Zara, the fast fashion Spanish retailer, has a unique supply chain management model, yet surprisingly one of the most successful. Joumana Jallad Shanshal examines why.

Zara has done it again. In April 2006, the company owned by the Inditex Group, took the lead in fast fashion apparel away from giant Swedish retailer, Hennes & Mauritz (H&M) by posting $8.15 billion in sales in 2005, compared to H&M’s $7.87 billion. Yet, even though Zara bucked the trend to practically outsource production to Asia, embraced by the big retailers, it still managed to post record earnings and double-digit sales growth by keeping all its factories close to home. What’s the main driver of the Coruna-based retailer’s success? Zara has nimble fingers. The company’s quick response is almost unmatched in the retail world and its efficient distribution system is the main driver of growth.

The name of the game is speed Though Zara’s factories are located in Europe, where labor costs are considerably higher than in Asia, it is precisely that fact that enables the company to capitalize on quick inventory turnover.  Its vertically integrated supply chain leverages a design team of 200 that can take a concept from design to the store shelves in weeks. Zara, which recently opened its 2,000th store, can originate design and have finished goods within four to five weeks for entirely new designs and needs two weeks for restocking or modifying existing products, compared to six months for an average retailer.

The Spanish retailer’s centralized distribution network allows it to produce batches of clothing in small quantities and thus keep churning out merchandise in its stores. And that means, the company can actually hedge its bet in a seasonal downturn but also capitalize on the success of a product.  By maximizing its hits and minimizing the times it misses the boat, Zara can agilely manage its inventory, for instance during unseasonably hot winters, to contain profit slashing markdowns, the kiss of death for retailers.

Its fast production chain also removes a significant amount of risk that comes with fashion forecasting. So Zara finds itself in the “blessed” position of not really having to take a bet on fashion as much as follow it.  

And the company has had a knack at getting fashion just right. As the company’s stores get replenished with new and coveted “runway” looks there is a perceived “sense of urgency” on the part of customers to get their hands on the goods before they fly off the shelves. Zara customers keep coming back for more. And many repeat shoppers go as far as waiting for new stock - adding to the retailer’s appeal and emboldening its brand loyalty.

Expansion – the double-edged sword
With stores in all the major international cities and in locations that have started to rival high end fashion houses, the company plans to keep expanding, a strategy which has so far paid off. A 2004 Bain & Co. study found that fast-fashion outlets in Spain and Britain posted average double-digit sales growth, compared with 4% growth in overall retail sales in those countries. But Zara is facing some strategic issues. Its cost structure is on the rise and reaching far-away markets continues to strain the company’s beautifully-oiled logistics network and create some bottlenecks. Some researchers argue that the company needs to more fully penetrate existing markets before entering into new ones (though Zara has so far not closed a single store).

They also believe that the company’s inventory management should take into account the cultural differences of the various regions it operates in. That would mean customization of the company’s product lines to enable different goods for different regions or even some merchandize to be redirected to the right market, something the company does not fully implement currently.  

One market Zara has not yet penetrated with full force is that of the U.S.  Today its share of the American apparel market is only at 1% and many researchers believe that without that market Zara cannot continue its strong growth. And to penetrate the U.S. market the company would have to make significant changes and attribute more resources because of the size of the market.  Some analysts argue that the U.S. market is highly competitive and price sensitive, and thus believe it is not a priority for Zara.

One thing that is for sure - the company has kept a tight handle on its franchise.  In general the company has preferred opening company-managed stores or joint ventures.  But in the case of franchises the company retains a significant control of the brand, even offering extensive services to its partners in HR, logistics training, free of charge. Zara also retains the option to buy out partners if problems occur and retains the option to open more company owned stores.

Zara has purchasing offices in Barcelona and Hong Kong.  It sources fabric and other inputs from outside suppliers. But it leverages the group’s fully-owned factories in the dyeing, patterning and finishing part of the chain.  It also uses the group’s internal manufacturing factories, which apply just-in-time (JIT) production. This gives Zara a competitive advantage in terms of cost but most importantly control.  One case study shows that Zara’s business model makes it more profitable then any other retailer. Since retailers get almost half the price of the commodity sold, by playing both the role of the manufacturer and the role of the retailer, Zara is definitely much more profitable than the average retailer with similar posted prices. Its 23% return on investment is considered high in the industry.

Marching to a different beat
Also setting it apart is the company’s zero advertising policy, compared to fashion houses’ big advertising budgets, preferring to keep reinvesting in the business., Little is known of Zara’s owner, founder, and chairman of Inditex, Amancio Ortega Gaona, , who now tops the world’s 100 richest list. He sold 14% of his shares, netting more than $1 billion, and still retains the remaining 61% of the company which is estimated to be worth $5.5 billion. Mr. Ortega started his first lingerie production firm in 1963 which grew into the first Zara store in 1975. Rumor has it that he chose the name Zara as an abbreviation for Zaragoza, the Spanish town. Very quickly, Zara became a hit in the market and the company posted an average 39% growth year on year from 1994 to 1999 as the company began to expand. The company’s market debut in 2000 was 53 times oversubscribed.

Today, the Inditex Group consists of seven other retail brands including Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Kiddy’s Class. Most recently posting Inditex’s net sales reached €5.7 billion for the first nine months of 2006, a 22% growth from the same period last year. And Zara continues to account for 80% of the group’s revenue. The company has had a knack for getting it right.