Zara

Zara: Cool Clothes Now, Not LaterAsk any urban European female under the age of 30 and chances are she has shopped at Zara, the clothier whose inexpensive but stylish offerings have attracted a cult following. Zara also sells men’s fashions, again aimed at the stylish and youthful.Mathieu Soto, a college tennis player from France with dark eyes and devastating good looks, was asked to compare Zara to The Gap, the U.S. - based clothing giant with a major presence in Europe. His response: ―I don’t know. I’ve never shopped at The Gap.‖Most U.S. young adults have never shopped at Zara, but that seems likely to change in the near future. In the past five years Zara has grown from 179 stores mostly in Spain to 450 stores in 29 countries including the United States and Canada. Zara now has stores in New York, New Jersey, Miami, and Toronto—with more on the way.While Zara is unlikely to displace The Gap in the U.S. market, they are certain to offer U.S. consumers an option previously unavailable to them. They have a sound if unusual marketing strategy in which logistics plays an important role. Logistics also plays an important role in Zara’s growth plans, notably its expansion into the U.S. market.Zara’s Marketing StrategyZara’s marketing strategy focuse s on product variety, speed-to-market, and store location. It is also notable for what it excludes. Zara does not advertise in the traditional sense. If you want to find out what’s currently available at the Zara stores you have two options: go to the web site or go to the store. Zara puts 10,000 different items on the store shelves in a single year. It can take a new style from concept to store shelf in 10-14 days in an industry where nine months is the norm. In its primary European markets, Zara locates its stores close together. Visitors comment that Zara in Madrid is like Starbucks in a major U.S. city—you see another store on every street corner.Zara’s Toronto store is located just north of the center of downtown in a major shopping district dense with malls and lined with stand-alone stores and giant office buildings. The potential for intense competition is clear.―These office buildings are full of the people we want as customers. We want them to stop in at lunch or after work. We want to see them often, so we have to change what we have on the shelves,‖ said Zara’s Toronto store manager. ―They could shop in a lot of other stores, so we have to make it worth their time to come here.‖This also helps explain why the company does not advertise. If a Zara customer wantsto know what Zara has, he or she must go to the store. The stock changes often, with most items staying on the shelf for only a month, so the customer often finds something new and appealing. By the same token, if the customer finds nothing to buy this visit, the store’s regular customers know that tomorrow or next week—sometime soon—new goods will be on Zara’s shelves. That makes it worth another visit.Zara relies heavily on store employees for market information. If a customer looks at a sweater and comments, ―That would look really nice with a cowl collar,‖ an employee can relay that information to Spain where managers decide whether or not to produce the suggested item. If they decide to make it, they can put it on the shelf in Toronto in two weeks or less, partly because they ship by air. Ocean shipping would add at least another ten days to the time it takes to get the product in front of the customer, undermining the speed-to-market and product variety strategy.The Role of LogisticsPutting the variety of goods on the shelves in Toronto and other North American stores requires an unusual, though not unique, logistics strategy for the fashion industry. Zara air expresses goods from its single distribution center in Spain, usually in small quantities. In the 1970’s, The Limited used a similar strategy to support its test marketing, air expressing small quantities of new styles from Asia to U.S. stores. In Zara’s strategy, however, the speedy shipments are part of the core strategy, not just test marketing. Zara also ships frequently, allowing lower inventories while serving its multinational market from a single distribution center in Spain.―We receive shipments o n Tuesday and Saturday, which means that we have different items in the store at least twice a week. While each shipment replenishes items that sell well, each also includes new items. That’s why our customers come in often,‖ the Toronto store manager said. ―We might get ten of one item and five of another. We’re constantl y testing.‖The density of Zara’s store locations in Europe helps achieve logistics efficiencies. They can fill trucks for frequent shipment in markets close to production and ship larger quantities by air to more distant stores. Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. This contrasts radically to most large fashion manufacturers, which rely on low cost manufacturing in Asia and South America, but then pay higher inventory costs and move goods to market more slowly.The air express strategy also allows Zara to maintain a multinational market presence with only one distribution center. They trade higher transportation costs for lower warehousing and inventory costs. Add to this the idea that fast transportation supports the product-innovation strategy that is the heart of Zara’s marketing, and theimportance of logistics in Zara’s marketing strategy is clear.The Results and the FutureZara’s parent company, Inditex, reached $2.7 billion in 2001 revenue. This made it the fastest growing clothing manufacturer in the world. Zara, Inditex’s fastest growing division, turns its inventory twice as fast as major competitors, with an inventory-to-sales of 7% compared to an industry average of 14%. Their profitability in European operations (15%) is fifty percent higher than that of its major competitors. Zara manufactures 80% of its clothing in Europe, with most of the remaining 20% is sourced in Mexico.While top managers are understandably closed-mouthed about their plans, Zara seems ideally positioned to penetrate the U.S. market in a major way. With some manufacturing already in Mexico, they could easily open a second distribution center aimed directly at the U.S. market. This would make their youth-oriented styles widely available in the world’s most lucrative market.Question 1 –Zara’s Business Model and Competitive AnalysisZara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruña, Spain; a city which eventually became the central headquarters for Zara’s global operations. Since then they have expanded operations into 45 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. In order to realized these results Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape Zara’s current business model.Zara’s Busin ess ModelZara’s business model can be broken down into three basic components: concept, capabilities, and value drivers. Zara’s fundamental concept is to maintain design, production, and distribution processes that will enable Zara to respond quickly to shifts in consumer demands. José María Castellano, CEO of Inditex stated that "thefashion world is in constant flux and is driven not by supply but by customer demand. We need to give consumers what they want, and if I go to South America or Asia to make clothes, I simply can't move fast enough." This highlights the importance of this quick response time to Zara’s operations.Capabilities of Zara, or the required resources needed to exploit the opportunities and execute this conceptual strategy, are numerous for Zara. Zara maintains tight control over their production processes keeping design and manufacturing in-house or with some strategic partnerships located nearby Headquarters. Currently, Zara maintains 80% of its production processes in Europe, 50% in Spain which is very close to La Coruña headquarters. They have strategic agreements with local manufacturers that ensure timely delivery and service. Through these strategic partnerships and the benefits brought by this proximity of manufacturing and operational processes, Zara maintains the flexibility necessary to design and produce over 12000 new items annually. This capability allows Zara to achieve their strategy of expedited response to consumer demand.Value drivers for Zara are both tangible and intangible in the benefits that are returned to all stakeholders. Tangibly, Inditex, the parent company of Zara, has 11.02% net margin on operations and their market capitalization (Equity –market value) is €13, 981 (in thousands) in 2002. Their net working capital (current assets –current liabilities) is €133 (in thousands) . Additionally, the success of Zara can be demonstrated through their outstanding financial performance. From 1996 to 2000, Inditex SA tripled their corporate profits and in 2001, a year of overall economic downturn in the retail industry, Inditex SA saw a 31% increase in profits. Intangibly, customer loyalty and brand recognition have provided significant value to Zara. The number of consumers they attract continues to rise and their brand is synonymous with the cutting edge of fashion at affordable prices. The successful implementation of Zara’s business model provides great value to stakeholders and differentiates their business from their peers.Competitive AdvantageFundamental t o Zara’s success is their commitment to rapid response in customer trends in fashion, producing clothing often and with short life spans (10 wears). Their commitment to this goal and the capabilities that they have developed to achieve it, have provided significant competitive advantage to Zara especially in the areas of product development, strategic partnerships and cost of production, advertising and marketing, and information technology infrastructure. 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.Figure 1: Zara’s Business ModelProduct DevelopmentZara’s unique approach to product development is instrumental to their success. Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Coruña. At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara’s products. 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 forec asted. Zara’s speed to market in product development exceeds the capabilities of its competitors. This in itself provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices .Zara’s product development capabilities are essential to Zara’s business strategy and future success.Strategic Partnerships and Cost of ProductionIn comparison to competitors, Zara’s business strategy, in regards to strategic partnerships and cost of production, provide for a strategic competitive advantage. Zara, unlike its competitors such as Gap, Benetton, and H&M, does not use Asian outsourcing. Eighty percent of Zara’s materials are manufactured in Europe, with 50% made in Zara controlled facilities in the Galicia region of Spain near headquarters. Most of Zara’s competitors have 100% outsourcing to cheap Asian countries. Though the cost of production in Spain is 17-20% more expensive than Asia, Zara does have a competitive advantage 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 behavior. It also decreases costs of holding inventory. Zara’s 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 demandand has provided them with a competitive edge in comparison to their peers. Advertising and MarketingZara’s unique approach to advertising and marketing is an additional factor within their business model that adds to their success. Zara spends 0.3% of total revenues on advertising and marketing. This is significantly less then their competitors who on average spend 3-4% of their total revenues on similar expenditures. Hence, Zara maintains a cost advantage to their competitors in marketing activities. In order to effectively complete with their peers Zara uses location, store layout, and product life cycles to act as their marketing tool to consumers. 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 remodeled every 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 Zara’s capabilities that build value in the company.Information and Communication TechnologiesZara’s information and communication protocols are signif icantly different from its competitors. Zara spends less than 0.5% of total revenue on IT and IT employees account for only 0.5% of Zara’s total workforce. This differs from their competitors who spend on average 2% of total revenue on IT expenditures and have 2.5% of their total workforce devoted to IT. 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 Zara’s hybrid model (which incorporates human intelligence and IT applications), competitors rely almost completely on information technology. Zara’s 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 Zara’s operations and helps to abide by their fundamental principle to have the ability to rapidly respond to changes in consumer demand.Zara’s concept, capabilities, and value drivers, as demonstrated through their business model, have proven to be extremely successful. Their resistance to outsourcing, concentration on core operations and production capabilities, and focus on the pulse of fashion have made them one of the most successful clothing retails. In the event of future global expansion, their future success and sustainability will be drawn into quention. They will need to adapt their business capabilities of product development, strategic partnerships and cost of production, marketing and advertising, and information and communication technologies in order to adjust to increasing global operations.Question 2 – Key Decision Makers and Information Management in OperationsThe key decision makers in the ordering process on the face of it are the store managers and the commercials at the HQ. However, there are certain issues that need to be addressed here. The store manager’s decision influence on the replenishment of garments is limited to a single order (twice a week) based on manually auditing the quantities required for the store. This information is subsequently sent to the HQ. Although they are the decision makers in this case, the order is still conditional. In the fulfillment phase of the operations, the aggregated demand is ascertained and the supply is allocated according to past performance of the various garments at the stores.。