Digitalization of Zara and Fast Fashion
Over the past five to ten years, the retail industry has changed radically. These changes are clearly seen in the fashion industry, with the advent of e-commerce and fast fashion. While Amazon has transformed the e-commerce space and forced apparel companies to establish themselves online, fast fashion brands, of which Zara is one of the most synonymous, have transformed retail stores.1
The value of Zara’s “fast fashion” model is that it allows retailers to deliver designer products to mass markets at relatively low prices and with extreme speed – bringing trends virtually straight from the catwalks to retail locations. Traditional fashion retailers are not able to manage or achieve this, as they operate on a seasonal basis and require several-month-long lead times for the production and distribution of collections.1 Zara, on the other hand, has, through the use of digitalization and data analytics, managed to develop a nimble, efficient supply chain that cuts this production cycle down to less than three weeks.2 The ability to master this speedy production cycle has catered to demanding, instant-gratification-minded consumers and caused Zara to thrive over the past several years while other retailers have faced declining or stagnant growth.1
Now some of those other retailers and other fast fashion companies are attempting to replicate Zara’s quick production cycle strategy.3 In order to remain ahead, Zara has focused on continuing to use digitalization and big-data analysis in the short term to further increase sales turnover and operate with even leaner working capital. Every piece of clothing, for example, is tagged with a radiofrequency identification (RFID) microchip before it leaves a centralized warehouse, which provides real-time tracking of inventory right up until it is purchased by a consumer at a retail location.4 Therefore, the data about each store’s inventory levels, and the popularity of and speed with which each SKU sells is constantly being provided to the Company’s central data processing center.5 The center, which operates 24 hours a day, collects data from Zara’s 2,100-plus retail locations across 80-plus countries,6 allowing for bi-monthly product deliveries that are tailored to individual stores based on SKU-specific inventory data.7 Zara can then constantly refine and optimize its inventory management, distribution and design to minimize waste in the production cycle and eliminate fashion risk.
Through these practices, Zara has managed to streamline its supply chain to the point where approximately 50% of its SKUs are designed and produced during the relevant season. In the coming year, the percentage may rise even higher.3 By creating a nimble supply chain driven by digitalization and data analytics, Zara will continually improve its ability to order small batches of any given SKU from its distributors, track the success of the designs, and immediately order more inventory of the specific SKU and size for the locations that demand it, making Zara “hyper-local” in its inventory planning.
In the longer term, Zara is becoming increasingly focused on digitalization every aspect of a consumer’s shopping experience. This can be seen in its implementation of online “click and collect” in its key flagship locations,6 which allows customers to order items online and pick them up in-store, providing a win-win for the customer and Zara. From the customer’s perspective, it is incredibly convenient, and for Zara it provides even more immediate knowledge about inventory management and consumer preferences for individual SKUs. In order to remain competitive, I believe that Zara should focus on and expand this initiative. If this method of shopping continues to be popular with consumers, and Zara is able to quickly analyze and process the data, this channel could operate as a just-in-time supply chain. The Company could manufacture and distribute only the guaranteed number of items to be sold at specific locations, reducing its inventory to effectively zero.
I think that Zara could go even further by developing its e-commerce presence. While the Company does not distinguish between online and in-store sales, I would expect that e-commerce contributes less to its revenue.2 However, having a large portion of its customer experience digitalization could help Zara collect even more sales data than it already does, and allow it to compete with retailers such as Amazon that have helped shift customer preferences to e-commerce.
The question I would like to propose is: Going forward, do you think Zara’s supply chain strategy is not that difficult to replicate, and that it is only a matter of time before more traditional apparel retailers, such as Gap or Michael Kors, are able to successfully catch up and put pressure on Zara? Or does Zara, as one of the first movers in the space, have enough experience and expertise in developing and refining its supply chain that the learning curve is too steep for larger, more established and less nimble companies to truly catch up?
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Sources
(1) McKinsey & Company. “The State of Fashion.” https://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion
(2) Inditex Annual Report, 2016.
http://static.inditex.com/annual_report_2016/en/
(3) Hiiemaa, Kris. “In the Success Stories of H&M, Zara, Ikea and Walmart, Luck Is Not a Key Factor.”
http://erply.com/in-the-success-stories-of-hm-zara-ikea-and-walmart-luck-is-not-a-key-factor/
(4) Digitalist. “Zara’s Agile Supply Chain Is the Source of Its Success.” http://www.digitalistmag.com/digital-supply-networks/2016/03/30/zaras-agile-supply-chain-is-source-of-competitive-advantage-04083335
(5) Refinery 25. “15 Zara Secrets the Press-Shy Brand Hasn’t Made Public” http://www.refinery29.com/2016/02/102423/zara-facts?utm_campaign=160322-zara-secrets&utm_content=everywhere&utm_medium=editorial&utm_source=email#slide-11
(6) Inditex 1H, 2017. Report and Transcript. https://www.inditex.com/documents/10279/342864/Transcript+-+1H2017+Results.pdf/2ce7e3e8-e194-45e9-9655-b5398abc9b69
(7) Bloomberg. “Zara’s Recipe for Success: More Data, Fewer Bosses.” https://www.bloomberg.com/news/articles/2016-11-23/zara-s-recipe-for-success-more-data-fewer-bosses
Very interesting read. I think you open up a question that many brands are struggling with. To answer whether other brands can/should replicate this strategy, we have to go back to why this strategy works for Zara. It works because Zara has accepted a trend following approach (vs. trend setting) and given the pace of trends today, the business model relies on (very) short product life cycles where demand changes quickly. The entire supply chain—from design to manufacturing—has been optimized to be a fast follower.
A brand like Michael Kors has to decide whether it wants to execute its own unique brand identity or follow others. If it’s the former, then longer product lifecycles are inevitable given the time devoted to conception and design. I believe the supply chain strategy adjustment is difficult to execute in isolation of the fundamental strategic direction.
That said, I still believe it’s extremely difficult to replicate Zara’s supply chain strategy, especially for more established businesses within the industry. The process of rewiring the entire organization’s DNA to execute on what Zara has spent years upon years to refine and perfect will be challenging (to say the least). As you alluded to, I do believe the learning curve is too steep to replicate this system with the same unit economics as Zara. It’ll be a while until traditional brands can restock their stores with new designs twice a week.
Megan, thank you for the article, it was a very interesting read. I would like to pick on the questions you brought up at the end and offer a different perspective. As Imran suggested, I also still believe it is extremely difficult to replicate Zara’s wining supply chain strategy. However, we should not underestimate the power of smaller pure online players in the market that are already disrupting traditional fast fashion retailers: they are not replicating Inditex’s model, they are actually making it faster.
Quartz recently published a report through Goldman Sachs which states that “British fashion retailers ASOS and Boohoo are able to conceive, design, produce, and have clothing ready for shoppers on the sales floor quicker than Zara and H&M, and the two millennial-focused, social-media savvy brands are enjoying the rewards.” And we can easily spot these rewards in the evolution of their stock prices in the last year: while H&M and Inditex’s share price has declined by 29% and 9% respectively, Asos and Boohoo’s share price has increased by 15% and 51% respectively.
The same report by Goldman Sachs charts the correlation between supply-chain lead times and like-for-like (LFL) sales growth, and the results show just how much speed matters (https://qzprod.files.wordpress.com/2017/04/colorcorrected-46.jpeg?quality=80&strip=all&w=640) .
How will traditional fast fashion retailers, that once disrupted the fashion industry, respond to the disruption they are now facing from a totally different set of pure online players?
Sources: Google finance, Quartz Media
To synthesize the comments from Imran and Paula above, I believe the incumbent players will have a difficult time adjusting to compete with Zara and H&M because of the cultural shift required. However, new start up can mimic and improve Zara’s approach.
On the incumbent side, we are seeing companies like Gap fire their design directors and rely on a data driven / fast fashion approach. However, they still have 8-10 week lead times relative to the 2-3 weeks that Zara has been able to achieve. This has required significant investment over a multi-year period and the journey is still ongoing.
However, other new starts up can mimic and improve Zara’s approach relatively easily. We are starting to see a proliferation of “clothes in a box” companies, similar to Trunk Club, that skip the retail store experience all together. By understanding customer preferences, and shipping directly, these online only start ups are able to shorten the lead time from runway to store and think about their design process from runway to customer.
Megan,
Your hypothesis that Zara is eventually moving towards just-in-time delivery is very insightful! I agree that it seems ideal for any company attempting to optimize its supply chain and reduce (holding inventory) costs. I urge you to consider in what ways just-in-time delivery may or may not create risks for Zara. For example, what does just-in-time delivery look like for a consumer-facing operation (I.e. storefronts)? If the delivery is a few days late, will inventory remain on the shelves or will they have sold out at that point? I believe it would be difficult for Zara to figure out the timing of just-in-time delivery of new inventory and the removal of old inventory. In a way, Zara storefronts are sort of a job shop – customers bundle/customize their product themselves – and how helpful is JITD for job shop operations as compared to continuous flow operations?