SINESSSCHOOL 9703-497 APRIL 1. 2003 PANKAJ GHEMAWAT JOSE LUIS NUENO ZARA: Fast Fashion article becomes subject to rapid changes of fashion, the greater the demand for cheap products of its kind an Fashion is the imitation of a given example and satisfies the demand for social adaptation.The mor Georg Simmel, "Fashion"(1904) Inditex(Industria de Diseno Textil)of Spain, the owner of Zara and five other apparel retailing chains, continued a trajectory of rapid profitable growth by posting net income of (340 million on revenues of 63, 250 million in its fiscal year 2001 (ending January 31, 2002). Inditex had had a heavily oversubscribed Initial Public Offering in May 2001. In the next 12 months, its stock price increased by nearly 50%--despite bearish stock market conditions-to push its market valuation to E13. 4 billion The high stock price made Inditex's founder, Amancio Ortega, who had begun to work in the apparel trade as an errand boy half-a-century earlier, Spain s richest man. However, it also implied a significant growth challenge. Based on one set of calculations, for example, 76% of the equity value implicit in Inditex's stock price was based on expectations of future growth-higher than an estimated 69% for Wal-Mart or, for that matter, other high-performing retailers The next section of this case briefly describes the structure of the global apparel chain, from producers to final customers. The section that follows profiles three of Inditex's leading international competitors in apparel retailing: The Gap(U.S), Hennes Mauritz(Sweden), and Benetton(Italy) The rest of the case focuses on Inditex, particularly the business system and international expansion of the zara chain that dominated its results The Global Apparel Chai The global apparel chain had been characterized as a prototypical example of a buyer-driven global chain, in which profits derived from"unique combinations of high-value research, design, sales, marketing, and financial services that allow retailers, branded marketers, and branded manufacturers to act as strategic brokers in linking overseas factories"with markets. These attributes were thought to distinguish the vertical structure of commodity chains in apparel and other labor were coordinated and dominated by upstream manufacturers rather than downstream intermediar k intensive industries such as footwear and toys from producer-driven chains(e. g, in automobiles)that (see Exhibit 1) rofessor Pankaj Ghemawat and IESE Professor Jose Luis Ni repared this case. HBS cases are developed solely as the basis for class rimary data, or illustrations of effective or ineffective management. Copyright @2003 President and Fello Harvard College To order equest permission to reproduce materials, call 1-800-545-7685, www.hbsp.harvard.edu.Nopartofthispublicationmay reproduced, stored in a retrieval used in a spreadsheet, o ed in any form or by any means-electronic, mechanical photocopying, recording or otherwise-without the permission of Harvard Business School
9-703-497 APRIL 1, 2003 ________________________________________________________________________________________________________________ HBS Professor Pankaj Ghemawat and IESE Professor José Luis Nueno prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. PANKAJ GHEMAWAT JOSÉ LUIS NUENO ZARA: Fast Fashion Fashion is the imitation of a given example and satisfies the demand for social adaptation...The more an article becomes subject to rapid changes of fashion, the greater the demand for cheap products of its kind. —Georg Simmel, “Fashion” (1904). Inditex (Industria de Diseño Textil) of Spain, the owner of Zara and five other apparel retailing chains, continued a trajectory of rapid, profitable growth by posting net income of €340 million on revenues of €3,250 million in its fiscal year 2001 (ending January 31, 2002). Inditex had had a heavily oversubscribed Initial Public Offering in May 2001. In the next 12 months, its stock price increased by nearly 50%—despite bearish stock market conditions—to push its market valuation to €13.4 billion. The high stock price made Inditex’s founder, Amancio Ortega, who had begun to work in the apparel trade as an errand boy half-a-century earlier, Spain’s richest man. However, it also implied a significant growth challenge. Based on one set of calculations, for example, 76% of the equity value implicit in Inditex’s stock price was based on expectations of future growth—higher than an estimated 69% for Wal-Mart or, for that matter, other high-performing retailers.1 The next section of this case briefly describes the structure of the global apparel chain, from producers to final customers. The section that follows profiles three of Inditex’s leading international competitors in apparel retailing: The Gap (U.S.), Hennes & Mauritz (Sweden), and Benetton (Italy). The rest of the case focuses on Inditex, particularly the business system and international expansion of the Zara chain that dominated its results. The Global Apparel Chain The global apparel chain had been characterized as a prototypical example of a buyer-driven global chain, in which profits derived from “unique combinations of high-value research, design, sales, marketing, and financial services that allow retailers, branded marketers, and branded manufacturers to act as strategic brokers in linking overseas factories”2 with markets. These attributes were thought to distinguish the vertical structure of commodity chains in apparel and other laborintensive industries such as footwear and toys from producer-driven chains (e.g., in automobiles) that were coordinated and dominated by upstream manufacturers rather than downstream intermediaries (see Exhibit 1)
703-497 ZARA: Fast Fashi Production Apparel production was very fragmented. On average, individual apparel manufacturing firms mployed only a few dozen people, although internationally traded production, in particular, could countries. About 30% of world production of apparel was exported, witead across dozens of feature tiered production chains comprising as many as hundreds of firm ith developing countries generating an unusually large share, about one-half, of all exports. These large cross-border flows of apparel reflected cheaper labor and inputs-partly because of cascading labor efficiencies-in developing countries. (See Exhibit 2 for comparative labor productivity data and Exhibit 3 for an example. Despite extensive investments in substituting capital for labor, apparel production remained highly labor-intensive so that even relatively large"manufacturers"in developed countries outsourced labor-intensive production steps (e.g, sewing) to lower-cost labor sources nearby Proximity also mattered because it reduced shipping costs and lags, and because poorer neighbors sometimes benefited from trade concessions. While China became an export powerhouse across the board, greater regionalization was the dominant motif of changes in apparel trade in the 1990s Turkey, North Africa, and sundry East European countries emerged as major suppliers to the European Union, Mexico and the Caribbean Basin as major suppliers to the United States, and China as the dominant supplier to Japan(where there were no quotas to restrict imports) World trade in apparel and textiles continued to be regulated by the Multi-Fiber Arrangement (MFA), which had restricted imports into certain markets(basically the United States, Canada, and West Europe)since 1974. Two decades later, agreement was reached to phase out the MFA's quot system by 2005, and to further reduce tariffs(which averaged 7% to 9% in the major markets). As of 2002, some warned that the transition to the post-MFA world could prove enormously disruptive for suppliers in many exporting and importing countries, and might even ignite demands for"managed trade. There was also potential for protectionism in the questions that nongovernmental organizations and others in developed countries were posing about the basic legitimacy of sweatshop trade"in buyer-driven global chains such as apparel and footwear. Cross-Border intermediation Trading companies had traditionally played the primary role in orchestrating the physical flows of apparel from factories in exporting countries to retailers in importing countries. They continued to be important cross-border intermediaries, although the complexity and(as a result)the specialization of their operations seemed to have increased over time. Thus, Hong Kongs largest trading company, Li Fung, derived 75% of its turnover from apparel and the remainder from hard goods by setting up and managing multinational supply chains for retail clients through its offices in more than 30 countries.For example, a down jacket's filling might come from China, the outer shell fabric from Korea, the zippers from Japan, the inner lining from Taiwan, and the elastics, label, and other trim from Hong Kong Dyeing might take place in South Asia and stitching in China, followed by quality assurance and packaging in Hong Kong. The product might then be shipped to the United States for delivery to a retailer such as The Limited or Abercrombie Fitch, to whom credit risk matching, market research, and even design services might also be supplied Branded marketers represented another, newer breed of middlemen. Such intermediaries outsourced the production of apparel that they sold under their own brand names. Liz Claiborne, founded in 1976, was a good example. Its eponymous founder identified a growing customer group (professional women)and sold them branded apparel designed to fit evolving workplace norms and their actual shapes (which she famously described as"pear-shaped"), that was presented in collections within which they could mix and match in upscale department stores. Production wa outsourced from the outset, first domestically, and then, in the course of the 1980s, increasingly to
703-497 ZARA: Fast Fashion 2 Production Apparel production was very fragmented. On average, individual apparel manufacturing firms employed only a few dozen people, although internationally traded production, in particular, could feature tiered production chains comprising as many as hundreds of firms spread across dozens of countries. About 30% of world production of apparel was exported, with developing countries generating an unusually large share, about one-half, of all exports. These large cross-border flows of apparel reflected cheaper labor and inputs—partly because of cascading labor efficiencies—in developing countries. (See Exhibit 2 for comparative labor productivity data and Exhibit 3 for an example.) Despite extensive investments in substituting capital for labor, apparel production remained highly labor-intensive so that even relatively large “manufacturers” in developed countries outsourced labor-intensive production steps (e.g., sewing) to lower-cost labor sources nearby. Proximity also mattered because it reduced shipping costs and lags, and because poorer neighbors sometimes benefited from trade concessions. While China became an export powerhouse across the board, greater regionalization was the dominant motif of changes in apparel trade in the 1990s. Turkey, North Africa, and sundry East European countries emerged as major suppliers to the European Union, Mexico and the Caribbean Basin as major suppliers to the United States, and China as the dominant supplier to Japan (where there were no quotas to restrict imports).3 World trade in apparel and textiles continued to be regulated by the Multi-Fiber Arrangement (MFA), which had restricted imports into certain markets (basically the United States, Canada, and West Europe) since 1974. Two decades later, agreement was reached to phase out the MFA’s quota system by 2005, and to further reduce tariffs (which averaged 7% to 9% in the major markets). As of 2002, some warned that the transition to the post-MFA world could prove enormously disruptive for suppliers in many exporting and importing countries, and might even ignite demands for “managed trade.” There was also potential for protectionism in the questions that nongovernmental organizations and others in developed countries were posing about the basic legitimacy of “sweatshop trade” in buyer-driven global chains such as apparel and footwear. Cross-Border Intermediation Trading companies had traditionally played the primary role in orchestrating the physical flows of apparel from factories in exporting countries to retailers in importing countries. They continued to be important cross-border intermediaries, although the complexity and (as a result) the specialization of their operations seemed to have increased over time. Thus, Hong Kong’s largest trading company, Li & Fung, derived 75% of its turnover from apparel and the remainder from hard goods by setting up and managing multinational supply chains for retail clients through its offices in more than 30 countries.4 For example, a down jacket’s filling might come from China, the outer shell fabric from Korea, the zippers from Japan, the inner lining from Taiwan, and the elastics, label, and other trim from Hong Kong. Dyeing might take place in South Asia and stitching in China, followed by quality assurance and packaging in Hong Kong. The product might then be shipped to the United States for delivery to a retailer such as The Limited or Abercrombie & Fitch, to whom credit risk matching, market research, and even design services might also be supplied. Branded marketers represented another, newer breed of middlemen. Such intermediaries outsourced the production of apparel that they sold under their own brand names. Liz Claiborne, founded in 1976, was a good example.5 Its eponymous founder identified a growing customer group (professional women) and sold them branded apparel designed to fit evolving workplace norms and their actual shapes (which she famously described as “pear-shaped”), that was presented in collections within which they could mix and match in upscale department stores. Production was outsourced from the outset, first domestically, and then, in the course of the 1980s, increasingly to
ZARA: Fast Fashion Asia, with a heavy reliance on OEM or"full-package"suppliers, and was organized in terms of six seasons rather than four to let stores buy merchandise in smaller batches. But after a performance decline in the first half of the 1990s, Liz Claiborne restructured its supply chain to reduce the number of suppliers and inventory levels, shifted half of production back to the Western Hemisphere to ompress cycle times and simultaneously cut the number of seasonal collections from six to four so as to allow some reorders of merchandise that was selling well in the third month of a season Other types of cross-border intermediaries could be seen as forward or backward integrators rather than as pure middlemen. Branded manufacturers, like branded marketers, sold products under their own brand names through one or more independent retail channels and owned some manufacturing as well. Some branded manufacturers were based in developed countries(e.g, U.S based VF Corporation, which sold jeans produced in its factories overseas under the Lee and Wrangler brands) and others in developing countries (e.g, Giordano, Hong Kongs leading apparel brand). And in terms of backward integration, many retailers internalized at least some cross-borde functions by setting up their own overseas buying offices, although they continued to rely on specialized intermediaries for others(e.g, import documentation and clearances) retailing tos respective of whether they internalized most cross-border functions, retailers played a dominant role in shaping imports into developed countries: thus, direct imports by them accounted for half of all apparel imports into West Europe. The increasing concentration of apparel retailing in major markets was thought to be one of the key drivers of increased trade. In the United States, the top five chains came to account for more than half of apparel sales in the course concentration levels elsewhere, while lower, also rose during the decade. Increased concentration was generally accompanied by displacement of independent stores by retail chains, a trend that had also helped increase average store size over time. By the late 1990s, chains accounted for about 85% of total retail sales in the United States, about 70% in West Europe, between one-third to one-half in Latin America, East Asia, and East Europe, and less than 10% in large but poor markets such as China and India Larger apparel retailers had also played the leading role in promoting quick response(QR), a set of policies and practices targeted at improving coordination between retailing and manufacturing so as to increase the speed and flexibility of responses to market shifts, that began to diffuse in apparel and textiles in the second half of the 1980s. QR required changes that spanned functional, geographic, and organizational boundaries but could help retailers reduce forecast errors and inventory risks by planning assortments closer to the selling season, probing the market, placing smaller initial orders and reordering more frequently, and so on. QR had led to significant compression of cycle times(see Exhibit 4), enabled by improvements in information technology and encouraged by shorter fashion cycles and deeper markdowns, particularly in womens wear Retailing activities themselves remained quite local: the top 10 retailers worldwide operated in an average of 10 countries in 2000-compared with top averages of 135 countries in pharmaceuticals, 73 in petroleum, 44 in automobiles, and 33 in electronics-and derived less than 15% of their total sales from outside their hom rkets. Against this baseline, apparel retailing was relatively globalized particularly the fashion segment. Apparel retailing chains from Europe had been the most successful at cross-border expansion, although the U.S. market remained a major challenge. Their success probably reflected the European design roots of apparel, somewhat akin to U. S -based fast food chains'international dominance, and the gravitational pull of the large U.S. market for U.S. based retailers. Thus, The Gap, based on its sales at home in the United States, dwarfed H&M and Inditex
ZARA: Fast Fashion 703-497 3 Asia, with a heavy reliance on OEM or “full-package” suppliers, and was organized in terms of six seasons rather than four to let stores buy merchandise in smaller batches. But after a performance decline in the first half of the 1990s, Liz Claiborne restructured its supply chain to reduce the number of suppliers and inventory levels, shifted half of production back to the Western Hemisphere to compress cycle times and simultaneously cut the number of seasonal collections from six to four so as to allow some reorders of merchandise that was selling well in the third month of a season. Other types of cross-border intermediaries could be seen as forward or backward integrators rather than as pure middlemen. Branded manufacturers, like branded marketers, sold products under their own brand names through one or more independent retail channels and owned some manufacturing as well. Some branded manufacturers were based in developed countries (e.g., U.S.- based VF Corporation, which sold jeans produced in its factories overseas under the Lee and Wrangler brands) and others in developing countries (e.g., Giordano, Hong Kong’s leading apparel brand). And in terms of backward integration, many retailers internalized at least some cross-border functions by setting up their own overseas buying offices, although they continued to rely on specialized intermediaries for others (e.g., import documentation and clearances). Retailing Irrespective of whether they internalized most cross-border functions, retailers played a dominant role in shaping imports into developed countries: thus, direct imports by them accounted for half of all apparel imports into West Europe.6 The increasing concentration of apparel retailing in major markets was thought to be one of the key drivers of increased trade. In the United States, the top five chains came to account for more than half of apparel sales in the course of the 1990s, and concentration levels elsewhere, while lower, also rose during the decade. Increased concentration was generally accompanied by displacement of independent stores by retail chains, a trend that had also helped increase average store size over time. By the late 1990s, chains accounted for about 85% of total retail sales in the United States, about 70% in West Europe, between one-third to one-half in Latin America, East Asia, and East Europe, and less than 10% in large but poor markets such as China and India.7 Larger apparel retailers had also played the leading role in promoting quick response (QR), a set of policies and practices targeted at improving coordination between retailing and manufacturing so as to increase the speed and flexibility of responses to market shifts, that began to diffuse in apparel and textiles in the second half of the 1980s.8 QR required changes that spanned functional, geographic, and organizational boundaries but could help retailers reduce forecast errors and inventory risks by planning assortments closer to the selling season, probing the market, placing smaller initial orders and reordering more frequently, and so on. QR had led to significant compression of cycle times (see Exhibit 4), enabled by improvements in information technology and encouraged by shorter fashion cycles and deeper markdowns, particularly in women’s wear. Retailing activities themselves remained quite local: the top 10 retailers worldwide operated in an average of 10 countries in 2000-compared with top averages of 135 countries in pharmaceuticals, 73 in petroleum, 44 in automobiles, and 33 in electronics—and derived less than 15% of their total sales from outside their home markets.9 Against this baseline, apparel retailing was relatively globalized, particularly the fashion segment. Apparel retailing chains from Europe had been the most successful at cross-border expansion, although the U.S. market remained a major challenge. Their success probably reflected the European design roots of apparel, somewhat akin to U.S.-based fast food chains’ international dominance, and the gravitational pull of the large U.S. market for U.S.-based retailers. Thus, The Gap, based on its sales at home in the United States, dwarfed H&M and Inditex
703-497 ZARA: Fast Fashi yet to achieve market shares of more than 2%-3% in more than two or three major countries6 combined. The latter two companies were perhaps the most pan-European apparel retailers but had Markets and customers In 2000, retail spending on clothing or apparel reached approximately e900 billion worldwide According to one set of estimates, (West) Europe accounted for 34% of the total market, the United States for 29%, and Asia for 23%. Differences in market size reflected significant differences in per capita spending on apparel as well as in population levels. Per capita spending on apparel tended to grow less proportionately with increases in per capita income, so that its share of expenditures typically decreased as income increased. Per capita spending was also affected by price levels, which were influenced by variations in per capita income, in costs, and in the intensity of competition(given that competition continued to be localized to a significant extent) There was also significant local variation in customers' attributes and preferences, even within a region or a country. Just within West Europe, for instance, one study concluded that the British sought out stores based on social affinity, that the French focused on variety /quality, and that Germans were more price-sensitive. Relatedly, the French and the Italians were considered more fashion-forward than the Germans or the British. Spaniards were exceptional in buying apparel only seven times a year, compared with a European average of nine times a year, and higher-than-average levels for the Italians and French, among others. Differences between regions were even greater than within regions: Japan, while generally traditional, also had a teenage market segment that wa considered the trendiest in the world on many measures, and the U.S. market was, from the perspective of many European retailers, significantly less trendy except in a few, generally coastal pockets. There did, however, seem to be more cross-border homogeneity within the fashion segment Popular fashion, in particular, had become less of a hand-me-down from high-end designers. It now seemed to move much more quickly as people, especially young adults and teenagers, with ever richer communication links reacted to global and local trends, including other elements of popular culture(e. g, desperately seeking the skirt worn by the rock star at her last concert) Attempts had also been made to identify the strategic implications of the changing structure of the global apparel chain that were discussed above. Some reduced to" get big fast others, however, were more sophisticated. Thus, an article by three McKinsey consultants identified five ways for retailers to expand across borders: choosing a"sliver"of value instead of competing across the entire value chain; emphasizing partnering; investing in brands; minimizing(tangible) investments; and arbitraging international factor price differences. But Inditex, particularly its Zara chain, supplied a reminder that strategic imperatives depended on how a retailer sought to create and sustain a competitive advantage through its cross-border activities. Key International Competitors While Inditex competed with local retailers in most of its markets, analysts considered its three closest comparable competitors to be The Gap, H&M, and Benetton. All three had narrower vertical pe than Zara, which owned much of its production and most of its stores. The Gap and H&M which were the two largest specialist apparel retailers in the world, ahead of Inditex, owned most of their stores but outsourced all production. Benetton, in contrast, had invested relatively heavily in production, but licensees ran its stores. The three competitors were also positioned differently in product space from Inditex's chains(see Exhibit 5 for a positioning map and Exhibit 6 for financial and other comparisons)
703-497 ZARA: Fast Fashion 4 combined. The latter two companies were perhaps the most pan-European apparel retailers but had yet to achieve market shares of more than 2%-3% in more than two or three major countries. Markets and Customers In 2000, retail spending on clothing or apparel reached approximately €900 billion worldwide. According to one set of estimates, (West) Europe accounted for 34% of the total market, the United States for 29%, and Asia for 23%.10 Differences in market size reflected significant differences in per capita spending on apparel as well as in population levels. Per capita spending on apparel tended to grow less proportionately with increases in per capita income, so that its share of expenditures typically decreased as income increased. Per capita spending was also affected by price levels, which were influenced by variations in per capita income, in costs, and in the intensity of competition (given that competition continued to be localized to a significant extent). There was also significant local variation in customers’ attributes and preferences, even within a region or a country. Just within West Europe, for instance, one study concluded that the British sought out stores based on social affinity, that the French focused on variety/quality, and that Germans were more price-sensitive.11 Relatedly, the French and the Italians were considered more fashion-forward than the Germans or the British. Spaniards were exceptional in buying apparel only seven times a year, compared with a European average of nine times a year, and higher-than-average levels for the Italians and French, among others.12 Differences between regions were even greater than within regions: Japan, while generally traditional, also had a teenage market segment that was considered the trendiest in the world on many measures, and the U.S. market was, from the perspective of many European retailers, significantly less trendy except in a few, generally coastal pockets. There did, however, seem to be more cross-border homogeneity within the fashion segment. Popular fashion, in particular, had become less of a hand-me-down from high-end designers. It now seemed to move much more quickly as people, especially young adults and teenagers, with ever richer communication links reacted to global and local trends, including other elements of popular culture (e.g., desperately seeking the skirt worn by the rock star at her last concert). Attempts had also been made to identify the strategic implications of the changing structure of the global apparel chain that were discussed above. Some reduced to “get big fast”; others, however, were more sophisticated. Thus, an article by three McKinsey consultants identified five ways for retailers to expand across borders: choosing a “sliver” of value instead of competing across the entire value chain; emphasizing partnering; investing in brands; minimizing (tangible) investments; and arbitraging international factor price differences.13 But Inditex, particularly its Zara chain, supplied a reminder that strategic imperatives depended on how a retailer sought to create and sustain a competitive advantage through its cross-border activities. Key International Competitors While Inditex competed with local retailers in most of its markets, analysts considered its three closest comparable competitors to be The Gap, H&M, and Benetton. All three had narrower vertical scope than Zara, which owned much of its production and most of its stores. The Gap and H&M, which were the two largest specialist apparel retailers in the world, ahead of Inditex, owned most of their stores but outsourced all production. Benetton, in contrast, had invested relatively heavily in production, but licensees ran its stores. The three competitors were also positioned differently in product space from Inditex’s chains (see Exhibit 5 for a positioning map and Exhibit 6 for financial and other comparisons).
ZARA: Fast Fashion The gap The Gap, based in San Francisco, had been founded in 1969 and had achieved stellar growth profitability through the 1980s and much of the 1990s with what was described as an"unpretentious real clothes stance, "comprising extensive collections of T-shirts and jeans as well as"smart casual work clothes. The Gaps production was internationalized--more than 90% of it was outsourced from outside the United States-but its store operations were U.S"centric. International expansion of the store network had begun in 1987, but its pace had been limited by difficulties finding locations in markets such as the United Kingdom, Germany, and Japan(which accounted for 86% of store locations outside North America), adapting to different customer sizes and preferences, and dealing with what were, in many cases, more severe pricing pressures than in the United States. And by the end of the 1990s, supply chains that were still too long, market saturation, imbalances, and inconsistencies across the companys three store chains-Banana Republic, The Gap, and Old Navy and the lack of a clear fashion positioning had started to take a toll even in the U.S. market. A failed attempt to reposition to a more fashion-driven assortment-a major fashion miss-triggered significant writedowns, a loss for calendar year 2001, a massive decline in the Gap's stock price, and the departure, in May 2002, of its long-time CEO, Millard Drexler Hennes and mauritz Hennes and Mauritz(H& M), founded as Hennes(hers)in Sweden in 1947, was another high performing apparel retailer. While it was considered Inditex's closest competitor, there were number of key differences. H&M outsourced all its production, half of it to European suppliers implying lead times that were good by industry standards but significantly longer than Zara's. H&M had been quicker to internationalize, generating more than half its sales outside its home country by 1990, 10 years earlier than Inditex. It also had adopted a more focused approach, entering one country at a time-with an emphasis on northern Europe-and building a distribution center in each one. Unlike Inditex, H&M operated a single format, although it marketed its clothes under numerous labels or concepts to different customer segments. H&M also tended to have slightly lower prices than Zara(which it displayed prominently in store windows and on shelving), engaged in extensive advertising like most other apparel retailers, employed fewer designers(40% as many as Zara, Ithough Zara was still 40% smaller), and refurbished its stores less frequently. H&M's price-earnings ratio, while still high, had declined to levels comparable to Inditex's because of a fashion miss that had reduced net income by 17% in 2000 and a recent announcement that an aggressive effort to expand in the United States was being slowed down. Benetton Benetton, incorporated in 1965 in Italy, emphasized brightly colored knitwear. It achieved prominence in the 1980s and 1990s for its controversial advertising and as a network organization that outsourced activities that were labor-intensive or scale-insensitive to subcontractors But Benetton actually invested relatively heavily in controlling other production activities. Where it was investment-light was downstream: it sold its production through licensees, often entrepreneurs with no more than $100,000 to invest in a small outlet that could sell only Benetton products. While Benetton was fast at certain activities such as dyeing, it looked for its retailing business to provide significant forward order books for its manufacturing business and was therefore geared to operate n lead times of several months. Benettons format appeared to hit saturation by the early 1990s and profitability continued to slide through the rest of the 1990s. In response, it embarked on a strategy of narrowing product lines, further consolidating key production activities by grouping them into production poles"in a number of different regions, and expanding or focusing existing outlets while
ZARA: Fast Fashion 703-497 5 The Gap The Gap, based in San Francisco, had been founded in 1969 and had achieved stellar growth and profitability through the 1980s and much of the 1990s with what was described as an “unpretentious real clothes stance,” comprising extensive collections of T-shirts and jeans as well as “smart casual” work clothes. The Gap’s production was internationalized—more than 90% of it was outsourced from outside the United States—but its store operations were U.S.-centric. International expansion of the store network had begun in 1987, but its pace had been limited by difficulties finding locations in markets such as the United Kingdom, Germany, and Japan (which accounted for 86% of store locations outside North America), adapting to different customer sizes and preferences, and dealing with what were, in many cases, more severe pricing pressures than in the United States. And by the end of the 1990s, supply chains that were still too long, market saturation, imbalances, and inconsistencies across the company’s three store chains—Banana Republic, The Gap, and Old Navy— and the lack of a clear fashion positioning had started to take a toll even in the U.S. market. A failed attempt to reposition to a more fashion-driven assortment—a major fashion miss—triggered significant writedowns, a loss for calendar year 2001, a massive decline in the Gap’s stock price, and the departure, in May 2002, of its long-time CEO, Millard Drexler. Hennes and Mauritz Hennes and Mauritz (H&M), founded as Hennes (hers) in Sweden in 1947, was another highperforming apparel retailer. While it was considered Inditex’s closest competitor, there were a number of key differences. H&M outsourced all its production, half of it to European suppliers, implying lead times that were good by industry standards but significantly longer than Zara’s. H&M had been quicker to internationalize, generating more than half its sales outside its home country by 1990, 10 years earlier than Inditex. It also had adopted a more focused approach, entering one country at a time—with an emphasis on northern Europe—and building a distribution center in each one. Unlike Inditex, H&M operated a single format, although it marketed its clothes under numerous labels or concepts to different customer segments. H&M also tended to have slightly lower prices than Zara (which it displayed prominently in store windows and on shelving), engaged in extensive advertising like most other apparel retailers, employed fewer designers (40% as many as Zara, although Zara was still 40% smaller), and refurbished its stores less frequently. H&M’s price-earnings ratio, while still high, had declined to levels comparable to Inditex’s because of a fashion miss that had reduced net income by 17% in 2000 and a recent announcement that an aggressive effort to expand in the United States was being slowed down. Benetton Benetton, incorporated in 1965 in Italy, emphasized brightly colored knitwear. It achieved prominence in the 1980s and 1990s for its controversial advertising and as a network organization that outsourced activities that were labor-intensive or scale-insensitive to subcontractors. But Benetton actually invested relatively heavily in controlling other production activities. Where it was investment-light was downstream: it sold its production through licensees, often entrepreneurs with no more than $100,000 to invest in a small outlet that could sell only Benetton products. While Benetton was fast at certain activities such as dyeing, it looked for its retailing business to provide significant forward order books for its manufacturing business and was therefore geared to operate on lead times of several months. Benetton’s format appeared to hit saturation by the early 1990s and profitability continued to slide through the rest of the 1990s. In response, it embarked on a strategy of narrowing product lines, further consolidating key production activities by grouping them into “production poles” in a number of different regions, and expanding or focusing existing outlets while
703-497 ZARA: Fast Fashi starting a program to set up much larger company-owned outlets in big cities. About 100 such Benetton megastores were in operation by the end of 2001, compared with a network of approximately 5,500 smaller, third-Party-owned stores Inditex Inditex(Industria de Diseno Textil)was a global specialty retailer that designed, manufactured, and sold apparel, footwear, and accessories for women, men, and children through Zara and five other chains around the world. At the end of the 2001 fiscal year, it operated 1, 284 stores around the world, including Spain, with a selling area of 659, 400 square meters. The 515 stores located outside pain generated 54% of the total revenues of 63, 250 million. Inditex employed 26, 724 people, 10,919 of them outside Spain. Their average age was 26 years and the overwhelming majority were women Just over 80% of Inditex's employees were engaged in retail sales in stores,8.5% were emplo anufacturing, and design, logistics, distribution, and headquarters activities accounted for the remainder. Capital expenditures had recently been split roughly 80% on new-store openings, 10%on refurbishing, and 10% on logistics/ maintenance, roughly in line with capital employed. Operating working capital was negative at most year-ends, although it typically registered higher levels at other times of the year given the seasonality of apparel sales(see Exhibit 7 for these and other historical financial data). Plans for 2002 called for continued tight management of working capital and E510-560 million of capital expenditures, mostly on opening 230-275 new stores (across all chains). The operating economics for 2001 had involved gross margins of 52%o, operating expenses equivalent to 30% of revenues, of which one-half were related to personnel, and operating margins of 22%%. Net margins on sales revenue were about one-half the size of operating margins, with depreciation of fixed assets(e158 million) and taxes(e150 million) helping reduce operating profits of 6704 million to net income of E340 million. Despite high margins, top management stressed that Inditex was not the most profitable apparel retailer in the world: that stability was perhaps a more distinctive feature The rest of this section describes the pluses and minuses of Inditex's home base, its foundation by Amancio Ortega and subsequent growth, the structure of the group in early 2002, and recent changes in its governance. (A timeline, Exhibit 8, summarizes key events over this period chronologically. Home base G Inditex was headquartered in and had most of its upstream assets concentrated in the region of licia on the northwestern tip of Spain(see Exhibit 9). Galicia, the third-poorest of Spain,s 17 utonomous regions, reported an unemployment rate in 2001 of 17%(compared with a national average of 14%), had poor communication links with the rest of the country, and was still heavily dependent on agriculture and fishing. In apparel, however, Galicia had a tradition that dated back to the Renaissance, when Galicians were tailors to the aristocracy, and was home to thousands of small Pparel workshops. What Galicia lacked were a strong base upstream in textiles, sophisticated local demand, technical institutes and universities to facilitate specialized initiatives and training, and an industry association to underpin these or other potentially cooperative activities. And even more critical for Inditex, as CEO Jose Maria Castellano put it, was that "Galicia is in the corner of Europe from the perspective of transport costs, which are very important to us given our business model. Some of the same characterizations applied at a national level, to Inditex's home base of Spain compared, for example, to Italy. Spanish consumers demanded low prices but were not considered as
703-497 ZARA: Fast Fashion 6 starting a program to set up much larger company-owned outlets in big cities. About 100 such Benetton megastores were in operation by the end of 2001, compared with a network of approximately 5,500 smaller, third-party-owned stores. Inditex Inditex (Industria de Diseño Textil) was a global specialty retailer that designed, manufactured, and sold apparel, footwear, and accessories for women, men, and children through Zara and five other chains around the world. At the end of the 2001 fiscal year, it operated 1,284 stores around the world, including Spain, with a selling area of 659,400 square meters. The 515 stores located outside Spain generated 54% of the total revenues of €3,250 million. Inditex employed 26,724 people, 10,919 of them outside Spain. Their average age was 26 years and the overwhelming majority were women (78%). Just over 80% of Inditex’s employees were engaged in retail sales in stores, 8.5% were employed in manufacturing, and design, logistics, distribution, and headquarters activities accounted for the remainder. Capital expenditures had recently been split roughly 80% on new-store openings, 10% on refurbishing, and 10% on logistics/maintenance, roughly in line with capital employed. Operating working capital was negative at most year-ends, although it typically registered higher levels at other times of the year given the seasonality of apparel sales (see Exhibit 7 for these and other historical financial data). Plans for 2002 called for continued tight management of working capital and €510-560 million of capital expenditures, mostly on opening 230-275 new stores (across all chains). The operating economics for 2001 had involved gross margins of 52%, operating expenses equivalent to 30% of revenues, of which one-half were related to personnel, and operating margins of 22%. Net margins on sales revenue were about one-half the size of operating margins, with depreciation of fixed assets (€158 million) and taxes (€150 million) helping reduce operating profits of €704 million to net income of €340 million. Despite high margins, top management stressed that Inditex was not the most profitable apparel retailer in the world: that stability was perhaps a more distinctive feature. The rest of this section describes the pluses and minuses of Inditex’s home base, its foundation by Amancio Ortega and subsequent growth, the structure of the group in early 2002, and recent changes in its governance. (A timeline, Exhibit 8, summarizes key events over this period chronologically.) Home Base Inditex was headquartered in and had most of its upstream assets concentrated in the region of Galicia on the northwestern tip of Spain (see Exhibit 9). Galicia, the third-poorest of Spain’s 17 autonomous regions, reported an unemployment rate in 2001 of 17% (compared with a national average of 14%), had poor communication links with the rest of the country, and was still heavily dependent on agriculture and fishing. In apparel, however, Galicia had a tradition that dated back to the Renaissance, when Galicians were tailors to the aristocracy, and was home to thousands of small apparel workshops. What Galicia lacked were a strong base upstream in textiles, sophisticated local demand, technical institutes and universities to facilitate specialized initiatives and training, and an industry association to underpin these or other potentially cooperative activities. And even more critical for Inditex, as CEO José Maria Castellano put it, was that “Galicia is in the corner of Europe from the perspective of transport costs, which are very important to us given our business model.” Some of the same characterizations applied at a national level, to Inditex’s home base of Spain compared, for example, to Italy. Spanish consumers demanded low prices but were not considered as
ZARA: Fast Fashion discriminating or fashion-conscious as Italian buyers-although Spain had advanced rapidly in this regard, as well as many others, since the death of long-time dictator General Francisco Franco in 1975 and its subsequent opening up to the world. On the supply side, Spain was a relatively productive apparel manufacturing base by European standards(see Exhibit 2), but lacked Italys fully developed thread-to-apparel vertical chain(including machinery suppliers), its dominance of high quality fabrics(such as wool suiting), and its international fashion image. For this reason, and because rivalry among them had historically been fierce, Italian apparel chains had been quick to move overseas. But Spanish apparel retailers had followed suit in the 1990s, and not just Inditex. Mango, a smaller Spanish chain that relied on a franchising model with returnable merchandise, was already present in more countries around the world than inditex Early Histo Amancio Ortega Gaona, Inditex's founder, was still its president and principal shareholder in early 2002 and still came in to work every day, where he could often be seen lunching in the company cafeteria with employees. Ortega was otherwise extremely reclusive but reports indicated that he had been born in 1936 to a railroad worker and a housemaid, and that his first job had been as an errand boy for a La Coruna shirtmaker in 1949. As he moved up through that company, he apparently developed a heightened awareness of how costs piled up through the apparel chain. In 1963, he founded Confecciones Goa(his acronym reversed) to manufacture products such as housecoats Eventually, Ortega's quest to improve the manufacturing/retailing interface led him to integrate forward into retailing: the first Zara store was opened on an up market shopping street in La Coruna, in 1975. From the beginning, Zara positioned itself as a store selling "medium quality fashio clothing at affordable prices. By the end of the 1970s, there were half-a-dozen Zara stores in galician Ortega, who was said to be a gadgeteer by inclination, bought his first computer in 1976. At the ime, his operations encompassed just four factories and two stores but were already making it clear that what (other)buyers ordered from his factories was different from what his store data told him customers wanted. Ortega's interest in information technology also brought him into contact with Jose Maria Castellano, who had a doctorate in business economics and professional experience in information technology, sales, and finance. In 1985, Castellano joined Inditex as the deputy chairman of its board of directors, although he continued to teach accounting part-time at the local university Under Ortega and Castellano, Zara continued to roll out nationally through the 1980s by expanding into adjoining markets. It reached the Spanish capital, Madrid, in 1985 and, by the end of the decade, operated stores in all Spanish cities with more than 100,000 inhabitants. Zara then began to open stores outside Spain and to make quantum investments in manufacturing logistics and IT The early 1990s was also when Inditex started to add other retail chains to its network through Structure At the beginning of 2002, Inditex operated six separate chains: Zara, Massimo Dutti, Pull Bear, Bershka, Stradivarius, and Oysho(as illustrated in Exhibit 10). These chains retailing subsidiaries in Spain and abroad were grouped into 60 companies, or about one-half the total number of companies whose results were consolidated into Inditex at the group level; the remainder were involved in textile purchasing and preparation, manufacturing, logistics, real estate, finance, and so forth. Given internal transfer pricing and other policies, retailing (as opposed to manufacturing and other
ZARA: Fast Fashion 703-497 7 discriminating or fashion-conscious as Italian buyers—although Spain had advanced rapidly in this regard, as well as many others, since the death of long-time dictator General Francisco Franco in 1975 and its subsequent opening up to the world. On the supply side, Spain was a relatively productive apparel manufacturing base by European standards (see Exhibit 2), but lacked Italy’s fully developed thread-to-apparel vertical chain (including machinery suppliers), its dominance of high quality fabrics (such as wool suiting), and its international fashion image. For this reason, and because rivalry among them had historically been fierce, Italian apparel chains had been quick to move overseas. But Spanish apparel retailers had followed suit in the 1990s, and not just Inditex. Mango, a smaller Spanish chain that relied on a franchising model with returnable merchandise, was already present in more countries around the world than Inditex. Early History Amancio Ortega Gaona, Inditex’s founder, was still its president and principal shareholder in early 2002 and still came in to work every day, where he could often be seen lunching in the company cafeteria with employees. Ortega was otherwise extremely reclusive but reports indicated that he had been born in 1936 to a railroad worker and a housemaid, and that his first job had been as an errand boy for a La Coruña shirtmaker in 1949. As he moved up through that company, he apparently developed a heightened awareness of how costs piled up through the apparel chain. In 1963, he founded Confecciones Goa (his acronym reversed) to manufacture products such as housecoats. Eventually, Ortega’s quest to improve the manufacturing/retailing interface led him to integrate forward into retailing: the first Zara store was opened on an up market shopping street in La Coruña, in 1975. From the beginning, Zara positioned itself as a store selling “medium quality fashion clothing at affordable prices.” By the end of the 1970s, there were half-a-dozen Zara stores in Galician cities. Ortega, who was said to be a gadgeteer by inclination, bought his first computer in 1976. At the time, his operations encompassed just four factories and two stores but were already making it clear that what (other) buyers ordered from his factories was different from what his store data told him customers wanted. Ortega’s interest in information technology also brought him into contact with Jose Maria Castellano, who had a doctorate in business economics and professional experience in information technology, sales, and finance. In 1985, Castellano joined Inditex as the deputy chairman of its board of directors, although he continued to teach accounting part-time at the local university. Under Ortega and Castellano, Zara continued to roll out nationally through the 1980s by expanding into adjoining markets. It reached the Spanish capital, Madrid, in 1985 and, by the end of the decade, operated stores in all Spanish cities with more than 100,000 inhabitants. Zara then began to open stores outside Spain and to make quantum investments in manufacturing logistics and IT. The early 1990s was also when Inditex started to add other retail chains to its network through acquisition as well as internal development. Structure At the beginning of 2002, Inditex operated six separate chains: Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho (as illustrated in Exhibit 10). These chains’ retailing subsidiaries in Spain and abroad were grouped into 60 companies, or about one-half the total number of companies whose results were consolidated into Inditex at the group level; the remainder were involved in textile purchasing and preparation, manufacturing, logistics, real estate, finance, and so forth. Given internal transfer pricing and other policies, retailing (as opposed to manufacturing and other
703-497 ZARA: Fast Fashi activities) generated 82% of Inditex's net income, which was roughly in line with its share of the group's total capital investment and employment The six retailing chains were organized as separate business units within an overall structure that also included six business support areas(raw materials, manufacturing plants, logistics, real estate, expansion, and international)and nine corporate departments or areas of responsibility(see Exhibit 11). In effect, each of the chains operated independently and was responsible for its own strategy roduct design, sourcing and manufacturing, distribution, image, personnel and financial results while group management set the strategic vision of the group, coordinated the activities of the concepts, and provided them with administrative and various other services Coordination across the chains had deliberately been limited but had increased a bit, particularly in the areas of real estate and expansion, as Inditex had recently moved toward opening up some multichain locations. More broadly, the experience of the older, better-established chains, particularly Zara, had helped accelerate the expansion of the newer ones. Thus, Oysho, the lingerie chain, drew 75% of its human resources from the other chains and had come to operate stores in seven European markets within six months of its launch in September 2001 Top corporate managers, who were all Spanish, saw the role of th c usiness strategies of the orate center as a "strategic controller" involved in setting the corporate strategy, approving the individual chains, and controlling their performance rather than as an"operator" functionally involved in running the chains. Their ability to control performance down to the local store level was based on standardized reporting systems that focused on(like-for-like)sales growth, earnings before interest and taxes(EBIT)margin, and return on capital employed. CEO Jose Maria Castellano looked y performance metrics once a week, while one of his direct reports monitored them on a daily Recent governance changes Inditex's initial public offering(IPO)in May 2001 had sold 26% of the companys shares to the iblic, but founder Amancio Ortega retained a stake of more than 60%. Since Inditex generated substantial free cash flow(some of which had been used to make portfolio investments in other lines of business), the IPO was thought to be motivated primarily by Ortega's desire to put the company on a firm footing for his eventual retirement and the transition to a new top management team Second, Inditex also made progress in 2001 toward implementing a social strategy involving dialogue with employees, suppliers, subcontractors, non-governmental organizations, and local communities. Immediate initiatives included approval of an internal code of conduct, the establishment of a corporate responsibility department, social audits of supplier and external workshops in Spain and Morocco, pilot developmental projects in Venezuela and Guatemala, and the joining, in August 2001, of the Global Compact, an initiative headed by Kofi Annan, Secretary General of the United Nations, that aimed to improve global companies' social performance Zaras Business system Zara was the largest and most internationalized of Inditex's chains. At the end of 2001, it operated 507 stores around the world, including Spain(40% of the total number for Inditex), with 488, 400 quare meters of selling area(74% of the total)and employing E1,050 million of the companys capital (72% of the total), of which the store network accounted for about 80%. During the course of fiscal year 2001, it had posted EBIT of E441 million(85% of the total)on sales of 2, 477 million(76% of the
703-497 ZARA: Fast Fashion 8 activities) generated 82% of Inditex’s net income, which was roughly in line with its share of the group’s total capital investment and employment. The six retailing chains were organized as separate business units within an overall structure that also included six business support areas (raw materials, manufacturing plants, logistics, real estate, expansion, and international) and nine corporate departments or areas of responsibility (see Exhibit 11). In effect, each of the chains operated independently and was responsible for its own strategy, product design, sourcing and manufacturing, distribution, image, personnel and financial results, while group management set the strategic vision of the group, coordinated the activities of the concepts, and provided them with administrative and various other services. Coordination across the chains had deliberately been limited but had increased a bit, particularly in the areas of real estate and expansion, as Inditex had recently moved toward opening up some multichain locations. More broadly, the experience of the older, better-established chains, particularly Zara, had helped accelerate the expansion of the newer ones. Thus, Oysho, the lingerie chain, drew 75% of its human resources from the other chains and had come to operate stores in seven European markets within six months of its launch in September 2001. Top corporate managers, who were all Spanish, saw the role of the corporate center as a “strategic controller” involved in setting the corporate strategy, approving the business strategies of the individual chains, and controlling their performance rather than as an “operator” functionally involved in running the chains. Their ability to control performance down to the local store level was based on standardized reporting systems that focused on (like-for-like) sales growth, earnings before interest and taxes (EBIT) margin, and return on capital employed. CEO José Maria Castellano looked at key performance metrics once a week, while one of his direct reports monitored them on a daily basis. Recent Governance Changes Inditex’s initial public offering (IPO) in May 2001 had sold 26% of the company’s shares to the public, but founder Amancio Ortega retained a stake of more than 60%. Since Inditex generated substantial free cash flow (some of which had been used to make portfolio investments in other lines of business), the IPO was thought to be motivated primarily by Ortega’s desire to put the company on a firm footing for his eventual retirement and the transition to a new top management team. Second, Inditex also made progress in 2001 toward implementing a social strategy involving dialogue with employees, suppliers, subcontractors, non-governmental organizations, and local communities. Immediate initiatives included approval of an internal code of conduct, the establishment of a corporate responsibility department, social audits of supplier and external workshops in Spain and Morocco, pilot developmental projects in Venezuela and Guatemala, and the joining, in August 2001, of the Global Compact, an initiative headed by Kofi Annan, Secretary General of the United Nations, that aimed to improve global companies’ social performance. Zara’s Business System Zara was the largest and most internationalized of Inditex’s chains. At the end of 2001, it operated 507 stores around the world, including Spain (40% of the total number for Inditex), with 488,400 square meters of selling area (74% of the total) and employing €1,050 million of the company’s capital (72% of the total), of which the store network accounted for about 80%. During the course of fiscal year 2001, it had posted EBIT of €441 million (85% of the total) on sales of €2,477 million (76% of the
ZARA: Fast Fashion total). While Zara's share of the group's total sales was expected to drop by two or three percentage points each year, it would continue to be the principal driver of the group's growth for some time to come,and to play the lead role in increasing the share of Inditex's sales accounted for by international operations Zara completed its rollout in the Spanish market by 1990, and began to move overseas around that time. It also began to make major investments in manufacturing logistics and IT, including establishment of a just-in-time manufacturing system, a 130,000 square meter warehouse close to corporate headquarters in Arteixo, outside La Coruna, and an advanced telecommunications system and sales locations. Devel financial, merchandising, and other information systems continued through the 1990s, much of it taking place internally. For example, while there were many logistical packages on the market, Zaras unusual requirements mandated internal development. The business system that had resulted(see Exhibit 12) was particularly distinctive in that Zara manufactured its most fashion-sensitive products internally. The other Inditex chains were too small to justify such investments but generally did emphasize reliance on suppliers in Europe rather than farther away. Zara's designers continuously tracked customer preferences and placed orders with internal and external suppliers. About 11,000 distinct items were produced during the year-several hundred thousand SKUs given variations in color, fabric, and sizes--compared with 2,000-4,000 items for key competitors. Production took place in small batches, with vertical integration into the manufacture of the most time-sensitive items. Both internal and external production flowed into Zara's central distribution center. Products were shipped directly from the central distribution center to well-located, attractive stores twice a week, eliminating the need for warehouses and keeping inventories low. Vertical integration helped reduce the bullwhip effect".the tendency for fluctuations in final demand to get amplified as they were transmitted back up the supply chain Even more importantly, Zara was able to originate a design and have finished goods in stores within four to five weeks in the case of entirely new designs and two weeks for modifications (or restocking of existing products. In contrast, the traditional industry model might involve cycles of up to six months for design and three months for manufacturing The short cycle time reduced working capital intensity and facilitated continuous manufacture of new merchandise, even during the biannual sales periods, letting Zara commit to the bulk of its product line for a season much later than its key competitors(see Exhibit 13). Thus, Zara undertook 35% of product design and purchases of raw material, 40%-50% of the purchases of finished products from external suppliers, and 85% of the in-house production after the season had started, compared with only 0%o-20% in the case of traditional retailers But while quick-response was critical to Zara's superior performance, the connection between the wo was not automatic. World Co of Japan, perhaps the only other apparel retailer in the world with comparable cycle times, provided a counterexample. It too had integrated backward into( domestic) manufacturing, and had achieved gross margins comparable to Zara's. But World Co s net margins remained stuck at around 2% of sales, compared with 10% in the case of Zara, largely because of selling, general, and administrative expenses that swallowed up about 40% of its revenues, versus about 20% for Zara. Different choices about how to exploit quick-response capabilities underlay these differences in performance. World Co served the relatively depressed Japanese market, appeared to place less emphasis on design, had an unprofitable contract manufacturing arm, supported about 40 brands with distinct identities for use exclusively within its own store network(smaller than Zaras), and operated relatively small stores, averaging less than 100 square meters of selling area. Zara had made rather different choices along these and other dimensions
ZARA: Fast Fashion 703-497 9 total). While Zara’s share of the group’s total sales was expected to drop by two or three percentage points each year, it would continue to be the principal driver of the group’s growth for some time to come, and to play the lead role in increasing the share of Inditex’s sales accounted for by international operations. Zara completed its rollout in the Spanish market by 1990, and began to move overseas around that time. It also began to make major investments in manufacturing logistics and IT, including establishment of a just-in-time manufacturing system, a 130,000 square meter warehouse close to corporate headquarters in Arteixo, outside La Coruña, and an advanced telecommunications system to connect headquarters and supply, production, and sales locations. Development of logistical, retail, financial, merchandising, and other information systems continued through the 1990s, much of it taking place internally. For example, while there were many logistical packages on the market, Zara’s unusual requirements mandated internal development. The business system that had resulted (see Exhibit 12) was particularly distinctive in that Zara manufactured its most fashion-sensitive products internally. (The other Inditex chains were too small to justify such investments but generally did emphasize reliance on suppliers in Europe rather than farther away.) Zara’s designers continuously tracked customer preferences and placed orders with internal and external suppliers. About 11,000 distinct items were produced during the year—several hundred thousand SKUs given variations in color, fabric, and sizes—compared with 2,000-4,000 items for key competitors. Production took place in small batches, with vertical integration into the manufacture of the most time-sensitive items. Both internal and external production flowed into Zara’s central distribution center. Products were shipped directly from the central distribution center to well-located, attractive stores twice a week, eliminating the need for warehouses and keeping inventories low. Vertical integration helped reduce the “bullwhip effect”: the tendency for fluctuations in final demand to get amplified as they were transmitted back up the supply chain. Even more importantly, Zara was able to originate a design and have finished goods in stores within four to five weeks in the case of entirely new designs and two weeks for modifications (or restocking) of existing products. In contrast, the traditional industry model might involve cycles of up to six months for design and three months for manufacturing. The short cycle time reduced working capital intensity and facilitated continuous manufacture of new merchandise, even during the biannual sales periods, letting Zara commit to the bulk of its product line for a season much later than its key competitors (see Exhibit 13). Thus, Zara undertook 35% of product design and purchases of raw material, 40%-50% of the purchases of finished products from external suppliers, and 85% of the in-house production after the season had started, compared with only 0%-20% in the case of traditional retailers. But while quick-response was critical to Zara’s superior performance, the connection between the two was not automatic. World Co. of Japan, perhaps the only other apparel retailer in the world with comparable cycle times, provided a counterexample. It too had integrated backward into (domestic) manufacturing, and had achieved gross margins comparable to Zara’s.15 But World Co.’s net margins remained stuck at around 2% of sales, compared with 10% in the case of Zara, largely because of selling, general, and administrative expenses that swallowed up about 40% of its revenues, versus about 20% for Zara. Different choices about how to exploit quick-response capabilities underlay these differences in performance. World Co. served the relatively depressed Japanese market, appeared to place less emphasis on design, had an unprofitable contract manufacturing arm, supported about 40 brands with distinct identities for use exclusively within its own store network (smaller than Zara’s), and operated relatively small stores, averaging less than 100 square meters of selling area. Zara had made rather different choices along these and other dimensions
703-497 ZARA: Fast Fashi Design Each of Zara's three product lines-for women, men, and children-had a creative team onsisting of designers, sourcing specialists, and product development personnel. The creative teams simultaneously worked on products for the current season by creating constant variation, expanding upon successful product items and continuing in-season development, and on the following season and year by selecting the fabrics and product mix that would be the basis for an initial collection. Top management stressed that instead of being run by maestros, the design organization was very flat and focused on careful interpretation of catwalk trends suitable for the Zara created two basic collections each year that were phased in through the fall/winter and pring/summer seasons, starting in July and January respectively. Zara's designers attended trade fairs and ready-to-wear fashion shows in Paris, New York, London, and Milan, referred to catalogs of luxury brand collections, and worked with store managers to begin to develop the initial sketches for a collection close to nine months before the start of a season. Designers then selected fabrics and other complements and, simultaneously, the relative price at which a product would be sold was determined, guiding further development of samples. Samples were prepared and presented to the sourcing and product development personnel, and the selection process began. As the collection came together, the sourcing personnel identified production requirements, whether an item would be insourced or outsourced, and a timeline to ensure that the initial collection arrived in stores at the tart of the selling season. The process of adapting to trends and differences across markets was more evolutionary,ran through most of the selling season, and placed greater reliance on high-frequency information. Frequent conversations with store managers were as important in this regard as the sales data captured by their IT system. Other sources of information included industry publications, TV, Internet, and film content, trend-spotters who focused on venues such as university campuses and discotheques, and even Zaras young, fashion-conscious staff. Product development personnel played a key role in linking the designers and the stores, and were often from the country in which the stores they dealt with were located. On average, several dozen items were designed each day, but only slightly more than one-third of them actually went into production. Time permitting, very limited volumes of new items were prepared and presented in certain key stores and produced on a larger scale only if consumer reactions were unambiguously positive. As a result, failure rates on new products were supposed to be only 1%, compared with an average of 10% for the sector. Learning b doing was considered very important in achieving such favorable outcomes Overall, then, the responsibilities of Zaras design teams transcended design, narrowly defined They also continuously tracked customer preferences and used information about sales potential based, among other things, on a consumption information system that supported detailed analy product life cycles, to transmit repeat orders and new designs to internal and external suppliers. The design teams thereby bridged merchandising and the back-end of the production process. These functions were generally organized under separate management teams at other apparel retailers Sourcing manufacturing Zara sourced fabric, other inputs, and finished products from external suppliers with the help of purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters While Europe had historically dominated Zara's sourcing patterns, the recent establishment of three companies in Hong Kong for purposes of purchasing as well as trend-spotting suggested that sourcing from the Far East, particularly China, might expand substantially
703-497 ZARA: Fast Fashion 10 Design Each of Zara’s three product lines—for women, men, and children—had a creative team consisting of designers, sourcing specialists, and product development personnel. The creative teams simultaneously worked on products for the current season by creating constant variation, expanding upon successful product items and continuing in-season development, and on the following season and year by selecting the fabrics and product mix that would be the basis for an initial collection. Top management stressed that instead of being run by maestros, the design organization was very flat and focused on careful interpretation of catwalk trends suitable for the mass-market. Zara created two basic collections each year that were phased in through the fall/winter and spring/summer seasons, starting in July and January respectively. Zara’s designers attended trade fairs and ready-to-wear fashion shows in Paris, New York, London, and Milan, referred to catalogs of luxury brand collections, and worked with store managers to begin to develop the initial sketches for a collection close to nine months before the start of a season. Designers then selected fabrics and other complements and, simultaneously, the relative price at which a product would be sold was determined, guiding further development of samples. Samples were prepared and presented to the sourcing and product development personnel, and the selection process began. As the collection came together, the sourcing personnel identified production requirements, whether an item would be insourced or outsourced, and a timeline to ensure that the initial collection arrived in stores at the start of the selling season. The process of adapting to trends and differences across markets was more evolutionary, ran through most of the selling season, and placed greater reliance on high-frequency information. Frequent conversations with store managers were as important in this regard as the sales data captured by their IT system. Other sources of information included industry publications, TV, Internet, and film content, trend-spotters who focused on venues such as university campuses and discotheques, and even Zara’s young, fashion-conscious staff. Product development personnel played a key role in linking the designers and the stores, and were often from the country in which the stores they dealt with were located. On average, several dozen items were designed each day, but only slightly more than one-third of them actually went into production. Time permitting, very limited volumes of new items were prepared and presented in certain key stores and produced on a larger scale only if consumer reactions were unambiguously positive. As a result, failure rates on new products were supposed to be only 1%, compared with an average of 10% for the sector. Learning by doing was considered very important in achieving such favorable outcomes. Overall, then, the responsibilities of Zara’s design teams transcended design, narrowly defined. They also continuously tracked customer preferences and used information about sales potential based, among other things, on a consumption information system that supported detailed analysis of product life cycles, to transmit repeat orders and new designs to internal and external suppliers. The design teams thereby bridged merchandising and the back-end of the production process. These functions were generally organized under separate management teams at other apparel retailers. Sourcing & Manufacturing Zara sourced fabric, other inputs, and finished products from external suppliers with the help of purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters. While Europe had historically dominated Zara’s sourcing patterns, the recent establishment of three companies in Hong Kong for purposes of purchasing as well as trend-spotting suggested that sourcing from the Far East, particularly China, might expand substantially