A company profile in a recent issue of The New Yorker suggests what you have to do to be competitive in the 21st century. The company is Zara, a Spanish clothing retailer based in Galicia. It is the third largest business of its kind and the fastest growing, with profits increasing at better than 30% a year a far greater ROI than its major competitors, the Gap and even the Swedish retailer H&M (see Message #106).
Zara’s success is based on two clever business strategies that ETRs are already familiar with:
1. Second best is good enough. You don’t need to be first in the market. First is good, but it’s also risky and expensive. Coming in second (in Zara’s case, by knocking off what works) is a plenty good way to enter and eventually dominate a market.
2. You can’t outperform your competitors by doing things the same way they do. Find their weaknesses and figure out a way to exploit them. Zara has overcome two of the fashion industry’s primary problems: dead inventory and unreliable third-world manufacturing relationships. Just as important in a market of fickle passions, it has figured out how to keep its fashions not only au courant, but absolutely up-to-the-minute.
The curse of the rag trade, as The New Yorker points out, is the great gulf of time that typically exists between the moment new designs are sketched and the day they arrive in stores. This 6-12 month cycle determines the yearly seasons by which fashion leaders showcase new styles which appear in the stores once a year. Zara doesn’t do twelve-month turnarounds. Not even close. It has developed a way to bring new fashions to its buyers in a matter of weeks.
It achieves this amazing standard by, first of all, foregoing the prestige of having its own designer brands. Instead, it leads the field in knockoffs. By following trends rather than anticipating them, Zara does not need months of planning and guessing. And by eliminating high-priced designers, it saves all kinds of money and hassle. That’s how it does away with dead inventory. Designs are produced in limited quantities and tested on the shelves within weeks.
Those that don’t get a quick and strong response are whisked off and replaced almost immediately. And this provides another benefit. Zara does not have to discount items that don’t sell well. Zara has its own highly automated factories in Spain 23 of them where fabrics are cut and dyed. The fabrics are then sent to a network of about 300 small workshops in Galicia and northern Portugal, which operate more as partners than subcontractors.
Having such a large number of mini-factories gives Zara the capacity to produce 11,000 designs a year, instead of just 200 or 300. And just as importantly, they are produced in much smaller lots, so there is no need to warehouse and stock unneeded material. Equipped with handheld devices linked directly to the company’s design rooms in Spain, Zara retailers all over the world punch in daily instructions about what customers are buying and rejecting, asking for, and curious about.
Impressively, it takes just 10-15 days to go from designing (knocking off) an item to selling it. The way Zara has combined age-old business relationships and space-age technology in order to outperform its competitors has made the fashion director of LVMH, Daniel Piette, call it possibly the most innovative and devastating retailer in the world. Think about how you can implement these ideas into your business plan.