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Zara

As one report says about Zara, “……Inditex’s (70% of their volume is Zara) segmentation of the supply chain (Inditex maintains control of fabric processing and garment finishing, and outsources the labor-intensive garment sewing operation) is very unique and provides a second key differentiating factor for its efficient supply chain”.

It gores on to add, “if the early stages of their assortment are poorly received, they can respond quickly by shifting their mix in favor of stronger sellers. In contrast, most retailers are forced to respond to merchandising mis-steps with an entirely downstream response (i.e., increased markdowns or remedial advertising), which are unavoidable costs associated with the traditional supply chain model. Inditex sources 70% of its goods from within Europe (including Turkey and Morocco), which adds to the company’s flexibility. US retailers are relatively more disadvantaged (manufacturing facilities are not as close to stores), which is why they are unlikely to have cycle times as low as those of Zara.”

From the Columbia conference on globalization (photo above) I took the following notes:Globalizing Retailing Concepts: The Case for Wal-Mart, Benetton, and Zara Bruce Greenwald, Professor, Too many organizations are trying to make money telling you how you can repeat the “ZARA Model”. I’ve always thought that was a bunch of baloney. So does Professor Bruce Greenwald of the Columbia Business School. Here are notes from his quite amazing talk.

    He reviewed a history of marketing and product failures, ironically zeroing in on the introduction of the PC by IBM in 1981, when I was in IBM, and positioned failures by DEC, HP and, frankly, even IBM. He did this to set up his talk about giving customers what they want.

    Retailers have three elements to them....merchandising, operations and location decisions. He argues Zara succeeds because its focus is on operations, not merchandising. They substituted operations expertise for merchandising expertise. They started as apparel manufacturers focused on operations rather than having strong design or merchandising tendencies. Wal-Mart, GAP, Benetton and others have failed to catch on globally because they could not export their merchandising. He argued that it is the operations side that can be globalized, not the merchandising side of the enterprise.

    He credits Zara’s success to these four factors:

    Adaptive Model....decisions are not made at corporate. This is what has made them the world’s only successful global retailer. They propose a design, they send a description of it to their store managers, the store manager decides what to order, they order less than Zara would like but if it works, they make a lot more quickly and if it fails, they stop quickly. (this reminds of me of Mackey McDonald at VF saying once, “it is OK to fail, just fail small and fail early”).

    Generic Stores.....white boxes without all the polished wood of a Gap and logos al over the place

    Functional low cost sales staff....they aren’t all running around in the same logo shirt, no cool people basically

    Trail/Error Merchandise Selection....(see Adaptive Model above).

    Andrew Grossman, CEO of GAV, said on my panel, “What I admire about Zara is their ability to charge a fair price for what they sell. They do this by creating a beautiful product as quickly as possible then bring it to a customer who has money to spend and knows they are getting a fair price and having a great shopping experience. Zara has built a huge barrier to entry by anyone else in their space”.

In a Citygroup report on JC Penney, they wrote:

Zara’s quick-response manufacturing model reduces its pre-season stock commitment substantially vs. the industry average.  More specifically, as the season starts, Zara’s commitment is generally 50% of anticipated sales, vs. over 80% for a typically competitor ..... This means that 40%-50% of what Zara manufactures is made in-season vs. less than 20% for typical competitors.  The result of Zara’s more flexible approach is that its assortment can be constantly refreshed throughout the season.  Notably, if the early stages of the assortment are poorly received, Zara can respond quickly by shifting its mix in favor of stronger sellers.  In contrast, most retailers are forced to respond to merchandising mis-steps with an entirely downstream response (i.e., increased markdowns or remedial advertising), which are unavoidable costs associated with the traditional supply chain model. Inditex sources 70% of its goods from within Europe (including Turkey and Morocco), which we believe adds to the company’s flexibility.  In this respect, we believe that J.C. Penney is relatively more disadvantaged (manufacturing facilities are not as close to stores), which is why the company is unlikely to have cycle times as low as those of Zara.”

Columbia Business School

Consider H&M and Wal-Mart. Wal-Mart has been universally unsuccessful overseas because of a lack of local economies of scale. If someone else has that, you’re at a disadvantage.

Zara looks like the only successful global retailer. Why? They have an adaptive model instead of traditional merchandising. Theirs consists purely of merchandise selection. They propose designs at headquarters and send descriptions of these to a store. Then, the local store manager decides what to order. Headquarters ships a trial order, usually smaller than that requested. They produce only the ones that work for the area where they work.

Zara’s model uses trial and error and operational flexibility instead of ideological merchandising judgment. This is a revolutionary change. It’s asking the Gap to stop being the Gap.

The first lesson to take from their success, versus the failure of others, is that the operations side can be globalized, but the merchandising side cannot. Centralized decision-making is ideological and won’t work. By contrast, improved coordination combined with fast response does work.

The first shot is deferred to the local firm, with quick follow-up. In this new model, merchandising expertise is replaced by operations expertise, centralized decision-making by decentralized order generation, and image staging by generic staging of stores.

On a one-country by one-country basis, Zara can be matched by traditional retailers. The low-cost advantages of going to China and India, which Zara doesn’t have, can help the traditional retailer do well in another country if it has the discipline to be focused locally, with all the advantages of economies of scale and local adaptations. However, if they do not recognize that only the operations side (and not the merchandising side) can be globalized, traditional retailers would be well advised to give up global ambitions.

In sum, a traditional retailer with a well-developed concept may do as well in a single country, but rarely on a global scale.

Don’t try to globalize using a traditional retailing concept. Centralized decision-making is ideological decision-making and it’s not going to work. 

Other notes from the meeting follow:

ZARA....The Truth Revealed.......finally