Latest trends at affordable prices
Zara is the main brand of the Spanish retail company Inditex, headquartered in Arteixo, in the north-west of Spain. Inditex’s sales in 2014 reached $19.7Bn, compared to H&M with $20Bn or The Gap with $16.4Bn. Zara designs, produces and distributes clothing products for women, men and kids. Zara has over 2.000 stores in more than 88 markets around the world and it is expanding its online presence (26 countries in 2014).
Zara’s key value proposition is delivering the latest trends at affordable prices. Unlike other competitors, Zara does not hire “star designers” like H&M (e.g. Balmain, Versace). Instead, its design team captures the trends from the Prêt-a-porter collections from Paris, London, Milan and New York, celebrities, street trend-setters and, of course, Zara’s customers.
Although Zara has a very limited advertising spend (0.3% of sales vs 3.5% average competitor), it is able to generate sales excitement through premium store locations and constantly renovated product offering -every store receives new merchandise twice per week. Therefore, customers are encouraged to increase their average number of visits per year (17 vs 3 in competitors) to check out the new products and they feel the urge to buy a piece of clothing for the fear of not finding it the next time they visit their store.
Zara’s business model has been enabled by its innovative supply chain, which has shifted from push to pull & has reduced the time-to-market.
Average fashion retailer has 2 to 5 collections that designs more than 5 months in advance and then “pushes” the manufactured merchandise to retailers or their own stores. Conversely, Zara produces the latest trends in the market less than a month in advance and, most importantly, produces what Zara’s customer wants.
Zara’s store employees provide real time feedback about store demand and consumer preferences to the designer team in Arteixo through hand-held computers. Zara also produces small batches of new designs to test the interest of consumers and thus decide what designs to mass-produce.
By having a “pull” approach, Zara reduces the “bullwhip effect”, lowers its inventory costs in store and reduces the need to sell at discounted prices: Zara generates only 15%-20% of its sales at mark-downed prices (vs 30-40% from European competitors).
Their cross-functional design teams –which include designers, product developers, procurers, manufacturing planners and logistics managers- have managed to decrease design lead-time due to collaboration and fast end-to-end decision making.
Regarding their procurement strategy, around two thirds of the fabrics purchased are undyed (gray) so that the material can be purchased before the design is finalized and to obtain savings from demand aggregation in procurement.
Zara’s manufacturing approach combines a “make and buy” approach. Zara produces internally in Spain the most fashionable items (40% of designs), which are also the riskier and need testing, in order to get them to the stores as soon as possible. The production of the more standard designs is outsourced to manufacturers in Morocco, Turkey and Asia to reduce the production cost of the products with a more predictable demand.
In 1990 Zara partnered with Toyota to apply the Lean and JIT principles to its production facilities. Zara’s plants are also product-focused and operate at 50% of capacity to provide flexibility given market demand.
Zara has two main distribution centers in Spain –Arteixo and Zaragoza-, from where all the clothing is distributed. DC’s also operate at a 50% capacity and are equipped with a cross-docking center which is able to manipulate more than 45.000 items per hour. Every product spends less than 3 days in the DC, usually only a few hours. The distribution to the stores happens twice per week –through truck or plane- and therefore eliminates the need to have local distribution centers in the countries where Zara is present.
In 2014 Zara implemented an RFID system to track inventory along the value chain. This system also allows store employees to locate inventory in other stores or on zara.com and therefore improves customer experience. RFID has improved efficiency by streamlining the replenishment order operations and making the inventory counting process 80% faster.
All in all, Zara has managed to leverage its supply chain to deliver its customer promise of affordable fast fashion.
Informe anual Inditex 2014: http://www.inditex.com/es/investors/investors_relations/annual_report
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