great enough to win in the market, and going online would make it much more challenging for Inditex to operate and hurt their margin.

  3. Hans,
    Very interesting analysis of the fashion industry’s upheaval as the sales game moves online, and I think it’s a great follow-up to the industry disruption that we talked about with the GAP case in marketing. Challenging to wrestle with potential changes to an operating model that has been successful for Inditex. I tend to agree with you that attempting to move fully into the online space, while maintaining a brick & mortar retail presence, will make it difficulty to capture cost efficiencies and compete directly with ultrafast fashion on price. However, I don’t think that Inditex needs to. Their ability to win at the brick and mortar retail game has already been proven, and I think the ultrafast fashion retailers are occupying another niche, especially among young folks. As young folks age and body shapes change, though, I think customers could become more likely to try before they buy within the clothing space to maximize efficiency. This trend plays to Inditex’s strength in offline locations, and primes them for the future.

  4. Interesting read that highlights the difficulties that Inditex and other fast fashion retailers face in the era of ultra-fast fashion – especially the fact that Inditex and other incumbents compete with pure online players who don’t have to carry the costs of a vast retail network. On the positive side for Inditex is its scale which surely offsets some of these added costs.

    I agree with you that their experience in this market and especially their access to capital can help them stay competitive. More than anything I believe that they could leverage their size/capital to acquire some of these ultra-fast fashion players to increase their pure-play online share of business.

    And to make an attempt to answer your last question: I do think Primark strategy seems to lead to what I like to call a “Kodak moment” (not the happy smiling one unfortunately but the one entailing an incumbent company that is reluctant to adopt new technology as is scared of what the consequences will be to its current competitive advantage). We all know how that story finishes – not with a happy smile for the Kodak folks unfortunately. In my opinion, Inditex should “take the hit” and focus on the online channel by improving it for its current offering but also by launching and acquiring pure online ultra-fashion players.

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