Page 202 - DMGT550_RETAIL_MANAGEMENT

Unit 11: Retail Pricing and Communication Mix

If you sell at X dollars and buy at Y dollars, as long as your operating and financial costs Notes
are lower than the gross margin i.e. the difference between X (selling price) and Y (cost),
you should be making money. And what with retailers running around with gross margins
of 50-60 per cent (that is more than half of their retail price), making money should be no
problem, right?
Wrong. In highly perishable goods such as fashion products that are susceptible to seasons,
gross margin is meaningless if the product does not sell as planned. In simple terms, you
make more money if you sell more, even at a lower margin 30 per cent on sales of ` 100 is
better than 60 per cent on ` 10. Given the unpredictability in fashion, it is quite likely that
you will end up selling a large proportion of your products at a discount. For many
retailers, 35-40 per cent of the total merchandise being sold at hefty discounts is quite the
norm.
Imagine fashion clothing to be like vegetables, or bread. On the first day it looks very
appetising and has lots of buyers. By the second and third day it starts to look stale, but
customers may still pick it up, maybe at lower prices. By the time a week is over, the
retailer is probably better off giving the bread away just to clear up space.
Working with him in the last few years, Inditex Chief Executive José María Castellano is
quoted as saying, “This business is all about reducing response time. In fashion, stock is
like food. It goes bad quick.”
Zara, which contributes around 80 per cent of group sales, concentrates on three winning
formulae to bake its fresh fashions:
Short Lead Time = More fashionable clothes
Lower quantities = Scarce supply
More styles = More choice, and more chances of hitting it right

Short Lead Times: Keeping Up With Fashion
By focussing on shorter response times, the company ensures that its stores are able to
carry clothes that the consumers want at that time. Zara can move from identifying a trend
to having clothes in its stores within 30 days. That means that Zara can quickly identify
and catch a winning fashion trend, while its competitors are struggling to catch up. Catching
fashion while it is hot is a clear recipe for better margins with more sales happening at full
prices and fewer discounts. In comparison, most retailers of comparable size or even
smaller, work on timelines that stretch into 4-12 months. Thus, most retailers try to forecast
what and how much its customers might buy many months in the future, while Zara
moves in step with its customers.
A very large design team based in Coruña in North West Spain is busy throughout the
year, identifying the prevalent fashion trends, and designing styles to match the trends.
Trend identification comes through constant research not just traditional consumer market
research, but a daily stream of emails and phone calls from the stores to head office.
Unlike other retailers, Zara’s machinery can react to the report immediately and produce
a response in terms of a new style or a modification within 2-4 weeks. Many other retailers
have such long supply chain lead times that for them it would seem a lost cause for them
to even try and respond to a sales report.
Reducing Risks
By reducing the quantity manufactured in each style, Zara not only reduces its exposure to
any single product but also creates an artificial scarcity. As with all things fashionable, the
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