Analysis of Zaras Inditex Business Model PDF

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Term Paper Business Development & Channels Professor Bill Carney

Student: Vivian Doufem Silva Kato MIM 2

Table of Contents

1. Zara............................................................................................................................................ 3

2. Fast-Fashion ........................................................................................................................... 3

3. Customer Centric Model......................................................................................................... 4

4. Supply Chain ............................................................................................................................ 4

5. Marketing Strategy ................................................................................................................. 5

6. Controversies .......................................................................................................................... 6

7. Conclusion ............................................................................................................................... 6

References .................................................................................................................................. 7

1. Zara Inditex is the largest fashion distributor and retailer in the world, with eight brands: Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterque. The figures around the company are massive, with 7,475 stores present in 96 markets, 49 online markets and directly employing 171,839 people. Inditex has its origins in 1963 as a small family business manufacturing women’s apparel in La Coruña, a small town in Galicia northern Spain. In 1975, Amancio Ortega decided to launch its first brand Zara which is Inditex flagship. Zara was a pioneer in the fast fashion model, completely disrupting the traditional fashion industry. This along with its logistics and efficiency are the keys to Zara’s success. (See reference 1).

2. Fast-Fashion Historically, fashion moved at a slow pace. Trends that so easily can go viral because an influencer on Instagram such as Chiara Ferragni or Kendall Jenner, could take years to come into the mainstream and go out of popularity. In the old days, before TV and photography, trendsetters were cities like Paris and Milan. Its fashion houses would come up with a new style and they would spread in a rather organic and slow pace, visitors would buy the clothes in wear them in other cities. In the 20th century, trends were still kept away from the public. Industry events, like textile conventions and runaway shows, were restricted only allowing those in the business. One would get glimpses of the fashion weeks in the press and a year later these trends would become commercial. Totaling in up to three years process. All of this has changed today, thanks to Instagram, the rise of fashion bloggers, celebrities, and partially thanks to Zara. (See reference 3). Zara’s original business proposition was to create similar copies of high-end lines at an affordable price. Which later transformed into instant fashion, Zara can react to new trends with amazing speed and come up with new lines for their retail stores in a very small amount of time. The fashion industry traditionally works with a seasonal model with huge production runs, at the end of each season, the clothes that did not sell goes on sale. Zara, however, designs new products all year-round. Producing them only for a short period of time, eliminating the need for discount sales altogether. Consequently, their consumers learned to purchase Zara’s products quickly, because they do not stay on the shelves for long. Creating a sense of urgency among its customers, therefore most of the sales are made on impulse. The limited production runs also gave out the notion that each piece was relatively unique as compared to massive compared to the designs of seasonal retailers. Knowing that each time they visit a Zara store the consumer will find a new release, also is an incentive for them to visit the store frequently. (See reference 3). Seasonal retailers also face the risk of trying to predict fashion trends a year in advance, not every trend showcased on the catwalk will instantly become a success with the mainstream public. Retailers like Ann Taylor, American Eagle, and lately even H&M currently sitting on a pile of 4.3 billion dollars in unsold merchandise, have suffered from this “fashion misses”. These clothes must be heavily discounted, considerably hurting profits. Zara business model eliminates this risk, by stocking very little and constantly updating collections. The company completely changed the fashion industry, breaking up the century-old biannual cycle of fashion. Now brands like Prada and Louis Vuitton are making up to six collections instead of two each year, due to Zara. (See references 4 and 5).

3. Customer-Centric Model The customer is co-creator to its products, knowing exactly what they demand is in the core of Zara’s business model. Attention to detail and technological innovation are present in every part of Zara’s value chain. Customer input is key in this process when a customer asked for a red scarf in Tokyo, San Francisco, and São Paulo simultaneously and the store did not have it, Zara’s headquarters knows they have an international trend insight. A few days later 2,500 stores received red scarfs they were sold out in less than a week. Zara is always listening to their customer when coming up with new designs, it is one of the reasons they are so successful. (See reference 6). Zara can use the information provided by its shoppers because of the training they give to their employees. The store’s staff is the most valuable asset of Zara’s customer research, they listen to feedback given by customers that might lead to styles, cuts, fabrics, and designs featured in a new collection. Each day the stores have to report to Zara’s HQ, so they are aware of the consumer behavior and needs in real-time and can act based on this information immediately. Zara’s customer research capacities give them a competitive edge, they can adapt to each culture and geography accordingly reflecting their customer needs. Social media is also a tool that is being used by Zara to improve customer relations and gather feedback. Moreover, Zara invests heavily in technological innovations to improve its customer service. The Radio Frequency Identification (RFID) is a system that allows the staff to find any item instore and online. Also making stocktaking more effective by 80 percent, as pointed by the Inditex website. Some of the innovations being implemented are mobile payments, same-day and next-day delivery, removal of paper tickets, self-checkouts, and interactive fitting rooms. (See reference 7).

4. Supply Chain The efficiency of Zara’s supply chain aligned with their business model is what makes the company successful. With a highly vertical structure, Zara has great control over every aspect of design, production, distribution, sales, promotion, and feedback are given by customers. Almost nothing is outsourced. By detaining tight control over its operations Zara can secure better communication and management across its production cycle and enable the efficiency in which the company operates. (See reference 8). Zara’s brain is their operation center in Spain, where they monitor everything that is happening in their stores in real time, receiving daily reports from the managers with the shopper’s feedback. This precious data is used to detect fashion trends that will impact the design of new lines and modifications on existing ones. After the products are designed it takes up to 15 days for them to reach the shelves. Which is a very small amount of time, even by fast-fashion standards. (See reference 3). Half of Zara’s manufacturing is located close to its headquarters either in Europe or Northern Africa. The trendiest items are made in Spain, more standard designs go to Morocco, Turkey and Portugal considered costly labor markets. Clothes with longer shelve life, like t-shirts, are produced mostly in China, Bangladesh, Vietnam, and Brazil. No matter where the item is manufactured, the time from start to finish in the production line is three weeks maximum. (See references 6 and 9). For quality control, every item goes to one of their 10 logistics centers in Spain to be inspected before reaching the shelves. In most companies, if the shirt is manufactured in Bangladesh and

has Japan as a final destination they would be shipped directly to Japan, so Zara’s model seems counterintuitive. However, this also serves another purpose, which is linked to their low inventory strategy. Not every store will sell the same type of clothing, the goal is to control what each Zara shop will receive, from clothing lines to colors and types of fabric. In this way, the stores receive merchandise appropriate for their individual needs. Brazilians will prefer vivid colors while a Parisian will wear darkest colors, the New York 5th Avenue store will not sell the same items that the one in Miami Beach. (See reference 3). From Spain, the merchandise can be delivered in any given Zara store in 48 hours and they are supplied two to three times per week, which requires great efforts and can be costly. Still, thanks to this timing, Zara reduces stocking space in their shops, and consequentially more space for retailing means less frozen money. Increasing profits and helping to maintain an updated sales line. (See reference 3). Zara has the capacity of sampling products before fully committing to them, which is also related to their low-inventory strategy. This is possible due to the rapid product replacement and limited production runs when the merchandise hits the shelves the sales will let Zara knows which designs and trends were more successful. The items that generated more profit, will then go to small changes to be relaunched in future collections. This cycle allows for the company to keep waste to a minimum and maintain a low-inventory in their stores. (See reference 8). For other companies like H&M and Gap to copy Zara’s approach to fast-fashion and logistics would require for them to completely reinvent themselves. Completely abandoning the seasonal fashion cycle and heavily investing restructure their logistical operations. First, they would have to bring and integrate their manufacturing facilities closer to its markets vertically integrating their operations. Accordingly, to the Inditex official website, more than half of Zara stores are located in Europe. Justifying the productions plants in Spain, Portugal, Morocco, and Turkey due to their proximity to Zara’s biggest market. Secondly, drastically reducing inventories, therefore possibly losing profitability due to transportation and manufacturing costs pile up while excess inventories reduce margins. As a comparison, H&M and Gap launch up to 4,000 products annually, while this number soars to 11,000 at Zara. Additionally, Zara only holds inventory on average for 6 days compared to H&M’s 54 days and Gap’s 94 days. (See reference 8).

5. Marketing Strategy Unlike its competitors, Zara does not engage in advertising or team up with fashion household names such as Karl Lagerfeld and Stella McCartney, their designers are anonymous. Zara invests heavily in real estate, including the location, ambiance, and feel of its stores. In harmony with Zara’s mantra of offering high-fashion with an affordable price, the location of each shop a lot of times is not far from fashion names like Chanel and Hermes. For Zara to be successfully perceived as a luxury brand it has to be closely linked to luxury brands. in Istanbul, the Zara store is a block away from Cartier and Chanel, in Rio de Janeiro a Zara can be found close to Versace and Burberry and so on. (See reference 9). Furthermore, customer experience is taken seriously. In the age of retail apocalypse, this fact became ever more vital for an apparel business. Zara combines the fast-fashion shopping with the feel of a high-end store, each of its stores has a sleek, elegant and minimalistic layout. Adding this with curated merchandise featuring the latest fashion trends with fast rotation.

Zara consumers go to the store knowing that the product they liked will not be there in the next week, making them more likely to make the purchase, which also adds to customer loyalty and the frequency they shop. (See reference 10). Despite not doing traditional advertising campaigns, Zara gets a lot of attention through wordof-mouth and social media. They benefit from a great number of influencers and celebrities regarded as fashion icons. Among them Olivia Palermo, Kendall Jenner, and Kate Middleton, the Duchess of Cambridge. (See reference 9).

6. Controversies Zara has been accused of copying other designers. In March 2012, Alexandra Jacobs wrote for the New York Times an article about her recent trip to the then new Zara on 5th Avenue in New York. While in the store she was reminded of Alexander Wang, Prada, and Balmain. And even of Christian Louboutin, that took Zara to court for selling red-soled shoes. He lost the case, the designs are not an exact copy, they always have minor changes to evade copyright laws. (See reference 9). Another stain on Zara’s reputation has been the use of unpaid labor to manufacture its clothes. In 2017, Istanbul shoppers were finding tags inside clothes declaring “I made this item you are going to buy, but I didn’t get paid for it”. These accusations were never enough to harm Zara’s profits. However, they are under constant scrutiny for causing massive environmental damage, due to the scale of their fast-fashion business. Stealing of their fashion designers and the terrible factory conditions are also issues hunting the company. (See reference 11). In 2011, Brazilian federal inspectors found immigrants working up to 16 hours manufacturing Zara clothes and living under terrible conditions, a case of modern slavery. Among other serious accusations is the exploration of minors, many of them Syrian refugees working in factories in Turkey. Even a dead rodent was found sewed into a dress brought in an American Zara. They had to pay a fine of US$1.8 million in Brazil, Equal Times stated: “Zara is a company that would rather pay fines than ratify bad labor practices”. (See references 11,12 ,13, and 14). Zara argumentation is that all of those incidents happened in third-party factories, so the company cannot take responsibility. Inditex website claims that Zara has a serious commitment to sustainability and ensuring good working conditions for their employees. However, many can argue the opposite given past accounts. (See references 11 and 1).

7. Conclusion The results of Zara in 2017 were remarkable. Sales increased 10% to $21 billion dollars. Gross profit towering on $12.1 billion dollars, 9% higher as compared to 2016. The company continues with its expansion in going to Belarus and launching online sales in India. In total, they opened 60 stores in the first three quarters of 2017. With excellent financial health and expansion plans in execution, despite any controversies, Zara’s model has been incredibly successful. And if the management keeps the good practices administrating Zara’s complex fast-fashion and logistics operations, the company will continue to have prosperity in the future. However, they should be more proactive in fixing their labor issues among others, in order to potentially avoid a crisis that might hurt the company. (See reference 15).

References Reference1: Inditex. (2018). Who we are. Retrieved from Inditex: https://www.inditex.com/en/aboutus/who-we-are Reference 2: Berman, A. (2017, August 18). How Zara Took Over The Industry Using Fast Fashion. Retrieved from Alex Berman - YouTube Channel: https://www.youtube.com/watch?v=I8_gmYNCQ1g Reference 3: VisualPolitik EN. (2017, November 13). How ZARA Changed the Fashion Industry - VisualPolitik EN. Retrieved from VisualPolitik EN - YouTube Channel: https://www.youtube.com/watch?v=7QA88UqmfFM Reference 4: Luyz, A. (2015, June 13). This clothing company whose CEO is richer than Warren Buffett is blowing the competition out of the water. Retrieved from Business Insider: http://www.businessinsider.com/zaras-retail-strategy-is-winning-2015-6 Reference 5: Paton, E. (2018, March 27). H&M, a Fashion Giant, Has a Problem: $4.3 Billion in Unsold Clothes. Retrieved from The New York Times: https://www.nytimes.com/2018/03/27/business/hm-clothes-stock-sales.html Reference 6: MartinRoll Business & Brand Leadership. (2018, March). The Secret of Zara’s Success: A Culture of Customer Co-creation. Retrieved from MartinRoll: https://martinroll.com/resources/articles/strategy/the-secret-of-zaras-success-aculture-of-customer-co-creation/ Reference 7: Inditex. (2018). Customers. Retrieved from Inditex: https://www.inditex.com/en/how-we-dobusiness/our-model/customers Reference 8: ToughNickel. (2018, March 7). Zara's Business Operations and Strategy - How and Why it Works. Retrieved from ToughNickel: https://toughnickel.com/industries/BusinessOperations-of-Clothing-Retailer-Zara Reference 9: Hansen, S. (2012, November 9). How Zara Grew Into the World’s Largest Fashion Retailer. Retrieved from The New York Times Magazine: https://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worldslargest-fashion-retailer.html?pagewanted=all See reference 10:

Danziger, P. N. (2018, April 23). Why Zara Succeeds: It Focuses On Pulling People In, Not Pushing Product Out. Retrieved from Forbes: https://www.forbes.com/sites/pamdanziger/2018/04/23/zaras-difference-pullpeople-in-not-push-product-out/#7457d09023cb Reference 11: Lieber, C. (2017, November 3). Unpaid Laborers Are Slipping Tags Into Zara Clothes. Retrieved from Racked: https://www.racked.com/2017/11/3/16603246/zara-labor-workersturkey Reference 12: BBC. (2016, October 24). Child refugees in Turkey making clothes for UK shops. Retrieved from BBC-Business: http://www.bbc.com/news/business-37716463 Reference 13: Hendriksz, V. (2015, May 11). Zara fails to protect laborers from modern-day slavery practices. Retrieved from Fashion United: https://fashionunited.uk/news/fashion/zara-fails-toprotect-labourers-from-modern-day-slavery-practices/2015051116376 Reference 14: Catalán, B. S. (2014, April 10). The exploitation of Zara workers in Chile. Retrieved from Equal Times: https://www.equaltimes.org/the-exploitation-of-zara-workers-inchile?lang=en#.Wu9-t4gvxPZ Reference 15: Loeb, W. (2017, December 22). How Inditex And Zara Are Winning, While H&M Is Losing. Retrieved from Forbes: https://www.forbes.com/sites/walterloeb/2017/12/22/howinditex-and-zara-are-winning-while-h-m-is-a-loser/#6e2cbae74d3a...