Chapter 3
Zara: Fast Fashion from Savvy Systems
Chapter Introduction

This chapter focuses on how Zara, the clothing giant, was able to dominate the retail fashion industry through its use of technology. Zara’s approach defies every aspect of conventional wisdom in fashion retail, yet it has managed to create a winning formula.
The chapter describes the manner in which technology has permeated design, sales, manufacturing, logistics, and distribution functions at Zara allowing it to become “the most innovative and devastating retailer in the world.”

1. Introduction o Understand how Zara’s parent company Inditex leveraged a technology-enabled strategy to become the world’s largest fashion retailer.

Section Outline
• The blend of technology-enabled strategy that Zara has unleashed seems to break all of the rules in the fashion industry. o The firm shuns advertising and rarely runs sales. o Unlike the other players, Zara is highly vertically integrated. o Inditex Corporation, the parent company of Zara, is now the world’s largest fashion retailer.
1.1 Why Study Zara?
• Zara has entered many countries and its profitability is among the highest in the industry.
• Zara’s products are fashionable but are comparatively inexpensive.
• It is important to understand how counterintuitive and successful Zara’s strategy is, and how technology makes all of this possible.
1.2 Gap: An Icon in Crisis
• In retail, having too much unwanted products (inventory) on hand will force you to mark down or write off items, affecting profits.
• For years, Gap sold most of what it carried in stores.
• When sales declined, Gap decided to chase the youth market and filled stores with miniskirts, low-rise jeans, and even a much-ridiculed line of purple leather pants.
• The throngs of teenagers the firm 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 huge amounts of inventory took its toll. o Gap’s same-store sales declined for twenty-nine months straight and profits vanished. o It had to close down many stores and wrote off much of its inventory.
SIDEBAR: Contract Manufacturing: Lower Costs at What Cost?
• Conventional wisdom in apparel retail is that firms can keep the cost of goods low by leveraging cheap contract manufacturing in developing countries.
• However, contract firms often skimp on safety, ignore environmental concerns, employ child labor, and engage in other unethical practices to have a low-cost bid.
• Gap, Nike, Wal-Mart, and many other apparel firms have been accused of working with suppliers who employ sweatshop labor to keep costs down.
• Firms that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may turn off customers, repel new hires, and leave current staff feeling betrayed.
SIDEBAR: Tech for Good: The Fair Factories Clearinghouse
• Firms can find themselves stung by corner-cutting partners that hide practices from auditors or truck products in from unmonitored off-site locations.
• Reebok invested millions in developing an in-house information system to track audits of its suppliers along dimensions such as labor, safety, and environmental practices.
• Reebok went on to donate this system to help create the nonprofit organization Fair Factories Clearinghouse.
• The Fair Factories Clearinghouse provides systems where apparel and other industries can share audit information on contract manufacturers.

Questions and Exercises

1. Has anyone shopped at Zara? If so, be prepared to share your experiences and observations with your class. What did you like about the store? What didn’t you like? How does Zara differ from other clothing retailers in roughly the same price range? If you’ve visited Zara locations in different countries, what differences did you notice in terms of offerings, price, or other factors?
Answer: This is an activity designed to promote class room discussion. The students who have visited the store may share their experiences about shopping at Zara. Factors such as customer service, price, fashion, variety, etc. can be discussed. Due to the nature of this question, student answers may vary.

2. What is the “conventional wisdom” of the fashion industry with respect to design, manufacturing, and advertising?
Answer: The conventional fashion industry business model is based on long lead times, contract manufacturing, and large advertising budgets.

3. What do you suppose are the factors that helped Gap to at one point rise to be first in sales in the fashion industry?
Answer: Gap’s targeting was appropriate in the earlier years and its fashion predictions were always spot-on. This led to increased sales; Gap sold most of what it carried in stores. Gap’s CEO turned Gap’s button-down shirts and khakis into America’s business casual uniform. This kind of innovation and operational efficiency led Gap to the top spot in the United States.

4. Who ran Gap in the 1990s? How did the executive perform prior to leaving Gap? Describe what happened to sales. Why?
Answer: Mickey Drexler ran Gap in the 1990s and he is credited with Gap’s meteoric rise during that decade. However, sales declined early in the next decade and Drexler’s response was the introduction of fashion for the youth market. The youth market never materialized and the shift drove Gap’s mainstay customers to other retailers. As sales declined further, Drexler was fired in May of 2002.

5. Who was the Gap’s second CEO of this decade? How did sales fare under him? Why?
Answer: Paul Pressler was Gap’s second CEO of the decade. During Pressler’s tenure, same-store sales declined in eighteen of twenty-four months, largely due to poor decisions on colors and styles.

6. Where do Gap clothes come from? Who makes them? Why? Are there risks in this approach?
Answer: Gap clothes are contract-manufactured by offshore companies in developing nations. The rationale for this practice is that lower labor costs lead to lower prices, increased volumes, and higher profit margins. The risk to this approach is that the firm will be criticized for low pay, use of child labor, and unsafe working conditions. Environmental disregard prevalent among contract manufacturers will be discovered by watchdog groups, the media, and customers. This type of negative exposure can severely impact a firm’s fortunes.

7. Describe the downside of working with a supplier exposed as having used unethical practices. How does this potentially damage a firm? How can technology play a role in helping a firm become more socially responsible with its supply sourcing?
Answer: A firm that works with a supplier exposed as having used unethical practices can be taken to task by watchdog groups, the media, and its consumers. This can trigger a brand-damaging backlash that may reduce sales, lower employee morale, and decrease the company's appeal among prospective employees. A firm can use in-house information systems or shared databases such as the Fair Factories system to track audit information on contract manufacturers along dimensions such as labor, safety, and environmental practices.

8. Describe the Fair Factories Clearinghouse. Which firm thought of this effort? Why did they give the effort away? What happens as more firms join this effort and share their data?
Answer: The Fair Factories Clearinghouse is a nonprofit organization formed to collect and share audit information on contract manufacturers. This effort was initiated by Reebok to monitor the activities of their own suppliers. Reebok donated their internal system and helped create Fair Factories Clearinghouse because they realized an industry-wide system would be more effective. As more firms join the system the database becomes broader and more valuable.