Zara

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Prepared by Professor Nelson Fraiman
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What is Zara
about?
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2006 Revenue (million US$)
$8,705
$7,065

$2,521

Benetton Zara Li & Fung

 8.3%  21%  22%

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 2006 Net Profit (million US$)
$858

$282

$165

Benetton Zara Li & Fung

 12%  25%  23% 10

 2006 Net Margin
12.1%

6.5%

3.2%

Benetton Zara Li & Fung

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Number of Stores (2006)

5000

990

Benetton Zara

 138
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 Where are Zara stores?
SPAIN 286
FRANCE 98
GERMANY 53
UNITED KINGDOM 50
PORTUGAL 48
ITALY 46
MEXICO 44
GREECE 41
USA 24
JAPAN 23
BELGIUM 20
BRAZIL 19
SAUDI ARABIA 18 There are 990 stores in 63 countries;
TURKEY
ISRAEL
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71% of stores are outside Spain.
CANADA 14
POLAND 13
RUSSIA 12
AUSTRIA 10
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 Inditex Sales by Region
FY 2006 FY 2005

International expansion: More than 60% of Inditex’s sales (and

more than 72% of Zara’s Sales) comes from outside Spain.

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 Inventory to Sales Ratio

Zara

Matalan

H&M

Gap

6 8 10 12 14

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 Working Capital as
a percentage of sales
40% 38%

30%

20%

10% 7%
4%

0%

-10% -7%
Benetton Hennes & Gap Inditex
Mauritz

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 Some quotes….
“Possibly the most innovative and devastating
retailer in the world”—
Daniel Piette, LVMH Fashion Director

“Floating on air”—the Economist

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 Zara Tidbits
 Amancio Ortega quit his sales job to start the
business with just 5,000 pesetas ($83)
 Founded in 1963 as a maker of ladies’ lingerie in
the Galician town of La Coruña
 Today, 71-year-old founder and majority
shareholder, Mr Ortega, is Spain’s richest man.

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 Zara
 Flagship enterprise of Inditex (2001 IPO)
 Sales of 7 billion dollars in 2006
 HQ and central distribution in La Coruña
(Galicia – northwestern corner of Spain)
 Women’s, men’s and children’s wear
 Over 1021 stores in 63 countries

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 Zara and Mango
 Spanish apparel retailers
 Both tap into global fashion trends:
– Global appeal of catwalk fashion
– International youth and fashion culture
– Value proposition in rich countries; aspirational
fashion in poorer countries – the unserved tier
combining middle-market pricing with high
fashion content and novelty

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Zara: Product Position

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 The Zara Timeline – compared the
traditional timeline

ZARA Traditional
 6 months ahead:  6 months ahead: 45-
15-20% committed 60% committed
 Start of season:  Start of season: 80-
50-60% committed 100% committed
 In-season response: 0-
 In-season response:
20%
45-50%
 End of season sale: 30-
 End of season sale:
40%
15-20%

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Production Commitment and Markdown
6-month Sales%
Pre-season Not at full
Start of season In-season price

Traditional
Industry 45-60% 80-100% + 0-20% 30-40%
Model

Advertisement Advertisement
+
Markdowns

Zara 15-25% 50-60% + 40-50% 15-20%

Fresh items
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 The Zara Model…..
 Design-driven; 11,000 styles per year
 Partial vertical integration, with owned
factories; owned factory production is reserved
85% for IN-SEASON production
 Tight coupling of market data and production
decisions in-season; cycle CAN be as short as 2
weeks from design to store delivery of the
completed garment

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 …..The Zara Model….
 Twice-weekly shipments of new product to all
stores from central distribution
 In-season production in response to demand is
limited by fabric on hand
 Small batch production creates a scarcity
premium and encourages impulse purchase
 Customers expect rapid inventory turnover,
learn to shop frequently (17 times per year)

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 ……The Zara Model…..
 Store design is uniform and upscale; stores are
located on premium shopping streets
 Pricing is market-based, not cost-based –
premium pricing in higher cost markets
 Powerful word of mouth supports store growth
without advertising (usually about 3-4% of
sales)
 Growth has been organic from Spain and EU,
outward

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 Relative Wage Levels:
Textile & Clothing

$30.00

$25.00
Hourly Wage (US$)

13.6

$20.00 10.12

$15.00
6.79

$10.00 15.81
3.7 12.97

$5.00 2.12 8.49

1.36 4.51
$0.39 0.43 2.98
1.76 1.89
$0.60 0.62
$0.00
India China Tunisia Morocco Hungary Portugal Spain USA Italy

Textiles Clothing

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To get a sense of the order of magnitude of wage variance:

 Clothing: hourly labor costs in U.S. $:

 India-- $0.39
 China -- $0.43
 Morocco -- $1.36
 Spain -- $6.79
 USA -- $10.12
Source: European Commission 1998 Statistics, Textile and Clothing Time Labor Costs

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Pricing Strategy

Pricing Strategy

200

150 170 200

140
100 110
100
50

0
Spain Rest of Northern Americas Japan
Europe Europe

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 Economics of Scarcity
 Highten the sense of now-or-never
– Supply only handful of dresses at a time
– Rapid design changes (11,000/yr)
– Don’t over-saturate the market
– Typical shelf life– couple of weeks
– Change the location of key items
 Stores are not flooded with garments
 A typical Zara customer visits the store 17
times/yr (compared to 4-5 for Gap)
Friends don’t tell friends about Zara

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 No advertising?
 Why?
– Don’t need to. Why spoil a good thing?
– We do advertise, but don’t like to pay for them
(free press is plenty)
– High speed fashion not amenable to ad
campaigns
 by the time an ad reaches audience, dress may be
sold-out or obsolete

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 JIT, really
 Most JIT system (even Toyota’s) focus on
manufacturing
 Zara has a true just-in-time system
– From customer to design, production, and
fabric manufacturing
– Customer’s pull not designer’s push drives the
system

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 Zara’s Strategy
A Passion for Fashion  Flexibility
– Volume, design, fabric,
 Global Reach color, manufacturing
 Vertical Integration  Economics of Scarcity
– Backward Integration  Efficient Knowledge
 Design, Fabric, Coloring Management
– Forward Integration  No advertising
 Retailing, market
research  Uniformity of Store
Format
 Supply Chain at the
 Two-pronged
core of their strategy
manufacturing strategy
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 Lessons from Zara
 Focus on
– Design
– Fashion
– New material
– Knowing your customers
– Response to market
– Flexibility
– Productivity

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 … Lessons from Zara
 Rethink the entire value chain
– Reduction in mark-down can more than
make up for the increase in labor cost
– Planned shortages can induce more future
demand
– Good store location, layout and product
display can be a substitute for advertising
– Faster response eliminates inventory risks
– Excess capacity pays for itself by faster
response
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 Questions for Zara

 How to continue to manage the

sourcing/distribution/fashion equation as
Zara grows
 Related: growth, pricing and marketing
strategies
 Can others duplicate their models or
improve on them? Does the formula
dilute?

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 Summary
 As of the moment, Zara has got it right

 Supplychain and logistics management in

support of a winning, design-based
marketing strategy.

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