T HIRD EYESIGHT
© D evangshu Dutta, 2002
@ the speed of fashion
By Devangshu Dutta
The middle-aged mother
buys clothes at the Zara
chain because they are
cheap, while her daughter
aged in the mid-20s buys
Zara clothing because it is
fashionable. Clearly, Zara is
riding two of the winning retail
trends - being in fashion and low
prices - and making a very
effective combination out of it.
Much talked about, especially since
its parent company's IPO in 2001,
often admired, sometimes reviled, but
hardly ever ignored, Zara has been an
interesting case study for many other
retailers and fashion brands around the
world. We set out to understand what are
the winning elements in Zara's business
model, and probably only scratched the
surface of the key to their success.
Here's the quick-n-dirty on Zara's recipe
Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated performers in a soft retail market in recent years. When Inditex offered a 23 per cent stake to the public in 2001, the issue was over-subscribed 26 times raising Euro2.1 billion for the company. What makes Inditex so tasty? Well, for a start, it seemed to show higher profit margins than comparable retailers, and secondly, the trend seemed sustainable. Good bet for most investors.
The Awkward Factor in the Profitability Formula
Buy low, sell high. Buy on credit, sell on cash. Retail profitability often seems like a no-brainer.
If you sell at X dollars and buy at Y dollars, as long as your operating and financial costs 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 Rs. 100 is better than 60 per cent on Rs. 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 Amancio Ortega Gaona, the founder of Inditex,
thought that consumers would regard clothes as a
perishable commodity just like yogurt, bread or fish
to be consumed quickly, rather than stored in
cupboards, and he has gone about building a retail
business that provides “freshly baked clothes”.
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
Short Lead Time = More fashionable clothes
Lower quantities = Scarce supply
More styles = More choice, and more chances of hitting it
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...