Zara’s Fast-Fashion Edge

Zara’s Fast-Fashion Edge

By Susan Berfield and Manuel Baigorri November 14, 2013

Arteixo is a small town in northwestern Spain near the Atlantic, surrounded by fishing villages. In its center, a glass building sits amid acres of green lawn. It’s the headquarters of Zara, the company that introduced the idea of fast fashion some two decades ago, then developed a highly centralized and often studied—but rarely duplicated—design, manufacturing, and distribution system. The building is officially known as the Cube. Those who work there think of it as the brain.The Cube is central command for a fashion empire built on an unconventional idea: speed and responsiveness are more important than cost. Zara is renowned for its ability to deliver new clothes to stores quickly and in small batches. Twice a week, at precise times, store managers order clothes, and twice a week, on schedule, new garments arrive. To achieve this, Zara controls more of its manufacturing than do most retailers: About half its clothes are made in Spain or nearby countries. For Zara, its supply chain is its competitive advantage.

Zara’s expanding global reach could finally put its Iberian Peninsula-based ecosystem to the test. Spain has always been its biggest market. But in 2013, China surpassed France to become its second-largest in terms of the number of stores (142). Expansion in China offers challenges for every retailer. And it could put the Spanish clothier in a singular predicament, because Zara is a global company that doesn’t act locally. “The secret to their success has been centralization,” says Felipe Caro, an associate professor at the University of California at Los Angeles’s Anderson School of Management and a business adviser to the company. “They can make decisions in a very coordinated manner.” Zara’s ability to control its inventory from Arteixo is a key piece of its business model. “As soon as they decide to localize, to have two brains, one in Spain and one in China, it will be a different Zara,” Caro says.

Just outside the Cube is the company’s 5 million-square-foot main distribution center. The company produces about 450 million items a year for its 1,770 stores in 86 countries. Some 150 million garments pass through the center to be inspected and sorted, according to Zara, which declined to make senior executives available for interviews. Whether a shirt is made in Portugal or Morocco, in China or Bangladesh, it still goes to Spain before being shipped to a store. Beyond the distribution center are the 11 Zara-owned factories. Every shirt, sweater, and dress made in them is sent directly to the distribution center via an automated underground monorail. There are 124 miles of track. Across the surrounding Galicia region are subcontractors, some of which have worked for the company since Amancio Ortega founded it in 1975.

Now 77 and the world’s third-richest person, Ortega served as chairman of Inditex (ITX:SM), the company he built around Zara, until 2011. Inditex, which includes seven other brands, has become the world’s largest clothing retailer. Last year its 6,009 stores had sales of almost €16 billion ($21.4 billion); Zara accounted for €10.5 billion of that. Inditex will open more than 400 stores in 2013—about 110 of them Zaras—according to the company. It’s expected to open at least that many in 2014.

Ortega still keeps a desk at the front of the main room in the Cube, amid the designers, buyers, planners, and marketers. There, information about what’s selling, and what isn’t, flows in from store managers around the world. This allows designers to make quick changes to garments, buyers to order more (but not too much more—exclusivity sells) of a certain coat, and planners to decide what items to cull from a store.

Zara’s factories in Spain and those it uses in Portugal, Morocco, and Turkey produce its trendiest clothes, often riffs on the latest fashion trends. They account for about half of Zara’s inventory, according to the company. Its more basic T-shirts, sweaters, and the like are ordered on a traditional schedule, about six months in advance, from factories in Asia, where labor costs are often cheaper, then sent by ship to Spain.

Zara executives have invested in high-tech equipment and extra capacity that allows their factories to accommodate sudden production increases or changes—something few Asian manufacturers would be able to do. At the beginning of a season, a typical retailer would have placed orders for at least 80 percent of the garments it will offer, according to a Harvard Business School case study on Zara. The chain selects only about 50 percent of its designs that far in advance. Change doesn’t disrupt the system; it’s part of the system.

Once new items have been inspected, sorted, tagged with prices, and hung on racks or folded, they’re packed overnight, loaded onto trucks, and taken directly to a store or the airport. The trucks and planes run on established schedules, delivering clothes to most stores within 48 hours.

Zara can afford the extra labor and shipping costs because it doesn’t have to discount as much as its competitors. Nor does it advertise. Zara gets 85 percent of the full price on its clothes, while the industry average is 60 percent to 70 percent, according to the Harvard case study. Unsold items account for less than 10 percent of its stock, compared with an industry average of 17 percent to 20 percent. “Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost,” says Kasra Ferdows, one of the authors of the Harvard study and a professor at Georgetown University’s McDonough School of Business. “Zara understands that if they don’t have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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