Ch 3 - Zara fast fashion

40 ENDNOTES [l Weiss. ·c 1 oupon's $6 rnmon Gambler." The Wall $11C!el JoumaJ. Oecernbtr 70 2010. 1. N 2 N. DiMeo. ·nvo·s Goal with New DVR: [lecome the Google of lV." Mommg fd11io11 a· t1onal Public Rildio. Apnl 7, 2010. I Rusli, ·c;sco Shutters I lip. lwo Years ahe• Acqu1snion: New York Times. Apt I 12. 3 · 201t I.Croghan. ·rood L,11est Luxury I u1e: NewY01k DmlyNews. March 12, 2006 4. . c Makin. ·rreshDirect Delivers I ocully Sou1ted rood to 1 lomes in ' 4 C o~nltl' S. 5 · MyCclilratle1scycom, May B. 2013. 6 ~, rox ·1me1View wilh r 1 eshDirect Co rounder Jason Acke1man: [lloomberg relevi· • sion. J~ne 17, 2009. r Schonfeld, 'The Big Cheese of Onl ne Gtocers Joe r edele·s_lnventory !~rnng ld~a~ 7 · Mily Make f-reshOi1ect the r1rst £lig Web Supermarket to find Profit, usrness · • J.inuaty I. 2004. 1 lasete• n. [!erg. and M. r urne1, -Whar r reshDirect 1 earned fmm Dell.. 8 · Sua1cgy+llusi11ess. f ebruary I 2. 2003. D Mcinerney, 'Good foods Taste (,reat." 1COxMar1Jta11an. March 4, 2013. 9 · C Makin, ·rieshDirect Delivers tocally Sourced food to Homes in 14 Counties." l O. MyCer111ol./crscycorn. M:Jy 8, 2013. J Black ·can rreshDirell Bring Horne the llacon'" llusinessWeek, Sep1er~1 24, ;'~ ~: l 1. s. Srebcr and J. M tchell. ·1 reshDuect· Online Gmcery lhal Actua'Y ivers. tns1g/11 2007. • fl. Walsh. "Why the 1 ary Way to Shop for Groceries-Online- ~ the Green W IJy. 12 · lune, Aptil ?9, 2013. 1 3. 11. Green. ·11eshDirect: fiusi11cssWcek . November 24. 2003. s s b d J Mile hell ·r reshDnect· Online Grocery 1 hat Actually Delivers!" /LSI 14. lm"~~ir.e;t~~. 6. Kiikpam~k "The Online Grocer Version 2.0; fo~rurre. N?~~~~~~~ 1 ~ 7001; p 1 ox, "Interview w11h I 1eshD11eC1 Co rounder J.1son Ac et man. lelev1sion. June 17, 2009. p I ox, ·1merview w"th I reshDirect Co rounder Jason Ackerman." nloom/Jc19 Tdevi l S. sio11, June II, 2009. 16. R M Sdlneiderman. ·1 ieshDuect C 1 oes to Greenwich; W<1Tt St1eet JoumoJ, April 6, 2010. C V,1ler10, "Interview with I reshDirecl Co rounder Jason Ackerman." VenWIC , 17. 2""" September 18. vv7. R Shulrmn, "Gtoceries Grow I Tusive for Many 1n New York City." Wasl ~ t.Jn l'D U. 18 · I eb1u,1ry 19. 2008. M. Porter. -What Is Strateqy?" I lmvard /Jusincss Review 74, no. I> 19 · (Novembe• December 19%) 61 18. 20. 21. 22. 23. 24. 25. 26. l<.lhn~>y. "Net Speed Ain't $C{?n Nothin' Yet: Wil('(I News. March 21, 2000. l I ndllch, Op1rrnl lttusions: rucenl ancl tlte Cwsli of lelewm (New York. Snnon & Schuster. 2004). M. f'o•ter. ·s1r, 1 te<JY , 1 nd the Internet," Jlmvc11cl llusmeH Rc'V1t'W 79. no 3 (M,1rch 7001): 62 /B. ll. Breen. "I !\ring in Dell lirne: f~sl (om1 1 xmy, December 19, 2001. hll p lh vww u c rnp.111,. )1t\.' ll "' ~.1 11 (• J.Y (J... tum I I · · K. O"M.iiah. D. I lohn,1n, and , ~ 0111a . "lhe AMll llese,mh Supply Cl.1,1in lo!' 2S ;~~ 1 ~009." AMR Resc11rd1, May 28. ?00'), h r J frm vv .r1111est;:~rr h )rn/L<>ntPra./ Vi e w. i1\ l "'c(1111 p \JfU I< m./ ·1~·1t '· A I leswlcJahl, "Deli's Special Cornmillee Asks Cini Icahn ro C.et Specific on lluyout Plans; AJJ/111n9sD. May 13, ?O t 3 J I dwards. 'JWI s s 100 Mi llion Carnp.iiqn for Mic1osofl s llmg Is I ailing." /JNl.I. July 16. 20l¥J. INFORMATION SYSTEMS VERSION 3 .o 27. T Mullaney. 'Jewelrylle1st: Busine.ssWeek.May 10. 2004. S. Yin. 'Repoll. Apple Controls 60% of Touchscreen Supply," PCMagcom. rebruary 11, 28. 2011 J flatley. "Intel lnvem $7 Bilhon in Sta1es1de 32nm Manufacturrng." I 11godger. fobru 29 · ary 10, 2009. R. KJtz. ·1 ech l1tans Building iloom." l[lE Spectrum 46, no. 2 (f ebruary I. 200'J): 40-43. 30. 5 d Adilpted from C Shapiro and 11. VJrran, ·1 ocked In, Not Locked Oul." fnclusrry um · 31 · ard, November 2 9, 1998. s. Vanek Srnilh. "OMG You're St II Using AOL for I rnail?" Mmkctplace Radio, January 32. 2 3. 2010. J. c,iaham. "[ rrnil (Jniers Deliver Gifts of N1hy I eatures lo Lure, Keep Users: USA 3 3. Today, April 16, 2008. r Davenport Jnd J. I liiH s, Competing on A11a/y1rcs. rite New Scienw of Wirtrting 34 · (Boston: 11,1rvard llusiness School Press, 2001) A villuous adoption cycle occu•S when network elf ens exisl thJt make ii product or 35. seivice rnore attractive (increases benefits. reduces costs) ,1s the adopter base grows. ll. Nichols, "Should Open fable [le Warned ,1boul Yelp and fripAdv1sor?" T11cMotlcy 36 · fool.May 19,2014, K Peterson, -Why l'ric eline Paid So Much for Open Table; C85 News. June 16. 2004. 37. M Merced. ·riiceline to fluy Open fable for S2.6 Bilhon," New Yo1k limes. June 13, 38 · 2014 Google fourth Quarter 2008 farnings Summary, hup://investor.google.com/earn· 39. I 1ngs.htrn, N wn field "Microsoft Wins Key Search Deals; Woll Sltl!el JoumaJ, January 8, 2009; P. 40. C l m~e.!lRe~rt MKrosolt to Pay Nokia S 1 ll1lhon for Support: ff limes, March 8, 2011. fl. I eld, "Why the Decks Ate Stacked against Sohware Startups in Patent I itrgation; 41 · fec/1110/ogyl/eview April 12.7009. T Wu "WeJpons of Business Destruction: srmc I ebrua1y 6, 2006. R Kelley, 42 ·mackBeuy Maker. NII' Ink $612 Milhon ~enlement." CNNMorrcy, March 3. 2006. I Mills. "OOJ Clears Apple Mioosoh RIM De,11 to Buy Norlel Patents: (NU, I ebruary 43 · 13 2012. M. Asay, 'Microsoft's Mobile Pment SuJtegy l hreaten. Don't Sue: Rcacl Wiiie, May 8. 44 · 2013 45. 1 Mullaney ands Ante. ·1nrow,us: 811sincssWrck. June 5, 2000. N carr:ll Doesn't Matter· JlmvmdRusmcss Review BT, no. 5 (May 2003) 41--49. 46. 47. 48. 49. so. 51. 52. 53. 54. 55. 56. 57. 'Movies lo Go; fconomisr. July 9. 2005 June 18, 2014. figures for both firms: B KS S 1.lSll. AM/N S 153.BlB. N. Wingfield, "Net nix vs. the Naysayers: Watt S1rcer Jownal March 21, 200 l G. I tame!. 'Killer Strategies 1 hat Make Shareholders Ilic h." for1unc. June 2 3, 1997 for more on the long tail and collaborative fi!Jering, see ChJpter 4 K. Bames, "Music Sales !loom. bul Album Sales f iule for '08," USA 1oday . January 4. 2009. I. Srnith, ·Another 1,1wsu t I iled on W,1ge Issues of Cab Dr i vers; OOlcl1ci.1cr Reporttl, November 8. 201] M. Mel atland. 'Uber s Remarkable Growlh Could Ind the I r.1 of Poorly P,1id ub Drivers: Waslringrorr l'ost. May U. 2014. Annik.. 1 , "New Uller X Prices. Now 30% Che,1per than il l,1x • U/Jc1 61og. October l5. ~3. ~ M. Mel , 11 1and. 'Uber s Bernarkahle G1ow1h Could Ind the Ira of Poor Y Paid Drivers: Wml1impon l'osl. May 21. )014. 1. Keane. ·111 laxi>' flallle with Uber, Ugly I ndg.ime looms: llosrorr c ,to/Jc J une t; 7014. CHAPTER 3 Zara: Fast Fashion from Savvy Systems ---- ·-·· -· -·-- ·-·· - ·- -- - 1. INTRODUCTION _____ ........ -·~··---·-· .. - ... - -------- - LEARNING OBJECTIVE 1. Understand how Zara's parent company Inditex leveraged a technology-enabled strategy to become the world's largest fashion retailer. Operating in the northern coastal city of La Cormia (or A Corutia in the local Galician language), Spanish entrepreneur Amancio Ortega was brainstorming names for his new shop and settled on "Zorba" after the classic movie Zorba tlic Greek. He simply thought it was "a nice name." Unfortu· nately, there was a bar with the same name a few blocks away and the bar's owner was worried patrons would be confused. The molds for the letters for Ortega's shop had already been cast, so they played around with what they had and came up with "Zara."1 1 1 As it turns out, for Zara it's technology, not the name , that has made all the dHference in its rise to dominate the decidedly ungeeky fashion industry. Tod ay, Zara is the game-changing crown jewel in the multibrand empire of Inditex Corporation (Industri as de Diseno Textil), the world's largest pure -play fashion retailer and a firm that's bigger than Gap, H& M, Topshop, and anyone else in the space. The firm's supremacy is plotted and executed from "The Cube," the gleaming, futuristic headquarters located in La Coruna's Artcixo industrial area. The blend of technology-enabled strategy that Zara has unleashed seems to break all of the rules in the fash- ion industry. The firm shuns advertising and rarely runs sales. Also, in an industry where nearly every major pl ayer outsources manufacturing to low-cost countries, Zara is highly vertically integrated, keep· ing huge swaths of its production process in-house. These counterintuitive moves arc part of a recipe for succ ess that's beating the pants off the competition and has catapulted Ortega to become the world's third richest man, ahead of Warren Buff el. The firm tripled in size between 1996 and 2000, and then its revenue skyrocketed from $ 2.43 billion in 2001 to more than $20 billion in 2012. Jn August 2008, sales edged FIGURE 3. 1 ~ead of Ga~, making Inditex the world's largest fashion retailer. 121 Table 3.1 compares the tw o fashion retailers. While Inditex supports eight brands, Zara is unquestionably efinn's crown jewel and growth engine, accounting for roughly two-thirds of sales J:l l TABL E 3 .1 Gap versus Inditex at a Glance Gap Inditex S 162 billion $22 .7 billion Zara ·s operations are concentra1ed in Spain, but they have stores around the world like these rn Manhattan and Shanghai. .\c1urn•· Vst•,/ tdlh pcnni,;siot1 frmn lnc/it.('X

42 contract manufacturing Out so urcing produ cti on to th i rd - party firms rirms that use c ontract manufacturers don't own the pla 11 ts or direct ly employ the workers who produce the 1eque > 1ed g oo d s. INFO RM AT ION SYSTEMS VERSION 3.0 1.1 Why Study Zara? --- - ...-- - -- - ------- -- ---- --- -- -- - - --- --------- While competitors faller, Zara is undergoing one of the fastest global expansions the fashion world has ever seen, opening one store per day and entering new markets worldwide- eighty-eight countries so far. The chain's profitability is among the highest in the industry.1 · 1 1 The fashion director for luxury good~ maker LVMH calls Zara "the most innovative and devastating retailer in the world." ISI Zara's duds look like high fashion but arc comparatively inexpensive (average item price is $27, al· though prices vary by country)Y •I A Goldman analyst has described the chain as "Armani at moderate prices," while another industry observer suggests that while fashions arc more "Banana Republic," prices arc more "Old Navy."1 7 1 Legions of fans eagerly await "Z-day," the twice-weekly inventory deliv- ery to each Zara location that brings in the latest clothing lines for women, men, and children. One well-known fan of the brand is the Duchess of Cambridge. The day after the wedding of Prince William and Kate Middleton, she made an appearance in a cornflower blue, pleated polyester dress from Zara. The price was £49.991 8 1 for high-quality, inexpensive fashion that's good enough for a future queen. ln order to understand and appreciate just how counterintuitive and successful Zara's strategy is, and how technology makes all of this possible, it's important to first examine the conventional wisdom in apparel retail. To do that we'll look at former industry leader- Gap. 1.2 Gap: An Icon in Crisis - --·- - ----- ---- ..--- ------ .. -- ------ -- _______ .. ----- ---- Most fashion retailers place orders for a seasonal collection months before these lines make an appear- ance in stores. While overseas contract manufacturers may require hefty lead times, trying to guess what customers want months in advance is a tricky business. ln retail in general and fashion in particu- lar, there's a saying: inventory equals death. Have too much unwanted product on hand and you'll be forced Lo mark down or write off items, killing profits. for years, Gap sold most of what it carried in stores. Micky Drexler, a man with a radar-accurate sense of style and the iconic CEO who helped turn Gap's button- down shirts and khakis into America's business casual uniform, led the way. Drexler's team had spot- on tastes throughout the 1990s, but when sales declined in the early part of the following decade. Drexler was left guessing on ways to revitalize the brand, and he guessed wrong- disastrously wrong. Chasing the youth market, Drexler filled Gap stores with miniskirts, low-rise jeans, and even a much ~ ridiculed line of purple leather pants.I 'll The throngs of teenagers he sought to attract never showed up, and the shift in offerings sent Gap's mainstay customers to retailers that easily copied the styles that Gap had made classic. The inventory hot potato Drexler was left with crushed the firm. Gap's same-store sales declined for twenty-nine months straight. Profits vanished. Gap founder and chairman Dan Fisher lamented, "It took us thirty years to get lo $1 billion in profits and two years to get to nothing."1 111 1 The firm's debt was downgraded lo junk status. Drexler was out and for its new head the board chose Paul Pressler, a Disney executive who ran theme parks and helped rescue the firm's once ailing retail effort. Under Pressler, Gap's struggles con· tinued, largely due to bad bets on colors and styles.1 11 1 Pressler's tenure saw same-store sales decline in eighteen of twenty-four months.I 12 1 The marketing model used by Gap to draw customers in via big· budget television promotion had collapsed. A Forl1111c article on Presslcr's leadership was titled r "fashion Victim.'' Business Week described his time as CEO as a "Total System Failure. "1 1"1 Under tht firm's third CEO in a decade and after years of restructuring that resulted in the closure of hundreds of stores, Gap profits have finally returned, but the firm's admiration of Inditex, and its inability to act oD this envy, remains clear. Says one Gap exec, "I would love to organize our business like Inditex, but I would have to knock the company down and rebuild il from scratch."( Ml Contract Manufacturing: Lower Costs at What Cost? Conventional wisdom suggests that leveraging che ap contract manufacturing In developing countrieS can keep the co st of goods tow. Fi rms can l ow er pri c es and se ll more product or mainta in higher profit rnar· gin s- all good for the bottom l ine. But many firms have also exper enced the ugly downside to th is pract i c~ Global competition among contract firm> ha s led to race -to the bottom cost -cutti ng measures . Too often. th S'l means that in order to have the tow-cost bid, contract firms sk'mp on safety. ignore env i ronmenta l con c erns. employ child i abor, and engage in other gha stly pract i ce s. The apparel industry in part i cular has been plagued by accusations of sweatshop labor and unsafe worki~ • conditions. Inc idents such as the Spring 2013 Bangladesh Rana P. aza disaster. which k" lled more than I.~ people in the collapse of an illegally constru c ted eight- story bu il di ng hous ng mu ltip'e contract garfl1 T)ie factories, underscore the human tolj of unacceptable contract manufacturi ng pract i ces Walrnart, CHAPTER 3 ZARA: FAST FASHION FROM SAVVY SYSTEMS Chi dren's ~ l ~ f e, and Benetton were among the firms said to have purc hased clothing from firms opera tin in Rana P aza . The track_ record of Bangladesh · garment factories has been notably grim. In the dozen years g ri - or to the_ Ran ~ Plaza. nc 1dent, over 700 workers in Bangladesh were killed in garment factory fires llf.J While d'a wa s not 1m~l ic ated in the Rana Plaza inciden~ . the firm was singled out as a protest target b ec a~se t is one~ thedl Z argest importers of ~ lothing from Bang l adesh, • 7 1 and it refused to sign a sarety acco rd backed by H&M an ara, among others .• s ~ i ~firms ~r ~ big ~argets, and those that fail to adequately ensure their products are made under ac ceptable a r con it ~ns risk a brand -damaging ba c kla sh that may turn off customers repel new hires and l eave cur rent ~ taff bfeehng betrayed . Today's manager needs to think deeply not onl; about the ir o~n firm's eth"c 1 pra ctic es , ut also those of all or their suppliers and partners. 1 a Tech for Good: The Fair Factories Clearinghouse The problem or sweat h I b . . Managers often feel hs op a or and dismal industry practices has plagued the clothing industry for years. unacc:eptably poor t e presste to seek ever lower costs and all too often end up choosing suppliers with that hide pra <: tices fr~~t ces: ven well mean ing fir _ ms can find themse ves stung by corner-cutting partners tragic· for those explo't daud~ors or truck p_roducts I ~ from unmonitored off-site locations. The results can be to dog N ke years a~e~ ~l~n ~an carry lasting negative effects for the firm. The sweatshop moniker continues lerns. • '<lt egations were uncovered and the firm moved aggressively to deal with its prob· Nike rival Reebok (now part f Ad'd P.res1 de ntofHuman R hts ao i as) has al ways taken working conditions seriously . The firm even has a Vice vested mllllons in dev~o in nd h~s made ~uman d_1gnity a key p atform for its philanthropic efforts. Reebok in· dimensions suc:h as labo~ ~an in - hous~ information system to track audits of its hundreds of suppliers along to that one division spo~ · sa ety, a;d environmental pract i ces. The goal in part was to identify any bad apples !leaker line. · ing goo s, for example, wouldn't use a contractor identified as unacceptable by th~ lhedataw rnana as valuable to Reebok ar . inf~;;'ent realized the syste~ ~o~~ula rl y g ven that the firm has hundreds of contract suppliers. But senior Clrgan !i ~Reebok went on to d d do even more good if the whole industry could share and contribute l'litiona~~o~ Fair Fa c tories Clearin o~~~e this :ystem and prov·ded crit1ca backing to help create the nonprofit lnlOfma~io au Factor i es (FairFacton~s or se W1t _h management that included former lawyers for Amnesty Inter· ,... ..... ". __ non contract manufa t . g) prov des systems where apparel and other industr i es can share audit by b nt oflJust ic e needed toe urer~ Launching the effort wasn't as easy as sharing the technology The US Uyers t provide a spec· I · · · · o collude and fu th ia exemption and had to be convinced the effort wouldn't be r er squeeze prices from competitors (the system is free of pricing data). 43