How Zara’s Winning Strategy Is Disrupting The Indian Fashion & Retail Industry
Spain’s Inditex, the owner of Zara fashion brand, saw the brand’s net profit surge more than 70 percent in India in 2017-18, even as the world’s largest fashion group grew at one of its slowest rates in the country amid increasing competition from global rivals. Inditex Trent, which runs twenty Zara stores in India, saw its revenue increase 19 percent to Rs 1,221.67 crore in 2017-18 from Rs 1,023 crore in the previous year, according to Trent’s annual report.
Is it only Zara’s fast fashion approach, or a combination of retail strategy and fast fashion that’s driving growth in the country?
Zara follows what it calls an “oil stain” strategy. It means Zara opens its first few stores in a country to get an understanding of a market and then uses that knowledge as it expands into that market.
Starting sometime in the mid-Seventies in Spain, Inditex – the Euro 11 billion (revenue) company that owns Zara and some other labels – built a hugely successful business model by taking the latest catwalk designs and converting them into affordable high street fashion in a matter of three weeks. Zara focuses on rapid product development & design and outsources the manufacturing in small batch sizes to a network of dedicated suppliers. Its ability to bring changing fashion quickly to market has meant that, while customers in Europe visit other fashion stores just three times a year, they visit Zara 17 times according to one study. Zara stores also show a 40-50 percent increase in shopping mall foot traffic in India (Delhi & Mumbai).
Let’s analyze Zara’s winning strategy which helped it grow at an unprecedented rate by increasing top-line revenue & driving bottom line efficiencies:
- Fast Fashion: Zara delivers new fashions as soon as trends emerge. Its success is clearly its ability to chase fashion trends around the world, move a catwalk design from the design stage to shop floor in a span of two weeks and launch new lines in the quickest possible time with limited scope for reorders.
- Packaging & Variety: Zara offers trendy but inexpensive products that are sold in beautiful, high-end-looking stores. Their huge product range changes almost every week. Zara in India churns out more than 10,000 designs in a season and that helps it stay relevant to customers.
- Artificial Scarcity: Zara makes small quantities of each style, thereby retaining its exclusivity. By reducing the manufactured quantity of each style, Zara creates artificial scarcity and lowers the risk of having stock it cannot sell.
- Integrated Customer Feedback: Each individual store is linked directly to the designers in the company, so on any given day information is sent about the design from customers [through purchases] essentially to those designers in real time and products are altered immediately. Customer insights are the holy grail of modern business; the more companies know about their customers, the better they can innovate and compete. But it can prove challenging to have the right insights, at the right time, and have access to them consistently. One of the secrets of Zara’s success is that the brand trains and empowers its store employees and managers to be particularly sensitive to customer needs and wants, and how customers enact them on the shop floors.
It’s imperative to look at Zara’s impeccable supply chain strategy which allows it to lap competitors.
Zara’s success relies on keeping a significant amount of its production in-house and making sure that its own factories reserve 85 percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency and variety of new products to be launched. Zara also commits six months in advance to only 15 to 25 percent of a season’s line – and it only locks in only 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured right in the middle of the season.Zara makes 85 percent of the full price on its clothes, while the industry average is 60 to 70 percent. Unsold items account for less than 10 percent of its stock, compared with an industry average of 17 to 20 percent. Zara’s business strategy allows the company to sell more items at full price because of the sense of scarcity and exclusiveness the company exudes. Zara’s total cost is minimized because merchandise that is marked down is reduced dramatically as compared to competitors.”
Lean Inventory Management
An inventory optimization model is in place to help the company to determine the quantity that should be delivered to every single one of its retail stores via shipments that go out twice every week. The stock delivered is strictly limited, ensuring that each store only receives exactly want they need. This goes towards the brand image of exclusivity while avoiding the build up of unpopular stock.
Centralized Order Fulfilment
Zara sticks to a deep, predictable and fast rhythm, based around rapid deliveries to stores. Zara’s reliance on centralized order fulfillment is what enables the company to maintain incredibly efficient workflows – from initial design right through to delivery to stores and customers. The company’s approach is another example of why streamlined operations and supply chain management are critical to profitability and achieving scale. The secret to Zara’s success has been centralization.
Solid distribution Network
Zara’s strong distribution network will help it take the next leap on its digital journey “Select/Buy Online, Experience/Collect Offline.”
Market watchers say that Zara, H&M and other global firms have just touched the tip of the iceberg of the gigantic fashion apparel market in India. According to estimates by retail consultancy firm Wazir Advisors, India’s addressable market for apparel and clothing is about Rs 4 lakh crore and that is growing about 12 percent year-on-year. Out of that one-third of the business is for branded apparels that is growing 15 percent annually.