ZARA : FAST FASHION

1. Compare Inditex's financial results with the other retailers referred to in the case. What do the
comparisions indicate about Inditex's relative operating economies and its relative capital
efficiency?
(EXCEL SHEET)

2. How specifically do the distinctive features of Zara's business model

affect its operating economies? How would you compare Zara (in terms of
advantages/disadvantages) with an average retailer with similar pricing?
The Business Model followed by ZARA is quiet exclusive and different from other players
in the industry. Inditex operated in six different chains: Zara, Massimo Dutti, Pull & Bear,
Bershka, Stradivarius and Ohysho. Zara had operations in Europe, Americas & Middle
East/Asia. From exhibit 14 they had a total of 1284 stores out of which 507 were owned by
Zara. During the fiscal year 2001 profit of Euro 441 million on sales of Euro 2,477 million.
Zaras Business system was (Exhibit 12)
DESIGN
Retailing

Sourcing & Manufacturing

Distribution
Zara was able to originate design and have finished goods in stores within 4 to 5 weeks in
case of entirely new design. The short Cycle time reduced working capital intensity and
facilitated continuous manufacturing of new merchandizing. Zara also managed well their
selling, general and administrative expenses which was 20%of its Revenue.
Zara maintained a Vertical integrated Manufacturing and Supply chain structure. The
possible reasons for following such a structure can be:
Cutting cost because they do not outsource any channel.
Cutting time, faster, effective, and efficient. Following Just in Time system.
Avoid conflicts emerge from different channels and proper coordination.
The Business Model followed by Zara has advantages, it also has its fair share of negatives,
some of which being that because it has only a few manufacturing facilities it is unable to
take advantage of the Economies of scale in order to produce a large amount of apparel for a
relatively cheap unit price. Also due to its high replenishment rate of store selections it needs
in highly flexible machinery and a very skilled batch of workers who would possess the
ability of to produce quality products in quick time. This are very delicate skills and
outsourcing it creates a chance of degradation of Quality.

Zara follows the motto Now or Never , it creates artificial scarcity and prompts the
customer to buy it now or they may lose out for ever, it also reduces the risk of stock
leftovers. Scarcity in fashion increases desirability, which means shoppers need to buy
quickly as the item may not be available next week. Lower quantities also mean there
are not much to be disposed when the season ends; Zara only discounts 18% of its
stock in sales, which is half the industry average.
In order for this model to work, the supply chain has very short lead times and
Zara claims that Zara goes from design to final product in just 14 days.
Some drawbacks of this model can be said as:

Just-in-time manufacturing relies heavily on production in Northern Spain.

Any weather, labour or terrorist disruption to the area will have a serious
impact to sales, as there are no alternative supply centres in Europe.
As production is carried out in Spain where average wages are higher than low
cost Asian countries so factory wage costs will be higher than competitors,
which will affect margins.
Zara is also vulnerable to financial vulnerabilities in the Euro as most of its
cost-base is denominated in Euros.
Finally increased oil prices will affect profits as twice-weekly deliveries
means higher transportation costs.
A single warehouse is quiet risky as any disruption there can cause problems
in all Zara stores worldwide.

Zara dint believe in a push strategy where you shove your designs through advertisements
that would cost you a fortune and comes with no guarantee that your designs would be in
coherence with the taste of your intended customer base. Zara spent only 0.3% of its revenue
on media advertising and reduced their markdown requirements. Instead they believed in a
policy that involved in giving the customer what they want. They did this by having extensive
market surveys with which they rightly gauges the overarching vogue in apparels and deliver
as per that in a span of 14 days from the time the designs are made. And this was a
continuous process that was practiced continually. Fresh Fashion became their USP.

The negative of this being: However, with the expansion of Zara in Asia and North America,
inventory management problems will be more complicated and complex as more stores are
added on. Lead times to these far-reaching stores will be longer and Zara would not be as
effective in reacting to consumers tastes and demands. Transportation costs will also increase
since the product needs to travel a longer distance to reach its end customers. Zara also need
to cope with the high competition, culture and economic situation for this regions. Pricing
and Positing are the most delicate strategies that ZARA need to address and do a proper
market research when they venture in Americas or the Asian Market.

Advantages/Disadvantages of the pricing strategy with respect to a regular retailer.

Advantages:
Inditex, by following different pricing strategies with the 6 different chains of it has
created an opportunity to hedge their risk. All the 6 brands operate at different segments,
demographic and psychographic, without various price points and target segments. Thus the
entire brand of Inditex will not be affected directly and can hedge the risk of one of the
brands losing out. All the brands act as individual brands where the risk and rewards are
shared under the name of Inditex.
Zara, at different places has intended to put up different pricing. This is purely based on the
locational and distance factor, keeping in mind the economy and distance. This tends to be
good way in serving the target customers needs to the best of its potential. Pricing hugely
drives the image of a brand. They have actually have different target segments depending on
the disposable income of the people.
Zara also has follows the Oil Stain where it opens a flagship store first. It initially tests
the market before opening new stores. This actually helps bring down the initial investment
and reduces the risk of losses.
A regular retailer is not very likely to follow a changing pricing strategy as Zara does. They
will not look forward to diversify their chain indifferent entities either.
Disadvantages:
The resources within Inditex are being spread thin. Zara was the first of Inditexs chains,
but still 4% of Zaras 6% total market share is directly attributed to Zara. Thus Inditex is
hugely dependent on Zara and any loss would heavily impact the bottom line of Inditex as a
Whole.
Having a single warehouse in Spain to support the worldwide demand is also a risky venture
for Zara. A regular retailer would have various warehouses set up in different parts to reduce
risk of Material not reaching the retailers.
Zara to enter into a new market followed three modes of participation company owned,
joint venture & franchise. This needed lot of research which model to be followed
depending on the country. It was messy and confusing as Zara all the three modes had various
degree of ownership and profit sharing. A regular retailer might have followed a single
model.
Inditex has attempted to apply that pricing strategy with 6 other chains, and has not found
one as successful as Zara. While other 5 chains operated very close or some-what close to
each other. It was difficult to differentiate ZARA and Stradivarius as it caters to almost
similar segments. It should stop dividing its money and resources into smaller and smaller
pieces with new chains, and instead focus on investing deeply into one.
A regular retailer generally concentrates on one entity of its brand and tends to use its
resource completely into that and thus prevents the risk of resource leakage. This also enables
them to formulate their pricing strategy fair and clear to themselves as well to their target
customers.

3. How does Zara's choices about how-to-compete, particularly the ones

related to its quick-response capability, affect its operating economies?
How do these choices create competitive advantage?
Zara has created a brand in the minds of the customer as Fresh Fashion. Fundamental to
Zaras success is their commitment to give the customers what they want in the shortest
possible spans in time, producing clothing to shorter life spans and defining the conventions.
This quick response mechanism have given them a significant competitive advantage in four
areas in particular, that being product development, strategic partnerships and cost of
production, advertising and marketing, and information technology infrastructure. All the
four areas are in sync that gives Zara the competitive advantage over other. The efficiencies
and processes developed in these four functions differ significantly from their competitors
and stand out in providing additional value and profitability to Zara.
Product Development
Zara gives its store managers significant autonomy in helping them determine the products
which they intend to put on display and the ones they deem to be right to put on sale, and also
relay the results of market survey and trends in the buying behaviour of the customers in store
all the way back to the headquarters in La Coruna. Zara maintains a design team of 200
people, all of which produce approximately 12,000 new styles per year for Zara. The process
of obtaining market information and relaying it to design and production teams expedites
product development by shortening the throughput time of a product to 3-4 weeks from
design to distribution. This process is very different from its competitors. Many competitors
rely on a small elite design team that plans both design and production needs well in advance.
Stores have little autonomy in deciding which products to display or put on sale because
Headquarters plans accordingly and ships quantities as forecasted. Zaras speed to market in
product development exceeds the capabilities of its competitors. They have significantly cut
down their Cycle time from 6 months in 1970 to 6 weeks in 2000(exhibit .4) This in itself
provides additional value to stakeholders, customers, and stores in producing quality clothing
at affordable prices .Zaras product development capabilities are essential to Zaras business
strategy and future success.
Strategic Partnerships and Cost of Production
Zara unlike its competitors like Gap, Benetton and H&M does not use cheap labours by
outsourcing the work to Asians. 80% of Zaras materials are manufactured in Europe, with
50% made in Zara controlled facilities in the Galicia region of Spain near headquarters.
Although the labour cost in Spain is 17-20 % more as compared to its Asian counter part Zara
still enjoys an edge over its competitors in regards to operations. The local strategic
partnerships that Zara maintains with manufacturers in Europe allow for a product throughput
time of 3-4 weeks from conception to distribution. To make this happen, the company designs
and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low. Zara
postpones dyeing and printing designs until close to manufacture, thereby reducing waste and
minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara
great flexibility in adapting their product lines based on up to date market trends and
consumer behaviour. It also decreases costs of holding inventory. Zaras competitors, through
outsourcing to Asian countries such as China, sacrifice the benefits of proximity for low labor
and production costs. Though there is a cost advantage in their approach in regards to labor,
the lack of flexibility in changing orders based on current trends hinders their operational

efficiencies. Inventory costs are higher for competitors because orders are placed for a whole
season well in advance and then held in distribution facilities until periodic shipment to
stores. This proximity effect and the flexibility that it gives Zara is fundamental to their basic
concept to respond quickly to shifts in consumer demand and has provided them with a
competitive edge in comparison to their peers.
Advertising and Marketing
Zara spends only a nominal 0.3% of its revenues in advertisement and marketing. This
helps them save a lot of its revenue and gives it room in spending it in some other areas
where its competitors are missing out. Zara always laid focus in store layouts, location (which
is the most important attribute to a retail outlet) and product life cycles. For instance, Zara
strategically locates all of their stores in prime retail districts for visibility marketing.
Additionally, because of the product development cycles mentioned earlier, customers are
trained to visit Zara stores often because new items are presented weekly and are often not
restocked. This feeling of scarcity encourages customers to come to the stores and buy
frequently. Lastly, in order to keep the stores looking fresh and trendy; Zara invests heavily in
their store layouts. They have a testing facility nearby their headquarters in Spain where
different types of store layouts are tested. Each Zara store is remodelled every 3- 5 years in
order to keep up with current trends. Zara does not invest heavily in direct marketing, though
their efforts in image/brand marketing do a great deal to attract a loyal customer base. Their
cost advantage and ability to maintain brand recognition and customer loyalty are essential
elements of Zaras capabilities that build value in the company. The scarcity model followed
by Zara also acts in their favour as Customers have learnt that if they dont buy it now they
will not get ever.
Information and Communication Technologies
Another area where Zara spends much less as compared to its competitors. Unlike other
companies Zara spends only 0.5% of its revenue in IT and as less as 0.5% of the workforce
comprise of its IT team, on the other hand its competitor spends 2% in IT and 2.5% of its
workforce make up its IT team. Zara utilizes human intelligence (from store managers and
market research) and information technology (such as their PDA devices) in order to have a
hybrid model for information flow from stores to headquarters. For example, managers at
Zara stores use handheld devices to send standardized information regarding customer
feedback and ordering needs directly to in-house designers. This not only keeps Zara's
designers informed of fast-changing customer trends and demand, but also provides the
company with insight on less-desirable merchandise. Unlike Zaras hybrid model (which
incorporates human intelligence and IT applications), competitors rely almost completely on
information technology. Zaras unique approach of human intelligence assisted IT solutions
results in well-managed inventories, linkages between demand and supply, and reduced costs
from obsolete merchandise; however, there is still room for improvement in their IT
processes to realize more effective management of inventory levels. Hence, the hybrid
information and communication system that Zara uses provides cost advantages to Zaras
operations and helps to abide by their fundamental principle to have the ability to rapidly
respond to changes in consumer demand

4. How sustainable do you think Zara's competitive advantage is?

Zara has grown from a store opened in 1975 at upmarket shopping street in La Coruna to
total of 1284 stores Worldwide by 2001.It has become one of the most quality driven brand
and the first choice of fashion conscious people. They have positioned themselves at High on
fashion at best price. They have lowest Cycle time due its robust Distribution channel. Taking
about sustainability of Zaras competitive advantage we can actually focus on some key
elements, likely:
Short Lead Time: Zara puts on a new collection of apparels i.e. from design to
rack in just 14-15 days. Which is a whopping 12 times faster than its competitors at
about 6 months. Its cycle time is just 6 weeks. By updating its line of clothing so
frequently and in such an enticing manner Zara entices its customers to purchase
more merchandise more frequently and can adhere to the promise of Fresh
Fashion.
Frequency and speed of production: Zara has made its customer accustomed to the
fact that they would receive a fresh stock of product every fortnight, this is possible
only by the practices that are adopted by Zara due to its well-planned distribution
channels all around the Globe. But I think they should also start building more
warehouses as the market grows to reduce pressure and chance of failure of a single
warehouse.
Speed of Production: Zara produces 50% of their merchandise by themselves,
unlike their competitors who are heavily dependent as their works are outsourced to
Asia. In Zaras case they are more in control of the way in which the work is done
and also the quality of work. Because of its such frequency in updating the
collections often their works are not in genuine as many of them are a subtle
repetition of their own previous works, hence very often the design has to be in a way
that makes the repetition negligible in the eyes of the customer. These sort of work
requires lose monitoring and hence Zaras model is in perfect alignment of their own
practice and hence the synergy created gives them a sustainable competitive
advantage. Only thing of concern for Zara is the rising wages in the European
countries and unavailability of workers.
Advertisement and IT Cost: Zara spends almost nothing in its IT department hence
saving valuable revenue which can be further used in re-investments, these reinvestments have come in the form of purchasing outlets in prime locations which
gives it the most important advantage of a retail outlet. It also spends heavily on
Human Capital and storage facilities. But as we all know IT is the most important
tool for any business to thrive and to remain competitive. Its an investment which
pays off in the future, so overlooking IT is not a good idea for Zara. Work of mouth is
working perfectly for Zara but they also need to spend more in Advertising to get
foothold in the Asian and Other new markets as people there are unaware of Zara.
Market Entry: Zara follows three different modes of market entry internationally:
company owned, joint ventures and franchises. Company owned stores are
established in high profile countries with high growth prospect and low business
risks. Zara had two other modes of market entry, franchise and joint venture. Zara
tended to use franchise in countries that were small, risky or subject to cultural
difference or administrative barrier. Whereas Joint ventures were applied in larger
countries and there was barrier to direct entry. This strategy was well thought of as it
would have cost Zara if they would open their Own stores. They actually tested the
market in this way and this gave them a competitive edge.