As the new academic sessions are about to begin, I thought it might be useful to re-visit a retailer that we featured extensively in the text-book: Zara.
When I was a student and then a lecturer the iconic and most successful brands tended to revolve around IBM and Dell. They were used extensively to highlight how a company can generate success through business models that differed from the competition and generated sustainable competitive advantage. They both subsequently struggled: in the case of IBM it almost went out of business as it ceased to become relevant to a changing market. It subsequently retrenched and evolved into a successful operation once again; albeit radically different from its original incarnation. Dell likewise went through extensive re-definitions of its business.
Zara has been arguably the most successful brand in the world over the past twenty years or so. It features extensively as a case study in all strong business schools and particularly in specialised retail classes.
I thought it might be opportune to carry out a “rain-check” on its present performance and see if it is showing any sign of any diminution of its success. Is it likely to follow the law of inevitability which suggests that over time even the most successful brands will decline and possibly go out of business?
Let’s briefly recap its business model.
Zara is part of the overall company called Inditex. This organisation owns a number of successful retail operations including Massimo Dutti, Pull & Bear and Berscha to name but a few.
It has overall global turnover of around £21 billion and operates around 7,000 stores world-wide.
Zara operated around 2,000 stores and as of Aprila2017 recorded a turnover of £5-6 million.
The business model essentially changed the way in which retailers operate when it started off initially.
Instead of designing items based on the four seasons model (Spring, Summer, Autumn and Winter) it worked on the principle of creating excitement for its customers by constantly introducing new designs and items every three weeks or so. It also produced very little stock in the case of each item. Currently it makes 60,000 copies of each item. This means an average of 30 for each one of its 2,000 stores.
Its real success rests with its supply chain and production system. It can replenish any of its stores anywhere within a three to five-day time-frame. Store managers track the trends and where a particular item is selling well, they contact headquarters in La Coruna and its rapid replenishment system kicks into play. Everything revolves around the twin principles of speed and responsiveness.
Even where an item sells out across the stores, it does not necessarily produce more. Instead it works on the principle of creating more interest and excitement by evolving that particular item into a similar cut or colour.
It challenges the basics of marketing which suggests that we give the customers what they want. In Zara’s case it does so but does not generate large levels of inventory that are likely to cost money in terms of lying around in distribution centres and eventually having to be “marked down” in order to get rid of excess.
It employs over 700 designers in La Coruna who act on feedback and marketing research that is fed back to them in order to synchronise designs with trends and colours.
Sixty per cent of its products are sourced close to Spain. This further speeds up the supply chain process and allows Zara to deliver on average two fresh deliveries of items to its individual stores. A sophisticated electromagnetic system allows Zara to track each individual litem as it moves through the supply chain.
I would stress that the ley learning point from the Zara model is that it is not about being a retailer. How do you describe Zara? It is a leading edge supply chain integrator which has developed a process for doing business that is very difficult to copy.
Is it still successful? The answer is unequivocally YES!
It recorded a 14 per cent increase in sales in April 2017 which, if assessed on a like-for-like basis amounted to a profit increase of between 8-9 per cent.
Has it adapted its model in recent times? After all the overwhelming evidence from the world of business indicates that, like a successful sports team, it cannot stay still in the face of an ever-changing world and the competition.
The key issue in my view is how it has responded to the inexorable move towards online shopping.
Zara made its first move into e-tailing with its “Zara Home” range of items in 2007. It extended this development with its clothing section in 2010. Interestingly Zara does not identify the breakdown in sales between its “bricks and mortar” stores and its online channel.
The general thrust of its direction however still appears to position “physical” stores at the forefront. This is reflected in a recent development in La Coruna where it opened a much bigger stores than is the norm. This stores is around 54,000 sq. ft. and replaced four smaller stored in and around the city.
This development is somewhat at odds with other retailers who have embarked on a rationalisation process of its existing stores in the face of the threat of online shopping. An example of this practice is Macys: the American retailer.
Commentators have differing views on the new approach of Zara.
It can be argued that one of the core principles of the Zara model revolves around the excitement created in the physical stores as a consequence of the frequent changes in merchandise. Shoppers visit Zara store much more frequently than is the case with its competitors. If Zara embarked on a conscious strategy of closing stores and shifting aggressively to its online channels it is possible that it would lose one of its core differentiating factors.
By developing bigger stores that effectively become flagship operations it can be argued that it can heighten the excitement for its core shoppers. It can also entice shoppers who do not live within a reasonable distance of such stores to make greater use of its online channel. Thus it does not compromise on its physical stores and avoids the accusation that it is ignoring its e-tail operations.
This is an aspect of Zara’s business model that we should monitor closely over the coming couple of years. The organisation has a large cash reserve and it perhaps not in a position where it is forced to reduce costs by closing stores.
It is difficult to replicate the “excitement” factor on an online channel and in my view its present approach captures “the best of both worlds”. However as we know from retailing nothing remains the same and we should be prepared for the unexpected.
For now Zara continues to grow in terms of sales and profits globally.