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Box case 6.2

Zara – a revolution in fashion

The Spanish fashion retailer Zara is making a conspicuous success from overturning
the established practices of the mass fashion business. Low margins
at home and cheap labour overseas have driven European retailers increasingly
to obtain supplies from the Far East, shipping them, in the main, by sea.
Zara, which is the major part of the Inditex group, has reversed this trend. 90
per cent of its goods are made in its own factories in northern Spain and
Portugal from where it ships them by truck or air to over 600 stores in 30
countries. The brand is very profitable –its return on sales is 15 per cent, five
times the typical level in the sector. It is also growing strongly: from its foundation
in 1975 it now has a turnover of C=3b. It has been described as ‘possibly
the most innovative and devastating retailer in the world’.

The key to Zara’s success is the speed with which it can now get new
designs to market. ‘The vertical integration of our production system allows
us to place a garment in any store around the world in two to three weeks,
provided the fabric is in stock’, says Maria J, Garcia, a spokeswoman for Zara.
The norm in the sector is five to ten months. No sooner has a new look made
the headlines than it is on the hangers in Zara – weeks or months ahead of
anyone else, and at a premium price. Moreover the company’s speed of
response means it can follow the ups and downs of demand very closely.
Twice-weekly deliveries mean that Zara shops are seldom short of popular
lines and yet need to hold very little stock. So when demand turns down they
simply switch immediately to the next thing.

By contrast, the much longer lead times elsewhere in the sector mean that
competitors have to place orders months in advance. Forecasting that far
ahead is almost bound to be wrong in such a fast-changing market and the
result is a huge cost in obsolete stock that must be discounted or scrapped.
Zara’s business model ensures loyalty and premium prices by always offering
its customers the most up-to-date designs. The cost of making the clothes
in its highly-automated European factories is certainly higher than it would
be to buy them from off-shore suppliers, but the savings in inventory costs
and discounts more than compensate for this and give the company a unique
positioning in its market. The Inditex group now claims to be one of the
largest fashion retailers in the world.