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INDITEX: Lessons in “Fast Fashion”
GER
Last modified on December 8, 2015 at 6:54 am
The global fashion retailer Inditex, best known for its Zara brand, continues to chart the course of “fast fashion” through the intimate alignment between its operating and business models.

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On December 17, 2015, GER commented on INDITEX: Lessons in “Fast Fashion” :

Yes, I agree that such a state of the art operating model must come at a cost. I am aware off two key costs savings that allow Inditex to achieve this:
1) Inditex does not advertise and instead relies on the strength of its operating and business model to grow brand awareness. In addition to providing fashionable, high quality items, the company has grown brand awareness through effective store positioning in high traffic areas and word of mouth recommendations as a result of customers’ positive in-store experiences.
2) The company’s just in time inventory model reduces the amount of inventory that Inditex has to mark-down at the end of the season. Although I know that the company does perform a bi-annual sale so arguably there are some mark-downs, a variety of sources suggest that Inditex marks down less inventory than its peers. I’ve tried to find some hard data to illustrate that the company’s mark-downs as a % of total sales are lower than its peers but not surprisingly this is not disclosed!

Additionally, Inditex does price its products higher than both H&M and Primark. It is able to extract a premium price due to the fact that its designs and quality are higher. Its products are priced cheaper than GAP but as I noted, GAP’s inability to adapt its operating model to respond to consumers’ demands for “fast fashion” means that it is little competition for Inditex.

On December 12, 2015, GER commented on Ryanair: „Lower price beats higher price every time” :

Great post!

I agree that Ryanair’s asset utilisation is completely unrivalled and that this is key to its low cost strategy. As you mention, this has been achieved through a range of process innovations including reduced turnaround times (the company’s turnaround times are reported to be on average 25 minutes, versus 45-60 minutes for rival airlines) and inconvenient flight times. I also agree that filling seats is crucial. I was interested to learn that in the year to March 2015, Ryanair’s passenger load factor was 88% versus 80% for the whole market (http://www.iata.org/pressroom/pr/Pages/2015-05-06-01.aspx).

However, in recent years Ryanair has been deeply criticised for its poor customer service and in-flight experience. Therefore it has taken steps to improve this (e.g. allocated seating and updating its website). Obviously these steps come with costs that I can only assume are hindering the company’s relative cost advantage. Therefore, I wonder, going forward, as customers demand more for their money, do you think that Ryanair will be able to find further efficiencies in its operating model to subsidise these increased costs?

On December 11, 2015, GER commented on ASOS – Effectively Delivering Style, Affordability and Accessibility :

As a fellow ASOS addict I think that this is fascinating. I agree that ASOS has done a fantastic job at delivering a seamless online shopping experience that makes you question whether to return to the high street ever again. I did not know that the company only has one distribution centre. Interestingly, Inditex (Zara, Massimo Dutti etc.) adopts the same centralised distribution structure and also benefits from it immensely.

There are two features of ASOS’s operating model that I’d be interested to learn more about:

(1) Technology
• What proportion of the processes at the distribution centre are automated versus done by employees?
• How has ASOS developed its data infrastructure to support growth? How much of its data infrastructure has been developed in house versus outsourced?

(2) Information Flow
• How do ASOS’s designers understand what trends customers are looking for?
• How effectively does information flow through the company? (i.e. from from designers, to prototyping, to production)

On December 10, 2015, GER commented on IKEA: Redefining the Market to Achieve Success :

This is a fascinating example.

It got me thinking about a couple of other points that I think are interesting about IKEA’s operating model:

Building on your supply chain analysis, I wondered, is it correct to argue that IKEA’s commercialisation of flat pack furniture means that it has effectively “disintermediated” the assembly stage from its supply chain? Instead, it outsources this stage (and the associated costs) to the customer. This would lead me to believe that IKEA requires lower manufacturing capacity than other furniture providers, since it only needs to manufacture the component parts rather than the fully assembled product. In my view, IKEA has been so successful at pursuing this strategy since it has been careful to pass sufficient cost savings onto the customer through the considerably lower pricing that you reference.

Another point that I think is interesting is IKEA’s store layout. IKEA has designed its stores so that customers are encouraged to walk through its showrooms before moving through to the “market place” where they choose their purchases. This means that customers are exposed to lots of ideas around how they can use IKEA furniture for interior design. I would hypothesise that this promotes increased in-store purchases.