retail

@ the speed of fashion

By Devangshu Dutta

The middle-aged mother

buys clothes at the Zara
chain because they are
cheap, while her daughter
aged in the mid-20s buys
Zara clothing because it is
fashionable. Clearly, Zara is
riding two of the winning retail
trends - being in fashion and low
prices - and making a very
effective combination out of it.
Much talked about, especially since
its parent company's IPO in 2001,
often admired, sometimes reviled, but
hardly ever ignored, Zara has been an
interesting case study for many other
retailers and fashion brands around the
world. We set out to understand what are
the winning elements in Zara's business
model, and probably only scratched the
surface of the key to their success.
Here's the quick-n-dirty on Zara's recipe
for growth.

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Zara is the flagship brand of the Spanish retail group, Inditex SA,
one of the super-heated performers in a soft retail market in
recent years. When Inditex offered a 23 per cent stake to the
public in 2001, the issue was over-subscribed 26 times raising
Euro2.1 billion for the company. What makes Inditex so tasty?
Well, for a start, it seemed to show higher profit margins than
comparable retailers, and secondly, the trend seemed sustainable.
Good bet for most investors.
The Awkward Factor in the Profitability Formula
Buy low, sell high. Buy on credit, sell on cash. Retail profitability
often seems like a no-brainer.
If you sell at X dollars and buy at Y dollars, as long as your
operating and financial costs are lower than the gross margin i.e.
the difference between X (selling price) and Y (cost), you should
be making money. And what with retailers running around with
gross margins of 50-60 per cent (that is more than half of their
retail price), making money should be no problem, right?
Wrong. In highly perishable goods such as fashion products that
are susceptible to seasons, gross margin is meaningless if the
product does not sell as planned. In simple terms, you make
more money if you sell more, even at a lower margin 30 per cent
on sales of Rs. 100 is better than 60 per cent on Rs. 10. Given
the unpredictability in fashion, it is quite likely that you will end
up selling a large proportion of your products at a discount. For
many retailers, 35-40 per cent of the total merchandise being
sold at hefty discounts is quite the norm.
Imagine fashion clothing to be like vegetables, or bread. On the
first day it looks very appetising and has lots of buyers. By the
Amancio Ortega Gaona, the founder of Inditex,
thought that consumers would regard clothes as a
perishable commodity just like yogurt, bread or fish
to be consumed quickly, rather than stored in
cupboards, and he has gone about building a retail
business that provides freshly baked clothes.

second and third day it starts to look stale, but customers may
still pick it up, maybe at lower prices. By the time a week is over,
the retailer is probably better off giving the bread away just to
clear up space.
Working with him in the last few years, Inditex Chief Executive
Jos Mara Castellano is quoted as saying, ''This business is all
about reducing response time. In fashion, stock is like food. It
goes bad quick.''
Zara, which contributes around 80 per cent of group sales,
concentrates on three winning formulae to bake its fresh
fashions:
Short Lead Time = More fashionable clothes
Lower quantities = Scarce supply
More styles = More choice, and more chances of hitting it
right
Short Lead Times: Keeping Up With Fashion
By focussing on shorter response times, the company ensures that
its stores are able to carry clothes that the consumers want at that
time. Zara can move from identifying a trend to having clothes
in its stores within 30 days. That means that Zara can quickly
identify and catch a winning fashion trend, while its competitors
are struggling to catch up. Catching fashion while it is hot is a
clear recipe for better margins with more sales happening at full
prices and fewer discounts. In comparison, most retailers of
comparable size or even smaller, work on timelines that stretch
into 4-12 months. Thus, most retailers try to forecast what and
how much its customers might buy many months in the future,
while Zara moves in step with its customers.
A very large design team based in A Corua in North West Spain
is busy throughout the year, identifying the prevalent fashion
trends, and designing styles to match the trends. Trend
identification comes through constant research not just
traditional consumer market research, but a daily stream of
emails and phone calls from the stores to head office. Unlike
other retailers, Zara's machinery can react to the report
immediately and produce a response in terms of a new style or
a modification within 2-4 weeks. Many other retailers have
such long supply chain lead times that for them it would seem
a lost cause for them to even try and respond to a sales report.
Reducing Risks
By reducing the quantity manufactured in each style, Zara not
only reduces its exposure to any single product but also creates
an artificial scarcity. As with all things fashionable, the less its
availability, the more desirable the object becomes. When Zara
opened its first store on London's Regent Street, shoppers are
said to have browsed without shopping, thinking that they
would come back to buy during a sale. Then the store assistants
explained that the styles were changed every week, and the style
liked by the customer would very likely not be available later.
Subsequently, Regent Street became one of Zara's most
profitable stores and more stores opened in the UK.

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The added benefit of lower quantities is that if a style does not
work well, there is not much to be disposed when the season-end
sale does happen. The result is that Zara discounts only about 18
per cent of its products, roughly half the levels of competitors.
Leadership in Numbers
Thirdly, instead of more quantities per style, Zara produces more
styles, roughly 12,000 a year. Thus, even if a style sells out very
quickly, there are new styles already waiting to take up the space.
Zara can offer more choices in more current fashions than many
of its competitors. It delivers merchandise to its stores twice a
week, and since re-orders are rare the stores look fresh every 3-4
days. Fresh produce, moving in step with the fashion trend and
updated frequently the ingredients are just right to create the
sweet smell of success.
But how does Zara achieve its three key success factors, which
would be a nightmare for most other retailers: of producing small
quantities of numerous styles in short time spans? Let us look at
the mechanisms that enable Zara to deliver on these parameters
as well as some unique aspects of the retailer's business model.

Zara's success is as much a result of its

history and location, as its counter-intuitive
business strategies. While it may not be
possible for another company to exactly
duplicate the conditions under which Zara
grew and flourished, we can certainly try
and learn from its experiences, its
processes and its business structures.
If you thought that it is not possible to produce all this success in
the same kind of set-up as other retailers, and that it also has to
cost something, you would be absolutely correct on both counts.
Zara follows a structure that is more closely controlled than most
other retailers, and pays further by having the various business
elements in close proximity to each other, around its
headquarters in Spain.

Ownership and Control of Production

For one, most other retailers (like the American chain Gap and
the Swedish retailer Hennes & Mauritz) completely outsource
their production to factories around the world, many of them in
low cost Asian countries. In contrast, it is estimated that 80 per
cent of Zara's production is carried out in Europe, much of it
within a small radius of its headquarters in Spain. In fact, almost
half of its production is in owned or closely-controlled facilities.
While this gives Zara a tremendous amount of flexibility and
control, it does have to contend with higher people costs,
averaging 17-20 times the costs in Asia.
Counter-intuitively Inditex has also gone the route of owning
capital-intensive manufacturing facilities in Spain. In fact, it is a
vertically integrated group, with up-to-date equipment for fabric
dyeing and processing, cutting and garment finishing. Greige
(undyed fabric) is more of a commodity and is sourced from

Spain, the Far East, India, and Morocco. By retaining control

over the dyeing and processing areas, Inditex has fabricprocessing capacity available on demand to provide the correct
fabrics for new styles. It also does not own the labour-intensive
process of garment stitching, but controls it through a network of
subcontracted workshops in Spain and Portugal.
Supercharged Product Development
Design and product development is a highly people-intensive
process, too. The heavy creative workload of 1,000 new styles
every month is managed by a design and development team of
over 200 people, all based in Spain, each person in effect
producing around 60 styles in a year (or 1-2 styles a week).
With new styles being developed and introduced frequently, each
style would provide only around 200,000-300,000 of retail sales,
a far lower figure than other retailers or brands, and certainly not
cost-efficient in terms of design and product development
costs. But obviously, this higher cost of product development is
more than adequately compensated by higher realised margins.
In addition, the entire product development cycle begins from
the market research. This combines information from visiting
university campuses, discos and other venues to observe what
young fashion leaders are wearing, from daily feedback from the
stores, and from the sales reports. This has meant a significant

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investment in information technology and communications
infrastructure to keep streaming up-to-date trend information to
the people making the product and business decisions.
At the leading edge of research are the sales associates and store
managers in Zara stores, who zap orders on customised handheld
computers over the Internet to Zara headquarters based on what
they see selling. And not just orders, but ideas for cuts, fabrics or
even a whole new line. They draw upon customer comments, or
even a new style that a customer might be wearing that could be
copied for Zara's stores. Traditional daily sales reports can hardly
provide such a dynamically updated picture of the market.
React Rather Than Predict
What sets Zara apart from many of its competitors is what it has
done to its business information and business process. Rather
than concentrating on forecasting accurately, it has developed its
business around reacting swiftly.
Here's a flavour of what a typical retailer or brand might do.
Say, around a certain time, designers may start looking at fashion
trends, and start designing a look for Winter 2004. Information
and inspiration comes from forecasting agencies, trade shows,
and various other places. Over a period of 3-5 months they
develop the ideas into physical samples. These are also
simultaneously costed. Sales budgets and stock plans are
developed based on what is going on in the business right then
(roughly one-year ahead of the targeted style). At various times
during this seasonal process, there are decision-making
meetings, where styles are accepted, rejected or changed, pricing
and margin decisions taken and orders finalised.
Since multiple decisions factors are involved there are several
meetings where a buyer / merchandiser, a designer, a
technologist, a sourcing specialist and others may get involved
together. No doubt, many calendars and travel schedules have to
be synchronised for this to happen smoothly.
Based on a host of factors, the orders might then be placed with
vendors in one or more countries around the world. Typically
vendors may take a few weeks to two months to procure fabrics,
have them approved by the retailer, and then produce a number
of samples, and only once all approvals are finished, put the style
into production.
From beginning to end, the process of defining a concept to
receiving goods in the retail store might take anywhere from 9 to
12 months for a typical retailer. This one-year advance decisionmaking on what merchandise and how much to stock, is a bit
like driving a car at speed by just looking in the rear view mirror!
Amazingly, it seems to work 60-65 per cent of the time.
Zara, on the other hand, largely concentrates its forecasting effort
on the kind and amount of fabric it will buy. It is a smart hedge
for one, fabric (raw material) mistakes are cheaper than finished
goods errors, and secondly, the same fabric could be turned into
many different garments. In fact, for an extra degree of flexibility
Zara buys semi-processed or un-coloured fabric that it colours up
close to the selling season based on the immediate need.

As far as finished garments are concerned,

rather than forecasting, it just quickly produces
the least amount possible of what is hot with
consumers, and moves to the next hot style
fast. With its range of clothes constantly being
updated, one or two slow-selling items are
unlikely to hurt profits. Customers are also
more likely to visit its shops regularly to see
new stock.
With that edge, and a super-fast garment design and production
process, it takes to the market what its customers are looking for.
Quick-Bake Recipe: Well-Mixed Ingredients
Garment styling for Zara actually starts from the email or phone
call received from the stores. Thus, from the beginning Zara is
responding to an actual need, rather than forecasting for a distant
future.
Based on the store demand, Zara's commercial managers and
designers sit down and conceptualise what the garment will look

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like, what fabric it will be made out of, what it will cost and at
what price it will sell.
The designer then actually sketches the garment out, details the
specifications and prepares the technical brief. Since fabrics and
trims are already in Zara's warehouse, sampling takes very little
time. Approvals are equally quick, since the entire team is
located in the same place.
As soon as approvals are received, instructions are issued to cut
the appropriate fabric. The cutting is done in Zara's own hightech automated cutting facilities. The cut pieces are distributed
for assembly to a network of small workshops mostly in Galicia
and in northern Portugal these 350 workshops between them
employ some 11,000 apparently grey-economy workers. None of
these workshops are owned by Zara. The workshops are
provided with a set of easy to follow instructions, which enable
them to quickly sew up the pieces and provide a constant stream
to Zara's garment finishing and packing facilities. Thus, what
takes months for other companies, takes no more than a few days
for Zara.
Finally, Zara's high-tech distribution system ensures that no style
sits around very long at head office. The garments are quickly
cleared through the distribution centre, and shipped to the stores,
arriving within 48 hours. Each store receives deliveries twice a
week, so after being produced the merchandise does not spend
more than a week at most in transit.
Information Technology Keeps It Boiling
Information and communications technology is at the heart of
Zara's business.
Four critical information-related areas that give Zara
its speed include:

Close watch on trends

& buying behaviour

Quick decisions
A HQ regional m anagers collect
and analyse the feedback.

M arket
research on
university
campuses,
discos & other
venues

Com m ercial team sits with

designers to use the
inform ation to create new
lines and tweak existing ones
-deciding with the
comm ercial team on the
fabric, cut, and price points
of a new garm ent

Feedback from the stores

Sales report
Qualitative comments

Line in Stores

Distribution
Collecting information on consumer needs: trend
information flows daily, and is fed into a database at head
office. Designers check the database for these dispatches as

well as daily sales numbers, using the information to create

new lines and modify existing ones thus, designers have
access to real-time information when deciding with the
commercial team on the fabric, cut, and price points of a new
garment.

Standardisation of product information different or

incomplete specifications, and varying product information
availability typically add several weeks to a typical retailer's
product design and approval process, but Zara warehouses
the product information with common definitions, allowing
it to quickly and accurately prepare designs, with clear cut
manufacturing instructions.

Product information and inventory management being able

to manage thousands of fabric and trim specifications, design
specifications as well as their physical inventory, gives Zara's
team the capability to design a garment with available stocks,
rather than having to order and wait for the material to come
in.

Distribution management: its State-of-the-art distribution

facility functions with minimal human intervention.
Approximately 200 kilometres of underground tracks move
merchandise from Zara's manufacturing plants to the 400+
chutes that ensure each order reaches its right destination.
Optical reading devices sort out and distribute more than
60,000 items of clothing an hour. Zara's merchandise does
not waste time waiting for human sorting.

Keeping Costs Down

Even while manufacturing in Europe, Zara manages to keep its
costs down. None of its assembly workshops are owned by the
company. Most of the informal economy workers the workshops
employ are mothers, grandmothers and
teenage girls looking to add to their
household incomes in the small towns and
Inventory
villages where they live. Last year the average
Control
monthly salary of a Spanish industrial worker
Fabrics
from
was about 250,000 pesetas - $1,300 a month,
stock
excluding the state's 30.8 per cent charge for
social contributions. In contrast, according to
reports, the workshops working for Inditex
Dyeing/Finishing
may or may not pay the social charges.
(if required)
According to one estimate, the seamstresses
probably get something less than half the
average industrial wage, maybe $500 a
Production
month. These are around 5-6 times typical
Indian or Chinese wages, and yet offer the
flexibility beyond what Asian factories can,
which has a tremendous impact on ratio of
Fleet to
full-price merchandise sales.
stores
Further, in terms of marketing costs, Zara
relies more on having prime retail locations
than on advertising for attracting customers
into its stores. It spends a meagre 0.3 per cent
of sales on advertising compared to an average of 3.5 per cent of
competitors according to the company, choosing highly visible
locations for its stores renders advertising unnecessary.

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Apart from designing to the fashion-of-the-day, Zara's
strategy of producing low volumes per style and changing
products quickly in its stores enables it to cut down on the
discounts as well. Only about 18 percent of Inditex
clothing doesn't work with its customers and must be
discounted. That's half the industry average of 35 percent.
Zara also has two clearly time-limited sales a year rather
than constant markdowns.
Lastly, since it spends effort on producing what are
current fashion trends, it spends its design effort on
interpreting rather than creating afresh. In fact, Inditex
has been constantly alleged to have knocked-off top
designers' ranges, thus spending less on product
development and design.
They have a premier look because they're often copies
from the top designers, according to one industry
observer.
However that may be, Zara delivers fashion when it is hot,
and at a fraction of the price charged by designer brands.
And consumers are certainly voting with their feet and
wallets.

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Setting a Trend or Responding Early to One?
That' s an easy question to start with. Others invest in setting a
trend; Zara doesn't. It just responds to them very quickly.
Remember, we are talking about following the innovators, not
about being one. This needs a capability to understand design,
but an even stronger capability to be a stylist- that is, recreating, rather than creating first.

Growing the scale is a tough part, because most Indian brands

don't have a market reach that is wide and deep enough to
achieve quick volumes. The distribution channels are also built
in multiple layers, each of which influences order-placement, and
therefore quantities and lead-time.

Yes, there are successful design-oriented retail businesses that set

fashion trends - they are very creative, but typically small. The
capability to create new design trends, and the capability to
distribute that design in large volumes quickly and profitably,
typically don't exist in the same company.
For those who want to be large and profitable rather than niche
and profitable, the mantra is to follow early. And, yes,
unpleasant as it may sound, knock-offs (re-interpreting
someone else's design) are a fact of life.
But can Indian fashion brands successfully re-interpret trends?
The answer would be a loud yes - that is what most of them do,
anyway. The key is: do you know how to do it early enough,
have the capability of growing it quickly to a certain scale, and
then dropping it to catch another trend?
Certainly you need to invest in market research. Not having an
MR agency doing consumer surveys and giving you research
reports, but actually feet on the street - your own people who
can spot trends, and communicate them to people who can
interpret the trends into styles that fit into your look for your
consumers.
Trends are visible on individuals who adopt looks early. The
extra flare, the strap going thinner - if you are trained to observe,
you can. In a fashion cycle, there are always innovators who pick
the trends up first, and early adopters who quickly follow.

Early

Late

Acceptability of style
(or volume of sales)

Majority

Majority

For those who want to

Contrastingly, Zara not only
be large and profitable
creates the merchandise, but
rather
than niche and
sells in its own stores. The
profitable,
the mantra is
people who decide the
to
follow
early.
And,
product styling and those who
yes,
unpleasant
as
it
decide the distribution sit in
may sound, knock-offs
the same office. Anything
(re-interpreting
that is not seen to reach a
requisite level of volume is not someone else's design)
ordered. So that is a strategy
are a fact of life.
which Indian brands with
captive distribution can follow
(those with own-managed stores, franchise-managed but
company-stocked stores, or shops-in-shop), not those which sell
by booking orders from retailers.
Doing it Fast Needs Close Control

Early
Adopters

Laggards

Innovators
Time

Have designers who can identify fashion-forward people - the

innovators - and identify what kind of styles they are wearing
which can spread in the larger population. If you can identify
who are the innovators in your segment, you can follow the trend
up to part of the early majority level. At some point remember
also to drop it. Because after that there will be other companies,
many others, who will quickly follow. Then margins become
low, and profitability becomes even lower, because there is much
more competition.

The other thing about Zara - while it follows, it does so very

quickly. It's merchandise hits the stores 15 days after being
designed. How can an Indian brand do things equally quickly,
when fabric lead times can vary from 30 days to 60 days (mill
made)? And when apparel production lead times can be 10-30
days?
Well, for one discussions and decision-making takes up a lot of
that time - what to sell, where to buy the fabric form, whether the
specifications are being met etc. Zara gets around this by having
various business functions sitting together at the headquarters,
and also having a culture (or structure and process) of having
people talk to each other. (It's shocking how many companies
just don't have the culture where different functions are
constantly in touch, despite sitting a few feet from each other.)

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In Zara's case, the sales & marketing people who are receiving
trend feedback are regularly talking to the designers and the
merchandisers, and the production scheduling is closely
coordinated as well. There is not much time wasted on approvals.
Secondly, even if everything else is fine, production capacity may
or may not be available at that specific time. There may be
another customer's order that may be handled on priority. The
work-around for this is to have your own production capacity, or
captive production capacity owned by someone else (i.e.
contracted production capacity). It is expensive, but the cost of
lost sales can be higher. This can work both for garment
capacities as well as for fabric capacities - one could take a position
by leasing a fixed number of loom-hours and this is feasible in
not just the Indian powerloom sector which is very flexible, but
also in the mill-made sector. This is not new to India - several
companies have worked on this principle, including Zodiac.

The needs must flow from

the finished product
backwards, rather than
being dictated by the raw
material. Zara was not a
spinner first and it did not
integrate forward; it built a
garment business and then
integrated backwards.
Therefore, everyone is clear
which end of the business
pays the bills.
Keeping It Together is
As Important
Just sitting close together in
one place is fine with a small
team of a few people, doing
a handful of styles. As the
business grows, keeping in
touch needs more than a shout across the room.
This is where information technology comes in. The only problem
is that for most companies, IT seems like an investment without
returns, and they just don't invest. Many others who do spend on
IT may leave the actual definition to the vendor, and the buying to
an EDP manager who has very little understanding of the
business as it is, or a vision of where it could go! So they end up
buying something that is not enough, too much or just incorrect
reinforcing the perception of investment without
return.
Those who do understand what pieces of IT platforms they need,
what can afford, and how to prioritise and guide the effort, will
find success. Here is the formula:
Invest in the right software, hardware and people
Update them frequently (including training the people)
Spend enough, but just enough not too much nor too little

Thirdly, what do you do to cut fabric lead time which is the

biggest chunk? Buying a capacity reduces only part of the lead
time. Zara buys fabric in advance, in accordance with the forecast
trends. Much of it is in greige form this gives the flexibility to
colour or print the fabric to the desired effect, as and when it is
needed. By buying relatively standard qualities from specified
vendors, the lead-time of deciding the vendor and approving
quality can be reduced drastically. The famed 15-day lead-time is
possible only when the fabric is in stock.
Also, for printing and processing the greige, again Zara operates
its own capacities - this allows it to schedule and prioritise
according to its business needs rather than being hostage to
someone else.
However, remember that only being vertically integrated will not
solve the problems. There are enough vertically integrated Indian
companies where the spinning department does not know or care
what the scheduling needs of the weaving department are, let
alone any knowledge of garments! This culture needs to change.

Identify your critical areas, and draw up a conscious roadmap or

blueprint for how you will invest in upgrading your IT
infrastructure. Keeping track of sales information, product
information, controlling capacities and production scheduling,
managing distribution - all of these are areas that IT can help
tremendously in. My guideline for IT implementation would be:
First pick an area that is hugely important in terms of
improving sales or saving costs - this may be putting a sales
update and analysis package, or an inventory management
system. Whatever it is, it should be something that impacts
your current business model hugely.
Put something in place that gets you some return quickly - you
and your organisation will feel more confident about further
investments; then go step-by-step down the prioritisation list.
Try not to fall into the trap of re-inventing the wheel - if
someone has already developed something and it fits 70% of
your needs then customise, don't re-develop.

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Zara has not built its IT infrastructure in a year or two what we
are seeing is a product of several years of consistent and constant
investment, one functional area after another. And they must
have had their share of failures. Indian brands will need to do
the same, without expecting that IT will help them create a large
and profitable business instantly.

Higher team productivity

Reduced overheads
Synchronise processes
Lower
Product Cost
Lower
Financial

Higher
Topline

Low er
Management
Cos ts

Lower ex-factory costs

Reduced development costs
Reduced quality rejections

Lower inventory and WIP

Performance-based decision support

NOTE: Benefits will vary for different organisations, process areas or business environments.

Value-Chain Profitability

Innovative products
Customer focus
-7 Lower lost-sales

Creatnet

Indian Market Realities Differ

While emulating the internal elements and backend strengths exist among Indian companies to
re-create a Zara, we have to acknowledge that its
current market context is different from India.
Zara exists in a market where fashion - the rise
and decline of the desire for a specific look in a
season or less - is a fact of life. Secondly, there is a
large population of consumers who can afford to
change their wardrobe with changing styles every
season - this can help to build scale. Thirdly, the
cost of custom tailoring is very high in that
market.
By contrast, the Indian ready-to-wear market is
dominated by menswear that has a longer
fashion-change cycle than womenswear. In the
menswear cycle carry-overs are not as much of an
issue. Fashionability is not as much a fact of life,
for most consumers. In fact, most consumers are
willing to wait several months for the sales, to
off-season merchandise that they may
end up wearing only the next year.

Zara's not the only

successful retail model
in the world there are
many other business
models from which to
learn. By all means, pick
elements from different
retailers. After all, it is a
time honored practice for
successful retailers
to wander into other
stores, and find out what
they could or should be
doing from Sam Walton
in Arkansas to many
Indian retail CEOs.

Thirdly, while styling of women's clothing does

change as frequently in India as elsewhere, the
low cost of custom tailoring allows the consumer
to update her wardrobe on budget. And let's
face facts, Indian consumers pay double of what
they would be if their garment price/income
ratio were the same in Europe and the US. Can
Indian ready-to-wear brands make clothing
affordable to more Indians? After all, that is one
of the cornerstones of Zara's business
philosophy.