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Zara Fast Fashion
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ZARA: FAST FASHION
RETAIL MANAGEMENTSECTION AGROUP 6
AGENDA
GLOBAL APPAREL INDUSTRY
INDITEX, ZARA and ITS BUSINESS SYSTEM
UNDERSTAND THE VALUE CHAIN – PORTER’S MODEL
ZARA’s INTERNATIONAL EXPANSION
RECOMMENDATIONS ( MCKINSEY FRAMEWORK)
CASE OBJECTIVEAnalyse Inditex and Zara’s International Expansion and provide recommendations for sustainable growth and Future Geographic
Focus
GLOBAL APPAREL INDUSTRY
PRODUCTION
• 30% of world production is exported – half from developing countries – reflect cheap labour and inputs
• China became export powerhouse and major supplier for Japan• Turkey, North Africa - major suppliers for EU• Mexico and Caribbean basin - major suppliers for US
CROSS BORDER INTERMEDIATION
• Trading companies play vital role for smooth flow of apparels from factories to retailers E.g. Li & Fung in Hong Kong
• Branded marketers – outsourced production E.g. Liz Claiborne• Branded Manufacturers – sold products under their own brand
name E.g. US based VF Corporation
GLOBAL APPAREL INDUSTRY INDITEX and ZARA
GLOBAL APPAREL INDUSTRY
MARKETS and CONSUMERS
• 2000: Retail spending on apparels was 900 bn euros• Europe 34%, US 29%, Asia 23% of market• Expenditure on apparel was decreasing as income increased• Local variation in customer attributes and preferences
• Germans- Price sensitive, British- social affinity, French- variety/quality
• 5 ways of retailer Expansion• Choose a “sliver” of value instead of competing across entire
value chain• Emphasize partnering• Investing in brand• Minimize tangible investment• Arbitrage international factor price difference
GLOBAL APPAREL INDUSTRY INDITEX and ZARA
GLOBAL APPAREL INDUSTRY
RETAILING
• Major role shaping imports into developed countries• Large Apparels Retailers promote Quick Response reducing Forecast
Errors and inventory risks, cycle times• Retailing activity remained local but fashion retail was globalised
GLOBAL APPAREL INDUSTRY INDITEX and ZARA
COMPETITOR POSITIONING
FASHION - FASHION +
PRICE-
PRICE+
ZARAH&M
GAP
BENETTON
• Amancio Ortega started clothing factories
1963• Zara first
opened in La Coruna
1975• Inditex – holding
company atop Zara
1985
Integrate forward to improve
manufacturing/ retailing interface
In 1985, Jose Maria Castellano
Rios joined – Importance to computers to
enable business
INDITEX and ZARA : AN OVERVIEW
Operation
• Manufacturing base in Galicia which was strategically important in terms of transport cost• Manufactured and sold apparel, footwear and accessories for women, men and children through 6 retail chains• 2001: Operated 1284 stores outside Spain, employed 26724 people(80% retail sales, 8.5% manufacturing, reminder for logistics activities) and selling area was 659400 sq meters
Financials
• Return on Equity was stable and oscillated around 22% - 25% mark ; Net margin was stable and was in the 9-11% range• The asset turnover ratio was also consistently > 1 with stable Return on Assets around 11-13 %
INDITEX and ZARA GLOBAL APPAREL INDUSTRY
ZARA BUSINESS SYSTEMDesign
Sourcing & Manufactur
ing
Distribution
Retailing
• Flat organization • Design team : design, tracking
consumer preferences – bridge merchandising & production back end
Design
• Sourced ‘gray’ fabric – max flexibility – from Comditel (100% subsidiary)
• IN-HOUSE (40%)• Cutting done by Inditex owned
workshops• Sewing outsourced
Manufacture & Sourcing
• Own centralized Distribution System at Arteixo
• Speculations about being subject to diseconomies of scale – 2nd centre at Zaragoza
Distribution
• Decentralized store management• Managers determine products to sell
and return• .03% on advertising
Retailing
• Fashion sensitive products manufactured internally•Vertically integrated – bull whip effect reduced •Cycle : 4-5 weeks for design and have finished goods in stores ( Industry : 6 months for design, 3 months for manufac)
INDITEX and ZARA GLOBAL APPAREL INDUSTRY
PROS & CONS OF THE BUSINESS SYSTEM
Cost savings by centralized DC Capacity problems with only one DC Lack of decentralization – farther from each
market ; requires more scheduling and control
INDITEX and ZARA GLOBAL APPAREL INDUSTRY
DISTRIBUTION
RETAILING
Flexibility using JVs Store Standardisation consistent image & low cost
Low advertising – no communication to customers
Store Mngrs gather info at POS Flat Structure Continuous tracking of Customer
Preferences Presentation of items in key stores
Higher Staff – Higher labour costs
DESIGN
SOURCING and MANUFACTURING
In –house 40% ;better control; short lead time Dyeing and Cutting – Core Activity done in-house
Low advertising – no communication to customers
FIRM BASED VALUE CHAIN
•Store places order twice a week to headquarter – hard deadline – •No inventory check on store comp•Handheld for newly available – linked to IS
•Shipping clothes involves Commercials at La Coruna• Determine store to be supplied – future SKU production with product manager
•11000 new items/year•Dyeing, Cutting – ZARA owned factories•Sewing – small workshops in Galicia & North Portugal•No forecasting- rely on commercials
ORDERING FULFILMENT DESIGN & MANUFAC
VALUE CHAIN ANALYSIS GLOBAL APPAREL INDUSTRY
ZARA’s COMPETETIVE ADVANTAGE
Vertical Integration• Merchandising strategy: Scarcity and Opportunity; Buy
now, not later• Fast Fashion : Up-to-date designs
Quick Response to Demand (Pull System)
• Purpose: to provide information to designers quickly
Small Batch Production
High Product Turnover
Central Distribution Center / Strong IT System• Place to move merchandise• Minimizes lead time• Shipped by time zones
VALUE CHAIN ANALYSIS GLOBAL APPAREL INDUSTRY
Efficient supply chain (primary
activities) and fast response
to the changing market
INTERNATIONAL EXPANSION
Market Selection• Oil Stain Technique : Opened operations in countries resembling
Spain in terms of economic development• Macro Analysis: Macro variables tariffs, tax,legal costs, salaries, real
estate• Micro Analysis: Sector specific – local demand, channels,
competitors, store locations• It used Market price to forecast future prices of apparels rather then
cost based approachMarket Entry • Company Owned Mode: High Growth and low business risk markets
with high resource availability• Franchise Mode: Small, Risky and culturally differentiated market
and administrative barriers• Joint Venture Mode: Market where it was difficult to obtain retail
space E.g. Japan (Bigi) and Germany(Otto Versand) Market• No acquiring foreign chains – overlapping networks, physical and
cultural impediments
INTERNATIONAL EXPANSION GLOBAL APPAREL INDUSTRY
INTERNATIONAL EXPANSION
Marketing• Flagship Store opened on a pilot basis - Marketing mix refined on this
basis - replicated throughout country• Pricing: Market Price + Difference in supply chain cost from Spain• Position
• Positioned differently in emerging and developed countries based on income difference
• Store format in different countries were also different due to position difference
• Promotion: No major investment in advertising and promotional activities
• Product: Difference in product features based on cultural and climateGrowth Options
• Limited in Spain• Italy market presented the maximum growth potential as the
customers spent maximum euros on apparels (1000 Euros viz-a-viz 600 Euros in Spain)
• Other growth opportunity present in North America and Asia
INTERNATIONAL EXPANSION GLOBAL APPAREL INDUSTRY
MCKINSEY RECOMMENDATIONS TO RETAILERS
1. CHOOSE YOUR SLIVER
2. GET COMFORTABLE PARTNERING
3. INVEST IN INTANGIBLE ASSETS
DESIGN : In houseSOURCING : Fully outsourcedMANUFACTURING : Partly outsourcedLOGISTICS :Partly OutsourcedSALES : Fully OutsourcedDISTRIBUTION : In house
Long term relations with Suppliers - ZARA ControlFranchise systems and JV – Controlled Partnerships
BRAND : Low advertising especially in foreign marketsTECHNOLOGY : Strong Investments; JIT with ToyotaPEOPLE: Low heirarchiy; people given opportunities
MCKINSEY FRAMEWORK GLOBAL APPAREL INDUSTRY
MCKINSEY RECOMMENDATIONS TO RETAILERS
4. KEEP CAPITAL REQUIREMENTS LOW
OPERATION IMPACT
Central DC – direct shipping to stores
Short lead times; Low storage costs
Intense market research – store manager
involved in product development
Low failure rates
Long term leases; Different business
modes for Expansion
Low financial strain
Flat heirarchy Flexibility and quicker communication
Production of price sensitive items
outsourced
Low production and selling prices
MCKINSEY FRAMEWORK GLOBAL APPAREL INDUSTRY
MCKINSEY RECOMMENDATIONS TO RETAILERS
5. EXPLOIT OPPORTUNITIES TO ARBITRAGE
MCKINSEY FRAMEWORK GLOBAL APPAREL INDUSTRY
RECOMMENDATIONS
Short-Term Solution: Expand in Europe
• Focus on Italy (63 Billion Euro Market)• Implement “Oil Stain” expansion method
Long-Term Solution: Expand Outside of Europe• Establish operations in North America ; North American Distribution
Center (Mexico)• Asian Expansion• Increase stores drastically to enhance presence in people’s mind
Focus on Marketing
• Marketing through Internet • Combined with E-commerce for US market
RECOMMEN-DATIONS GLOBAL APPAREL INDUSTRY
THANK YOU