Page 203 - DMGT550_RETAIL_MANAGEMENT

Retail Management

Notes less its availability, the more desirable the object becomes. When Zara opened its first
store on London’s Regent Street, shoppers are said to have browsed without shopping,
thinking that they would come back to buy during a sale. Then the store assistants explained
that the styles were changed every week, and the style liked by the customer would very
likely not be available later. Subsequently, Regent Street became one of Zara’s most
profitable stores and more stores opened in the UK.
The added benefit of lower quantities is that if a style does not work well, there is not
much to be disposed when the season-end sale does happen. The result is that Zara discounts
only about 18 per cent of its products, roughly half the levels of competitors.

Leadership in Numbers
Thirdly, instead of more quantities per style, Zara produces more styles, roughly 12,000 a
year. Thus, even if a style sells out very quickly, there are new styles already waiting to
take up the space.
Zara can offer more choices in more current fashions than many of its competitors. It
delivers merchandise to its stores twice a week, and since re-orders are rare the stores look
fresh every 3-4 days. Fresh produce, moving in step with the fashion trend and updated
frequently the ingredients are just right to create the sweet smell of success.
But how does Zara achieve its three key success factors, which would be a nightmare for
most other retailers: of producing small quantities of numerous styles in short time spans?
Let us look at the mechanisms that enable Zara to deliver on these parameters as well as
some unique aspects of the retailer’s business model.

If you thought that it is not possible to produce all this success in the same kind of set-up
as other retailers, and that it also has to cost something, you would be absolutely correct
on both counts. Zara follows a structure that is more closely controlled than most other
retailers, and pays further by having the various business elements in close proximity to
each other, around its headquarters in Spain.
Ownership and Control of Production
For one, most other retailers (like the American chain Gap and the Swedish retailer Hennes
& Mauritz) completely outsource their production to factories around the world, many of
them in low cost Asian countries. In contrast, it is estimated that 80 per cent of Zara’s
production is carried out in Europe, much of it within a small radius of its headquarters in
Spain. In fact, almost half of its production is in owned or closely-controlled facilities.
While this gives Zara a tremendous amount of flexibility and control, it does have to
contend with higher people costs, averaging 17-20 times the costs in Asia.
Counter-intuitively Inditex has also gone the route of owning capital-intensive
manufacturing facilities in Spain. In fact, it is a vertically integrated group, with up-to-
date equipment for fabric dyeing and processing, cutting and garment finishing. Greige
(undyed fabric) is more of a commodity and is sourced from Spain, the Far East, India, and
Morocco. By retaining control over the dyeing and processing areas, Inditex has fabric-
processing capacity available “on demand” to provide the correct fabrics for new styles. It
also does not own the labour-intensive process of garment stitching, but controls it through
a network of subcontracted workshops in Spain and Portugal.
Supercharged Product Development
Design and product development is a highly people-intensive process, too. The heavy
creative workload of 1,000 new styles every month is managed by a design and
development team of over 200 people, all based in Spain, each person in effect producing
around 60 styles in a year (or 1-2 styles a week). Contd....

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