Zara: Fast Fashion from Savvy Systems

Both Zara and The Gap are retail online clothing giants in the fashion s industry. Zara, now worldwide, was founded in Spain. The Gap, also now worldwide, is a US Corporation. Both companies made a critical strategic decision on the future growth of their companies, with Zara taking the lead to move their significant marketing online. Gap later followed. Both still make retail sales but are positioned on the Internet. Zara currently has over 1M hits on its website each month. Read this chapter to understand how early the use of IT, particularly data collection and analysis, helps gain a competitive advantage. How did Zara use data to make early decisions about its business operations? How did Zara's use of data compare to Gap's?

Don't Guess, Gather Data


Most products are manufactured for a limited production run. While running out of bestsellers might be seen as a disaster at most retailers, at Zara the practice delivers several benefits.

First, limited runs allow the firm to cultivate the exclusivity of its offerings. While a Gap in Los Angeles carries nearly the same product line as one in Milwaukee, each Zara store is stocked with items tailored to the tastes of its local clientele. A Fifth Avenue shopper quips, "At Gap, everything is the same," while a Zara shopper in Madrid says, "you'll never end up looking like someone else". Upon visiting a Zara, the CEO of the National Retail Federation marveled, "It's like you walk into a new store every two weeks".

Second, limited runs encourage customers to buy right away and at full price. Savvy Zara shoppers know the newest items arrive on black plastic hangers, with store staff transferring items to wooden ones later on. Don't bother asking when something will go on sale; if you wait three weeks the item you wanted has almost certainly been sold or moved out to make room for something new. Says one twenty-three year-old Barcelona shopper, "If you see something and don't buy it, you can forget about coming back for it because it will be gone". A study by consulting firm Bain & Company estimated that the industry average markdown ratio is approximately 50 percent, while Zara books some 85 percent of its products at full price.

The constant parade of new, limited-run items also encourages customers to visit often. The average Zara customer visits the store seventeen times per year, compared with only three annual visits made to competitors. Even more impressive - Zara puts up these numbers with almost no advertising. The firm's founder has referred to advertising as a "pointless distraction". The assertion carries particular weight when you consider that during Gap's collapse, the firm increased advertising spending but sales dropped. Fashion retailers spend an average of 3.5 percent of revenue promoting their products, while ad spending at Inditex is just 0.3 percent.

Finally, limited production runs allows the firm to, as Zara's CEO once put it "reduce to a minimum the risk of making a mistake, and we do make mistakes with our collections". Failed product introductions are reported to be just 1 percent, compared with the industry average of 10 percent. So even though Zara has higher manufacturing costs than rivals, Inditex gross margins are 56.8 percent compared to 37.5 percent at Gap. For labor cost comparison, reports that workers in Spain earn an average of $1,650/month versus $206/month in China's Guangdong Province.

While stores provide valuable front-line data, headquarters plays a major role in directing in-store operations. Software is used to schedule staff based on each store's forecasted sales volume, with locations staffing up at peak times such as lunch or early evening. The firm claims these more flexible schedules have shaved staff work hours by 2 percent. This constant refinement of operations throughout the firm's value chain has helped reverse a prior trend of costs rising faster than sales.

Even the store displays are directed from "The Cube," where a basement staging area known as "Fashion Street" houses a Potemkin village of bogus storefronts meant to mimic some of the chain's most exclusive locations throughout the world. It's here that workers test and fine-tune the chain's award-winning window displays, merchandise layout, even determine the in-store soundtrack. Every two weeks, new store layout marching orders are forwarded to managers at each location.

Technology ≠ Systems. Just Ask Prada

Here's another interesting thing about Zara. Given the sophistication and level of technology integration into the firm's business processes, you'd think that Inditex would far outspend rivals on tech. But as researchers Donald Sull and Sefano Turconi discovered, "Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zara's IT expenditure is less than one-fourth the fashion industry average". Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spent on tech has a payoff.

Contrast this with high-end fashion house Prada's efforts at its flagship Manhattan location. The firm hired the Pritzker Prize–winning hipster architect Rem Koolhaas to design a location Prada would fill with jaw-dropping technology. All items for sale in the store would sport with radio frequency identification (RFID) tags. Think of RFID systems as a next-generation bar code. (small chip-based tags that wirelessly emit a unique identifying code for the item that they are attached to). Walk into a glass dressing room and customers could turn the walls opaque, then into a kind of combination mirror and heads-up display. By wirelessly reading the tags on each garment, dressing rooms would recognize what was brought in and make recommendations of matching accessories as well as similar products that patrons might consider. Customers could check inventory, and staff sporting PDAs could do the same. A dressing room camera would allow clients to see their front and back view side-by-side as they tried on clothes.

It all sounded slick, but execution of the vision was disastrous. Customers didn't understand the foot pedals that controlled the dressing room doors and displays. Reports surfaced of fashionistas disrobing in full view, thinking the walls went opaque when they didn't. Others got stuck in dressing rooms when pedals failed to work, or doors broke, unable to withstand the demands of the high-traffic tourist location. The inventory database was often inaccurate, regularly reporting items as out of stock even though they weren't. As for the PDAs, staff reported that they "don't really use them anymore" and that "we put them away so tourists don't play with them". The investment in Prada's in-store technology was also simply too high, with estimates suggesting the location took in just one-third the sales needed to justify expenses.

The Prada example offers critical lessons for managers. While it's easy to get seduced by technology, an information system (IS) is actually made up of more than hardware and software. An IS also includes data used or created by the system, as well as the procedures and the people who interact with the system. Getting the right mix of these five components is critical to executing a flawless information system rollout. Financial considerations should forecast the return on investment (ROI) - the amount earned from an expenditure - of any such effort (i.e., what will we get for our money and how long will it take to receive payback?). And designers need to thoroughly test the system before deployment. At Prada's Manhattan flagship store, the effort looked like tech chosen because it seemed fashionable rather than functional.