Inditex, king of fast fashion
Over the past 20 years, one word disrupted the fashion industry and changed it more than any other single trend: fast. At the helm of this movement has been Inditex, a Spanish firm that originally started as a dress maker Galicia during the 60’s and has now become a collection of more than 100 companies worldwide.
Sophisticated and tightly run operations have been the key behind Inditex’s success and supported its business model: to quickly respond to fashion trends and consumer demand, offering new collections continuously at a relatively affordable price.
In the United States, the Group is most widely known through its brands Zara and Massimo Dutti. Its turnover for 2014 was over 18 billion euros and as of January 2015 it had 137,054 employees and more 6,600 stores around the world.1
Business model
Inditex business is centered around one simple premise, to be quick at responding to the market. Whereas it would take almost a year for a traditional fashion company to get its products out, from conception to runway to stores, to Inditex this process takes less than two months.
Speed is a priority, because merchandise needs to be adapted as fast as possible to fashion trends and demand. Scarcity around products and its life cycle is an additional element; the majority of garments in a store will be available in small amounts per size, to allow the renovation of the stock.
Stores are located in prime retail locations. For instance, both Zara and Massimo Dutti can be found in NY’s Fifth Avenue, Paris’s Champs Elysées and London’s Regent & Oxford Streets. Stores are differentiated by concept to segment market demand and target specific niches. Each concept’s management team makes decisions and administers its resources independently. However, they are all grounded on the same business and operating models. The Group provides support services to the brands such as administration, technology, logistics, general HR, legal and financial advisory.
- Zara is the largest brand and most often associated with the fast-fashion model.
- Massimo Dutti has a more sophisticated and upmarket image.
- Pull&Bear, Bershka and Stradivarius are focused on a younger audience, with more casual personalities.
- Uterqüe offers accessories such as leather goods, footwear, eyewear and jewelry.
- Oysho offers women’s lingerie and intimate wear.
- Zara Home is centered in home furnishings with the same accessible approach.
Operating model
Inditex is highly centralized and vertically integrated: its designs, manufactures and distributes its products, which are ultimately sold at its own retail stores. By controlling all four stages in the fashion process, it is able to ensure that collections are quickly adapted to customers’ tastes.1
Design
Under this model, the company has to identify and respond to changing trends in fashion by continuously designing new models. Traditional fashion companies like The Gap and luxury firms such as Burberry and Gucci would usually produce up to 4 collections per year: the ever popular Autumn/Winter and Spring/Summer, and Resort/Cruise and Pre-Fall, also known as inter-seasonal collections. Inditex uses its flexible model to produce more collections per year, reacting rapidly to demand and delivering products promptly to stores.
Each season’s merchandising is designed by Inditex’s more than 600 designers, which take inspiration on haute-couture fashion shows, fashion editorials and the feedback they receive from customers at each brand’s retail outlets. Data management plays an important role at gathering and transmitting feedback from stores.
Manufacturing
In accordance with its vertical integration approach, most garments are manufactured at the Group’s own factories. Only some production stages, such as garment-making, are subcontracted to specialist firms. Inditex has direct control over the fabric supply, the marking and cutting and finishing stages of production. The group handles directly the logistics associated with production, primarily through a subsidiary called Tempe.
Logistics & data management
Each brand or concept has its own distribution hub in Spain, where all the merchandise is delivered from the production centers and suppliers and later distributed to the retail outlets around the world. Furthermore, merchandise is adapted to the store’s customers profile, minimizing the risk of doing sales or not selling the garments. Shipments are frequent and continuous, with merchandise arriving to stores twice a week and containing new items to continuously refresh the collections on display.
Highly automated systems and a centralized organization allow a continuously updated offering. The company designed its own logistics software to support the high demands of its business model for speed. On average, merchandise is delivered from distribution center to store in less than two days for America and Asia and half of that time for Europe.
Retail
The company thinks of its stores as a vehicle for collecting information about consumer tastes and receiving feedback about market demand, this information feeds the design teams and allows them to adapt future merchandising.
Stores also serve as a primary channel for marketing, since they represent the brand personality and storytelling. Exterior design and shop windows act as advertisements for each concept’s most fashion-forward garments. To guarantee a standard image and store management, design, logistics and staff training are performed by the Group, regardless of the store’s ownership. Franchises are limited to smaller or specific markets, with only 13% of its more than 6,600 stores franchised by January 2015.
Final note
Inditex’s business and operating models are deeply integrated and allow the company to exert control over the fashion process, to be the king of fast. Benefits of this model, such as keeping low inventory levels and limiting the risk of fashion trends, outweigh additional necessary costs in production, data management and logistics. Hence, Index relies more in volume than margin compared to traditional fashion.
Sources:
- Inditex – Press Dossier, https://www.inditex.com/documents/10279/156946/inditex_eng.pdf/72744164-500e-4df6-adaf-e685d1b139c5, accessed November 2015.
- Inditex . Logistics – Youtube, https://www.youtube.com/watch?v=iKUmOsmh-Gs, accessed December 2015.
- Conversation with James McArthur, ex-CEO of Balenciaga, Harrods and Anya Hindmarch.
All images taken from Inditex website.
Very interesting post. I’m curious as to how Inditex and its brands are adapting to the growing threat of e-commerce. It seems like companies like ASOS.com offer a similar “fast fashion” value proposition but have the advantage of being online-only (centralized inventory; no costs for retail stores…). Is Inditex growing its online presence to stay relevant and/or do its physical stores actually create a competitive advantage against online-only threats?
Inditex took a very long time to enter the online marketplace. This model has proven very successful at expanding brands like Massimo Dutti in the US, being able to reach a broader base of customers.
For Inditex, even if online offers many advantages, it makes more difficult for the company to recreate the storytelling and brand experience of its brick-and-mortar outlets.
Rachel – That’s an interesting point. The main downside I see to focusing more on online is that Inditex brands gather intel on customer preferences through interactions between store employees and customers in the physical stores, which influences the next batch of designs released. In the online world, it may be harder to get preferences right when changing in the fast fashion world.
Nico – How is Inditex able to get merchandise from distribution centers in Spain to Asia and America in 2 days without having high supply chain costs? Did they consider opening separate manufacturing and design centers closer to each geographic region in order to keep shipping costs lower and cater to customer preferences in each region?
Janiki, Iniditex directly controls all the logistic and supply chain so it is able to capture the margin that global partners would earn if the company outsourced or sub-contracted these activities. However, it is aware that it still has very high supply chain costs compared to some of its peers but it sees it as a sacrifice in order to be able to sustain its business model. In its press dossier, it acknowledges that “speed is the No. 1 priority, above and beyond production costs”.
Because production is relatively centralized in Western Europe, the brands prefer to have manufacturing centers relatively concentrated to ensure global consistency. This is relevant for Inditex because, although it adapts to customer preferences, the Group’s objective is to build global brands that have the same personality.
@Janiki: I also believe one advantage of having centralized production instead of regional factories comes from the number of pieces produced by SKU. Since they change their designs quite often (fast turnaround of SKUS) I imagine that it would be difficult to plan their production and account for downtime from setup time in all their plants if they were not centralized. They have probably compared the cost of more factories with the cost of sending product by plane and found the latter one to be cheaper and more convenient because it also helps in reducing the lead time as Nicolas mentioned.
A great post about how an fashion industry was disrupted by Inditex and the rules of the game have changed. I remember when Zara entered Turkey market and all the local players were severely damaged by its affordable fast fashion business model. Some of the local competitors had to go out of business because they couldn’t adapt to this new operating model, the others are still trying to catch up. One example is Mudo, a local fashion retail company, and actually one FIELD 2 group is working on how to appeal to the Turkish young professional consumers again.
As you stated in the post, location is a huge factor of their success and they are looking for prime locations when opening a new store. Do you think that their operating model is sustainable, given the limited space available in these prime locations?
In addition the fashion industry is going towards sustainability agenda and more people are reacting to the fast fashion approach where it’s all about mass consumption. How do you think Inditex group should react to these approaches?
Thanks Sinem for sharing your experience. I agree that the availability of space in prime retail locations is a constraint for Inditex’s expansion. However, it also feeds into their model of creating scarcity around its offering. A few years ago, the firm began experimenting with online shopping, being able to offer a wider selection of items online and reaching customers where they don’t have brick-and-mortar stores.
Sustainability is certainly a pressure for these companies, particularly because they are associated with mass production. The topic is central in Inditex’s agenda. For example, they introduced a new store model focused on sustainability by addressing 5 points: the stores surroundings, water efficiency, energy savings, materials and recycling, and process and training (more details available in https://www.inditex.com/documents/10279/26311/eco_store.pdf/643f79dd-c1b3-494d-a703-ac972ef3dc97). Also the company is implementing changes in its processes, introducing its Sustainability Inditex framework. Examples of these initiatives are sustainable sourcing of materials, recycling fashion and right to wear (“Green to Wear”, “Clear to Wear” and “Safe to Wear”, “Tested to Wear”).
I found this post really interesting. I agree with you that being vertically integrated allows Inditex to manage every step of the production process faster to reduce lead times and serve their “fast fashion” value proposition. It was impressive to see how they share information directly between the different elements of their supply chain. The fact that each store, based on the knowledge of their customer base, can directly order product to the distribution center avoiding central planning organizations can probably help them reduce the bullwhip effect.
Another interesting point I found in your post is the scarcity of inventories you mentioned. Inditex is one of the few companies I know (not luxury) that loves to have under-supply of the inventories of certain products in the store. This scarcity, coupled with the fast turnaround of SKUs in the stores makes you want to buy the product when you visit the store instead of waiting for another visit because it might not be there anymore. This in turn, allows the stores to gather data quickly regarding the adoption and success of the product to inform the production process.
Thanks Sinem for sharing your experience. I agree that the availability of space in prime retail locations is a constraint for Inditex’s expansion. However, it also feeds into their model of creating scarcity around its offering. A few years ago, the firm began experimenting with online shopping, being able to offer a wider selection of items online and reaching customers where they don’t have brick-and-mortar stores.
Sustainability is certainly a pressure for these companies, particularly because they are associated with mass production. The topic is central in Inditex’s agenda. For example, they introduced a new store model focused on sustainability by addressing 5 points: the stores surroundings, water efficiency, energy savings, materials and recycling, and process and training (more details available in https://www.inditex.com/documents/10279/26311/eco_store.pdf/643f79dd-c1b3-494d-a703-ac972ef3dc97). Also the company is implementing changes in its processes, introducing its Sustainability Inditex framework. Examples of these initiatives are sustainable sourcing of materials, recycling fashion and right to wear (“Green to Wear”, “Clear to Wear” and “Safe to Wear”, “Tested to Wear”).
Sorry, repeat comment by mistake.
I’m fascinated by Zara’s business model and had no idea that they were part of a larger organization – thanks so much for sharing! Expanding a bit on Sinem’s question concerning their locations, is it true that the company chooses to spend money to assure prime locations instead of more traditional advertising/marketing? Personally, I cannot recall every having seen an ad for the subsidiaries mentioned based in the US, however I have definitely been to many of their locations.
I’m also curious about markets in which many of these stores exist, for instance Zara, Massimo Dutti, Pull&Bear, Bershka and Stradivarius. While you mentioned there is differentiation between brands, I imagine that there is still some cannibalization, particularly with the final 3. Does Inditex encourage a healthy competition between its brands, or is part of their value creation to carefully craft unique images and brand profiles with which different sub-sets of the target population can identify?
You are right Sam! They rarely spend on advertising, their marketing is more centered around the store shopping experience.
Although there would seem to be a degree of cannibalization in their portfolio, particularly with the brands you mentioned, Inditex does encourage creating a unique image and profile for the brands. For instance, Stradivarius is more bohemian and hippy, Bershka is much more fashion-forward and Pull&Bear is much more casual (generally jeans, t-shirts and hoodies) and has a significantly lower price range.
Very interesting post, highlighting the main capabilities that allow Inditex to have a competitive advantage in a tough industry.
It is mentioned that low production costs are at the core of this advantage. In recent years, there have been a number of attacks against the Company, acusing it of abusive labor practices in developing countries. I would be curious about how much of Inditex low production costs are related to labor, and how its operating model will be impacted by rising wages in certain countries, or if it was pressured to improve working conditions/increasing salaries.
“Tested to Wear” is one of Inditex’s goals for Sustainability, which according to the company aims to ensure “that working conditions for all workers in our supply chain meet Inditex’s high ethical standards”. While certainly the debate is to be settled, it looks like incorporating sustainability as a pillar in the strategy is a step towards that.
I, this is a great point. This is a company that has been accused of allegedly accepting slave-labor working conditions and in many countries. I wonder how such a big and important company could allow the introduction of child labor and poor working conditions in the operating model of some of its subsidiaries. In this case, I would like to know how Zara could change it without changing its winning business model.
Great post!