Question

Inditex's Business Model

Most fashion companies have their clothes manufactured in China. This provides low cost manufacturing but at the expense of flexibility. Managing a distant supply chain creates an inherent problem. By the time finished clothes are on route from your supplier, the prevailing fashion may have changed. The clothes you place in your retail store can end up looking decidedly out of fashion. Most clothing retailers are forced to continue with plans they developed more than six months in advance. Their clothes are usually made and sent out to stores via a centrally controlled system. This permits only slight local changes and most stores receive similar stock.

At Inditex, every store receives a tailored assortment, right down to the number of T-shirts, delivered twice a week. Just over half the stock will be designed and manufactured less than a month before it hits the store. Prices can vary considerably between countries. Shoppers in Spain, Portugal, and Greece can buy the clothes much as thirty per cent cheaper than elsewhere in Europe or overseas markets such as China or the US. As one director at Inditex put it, “company is global, but we shape everything in a very exclusive way to individualise it and shape the store to the customer's needs.”

Part of Inditex's business model is a reliance on communication and collaboration. The store's stock is developed in partnership between designers, country managers based at the brands' HQs, and the local store. This level of collaboration allows everyone to feedback ideas about what customers want and don’t want. The business is configured in a way that allows decisions to be made from the bottom to the top, not just in the stores, but throughout the supply chain. Just over half of Inditex's product is only ever produced in relatively small amounts; even if something is incredibly successful, it will never be reproduced exactly again. Designers find versatile fabrics that can easily work as well in a skirt as a jacket to help facilitate Inditex's flexible approach.

Unlike other clothing manufacturers, Inditex does not advertise. Its avoidance of advertising is party driven by its manufacturing model, which relies on constantly changing its garments. This precludes placing advertisements in magazines or billboards which require a lead time of weeks or month. However, website can be updated every day, reflecting real-time changes. Instead, it relies upon smart locations and regularly updating the look of its stores. It is one of the main areas of capital expenditure for Inditex, with 300 to 400 stores a year to renovate. While competing clothing retailers struggled, Inditex reported a ten per cent rise in sales in 2016, after it had invested €1.4 billion in its warehouses, technology, new stores, and online expansion.

As part of the decision-making process for the Zara brand managers, for each country monitor computer screens at headquarters filled with sales data and talk to store managers or regional directors by phone. Managers are helped by computer algorithms, developed in partnership with Massachusetts Institute of Technology. The use of computer technology helps Zara to get the right mix of sizes for stores. Although managers are guided by these automatic suggestions, they have autonomy to adjust everything manually, according to local feedback and market knowledge.

Over ninety-five per cent of Zara's collections are sold internationally. That said, there are still regional differences. For example, Zara's clothes in Germany tend to be a bit sporty; in Russia, they might wear a pencil skirt with high heels, but in the UK it would be worn with a brogue. At the same time, as different stores around the world are selling similar fashions, Zara stores around the corner from each other might be selling different items of clothing. It's all dictated by their shoppers. Staff at head office can make adjustments for products in as little as three weeks in advance, using production in or close to Europe; primarily Turkey, Spain, and Portugal.

At headquarters in Arteixo, there are eleven factories owned by Inditex producing goods for the Zara brand. Inditex's capability lies in skilled jobs, such as cutting out garment pieces, clothing design, and logistics; all of which it keeps in-house. It owns just two or three per cent of its manufacturing capacity. The sewing of fabric pieces is undertaken by more than 100 nearby partner factories that make pieces sent from the Inditex-owned factories into finished clothes.

Many have referred to this as 'fast fashion'. Executives at Inditex insists: 'It's not fast, it's more accurate. What's fast is the logistics, and the moment of creation must be close to what customers are saying. To be quick is easy. But that is not our model. Everything we do is trying to think inside the skin of the customer. It's more expensive, but you get more loyalty from the customers and more flexibility, more accuracy.

Another of Inditex's capabilities is its distribution system. In Arteixo, all Inditex's factories are linked to its distribution centre by tunnels and a 200-km network of ceiling rails on which 50,000 garments a week from each factory flow around on hangers. Basic items of clothing made in Asia are gathered in Spain, before being sorted for individual stores. The model may be under some pressure since Asia overtook Spain as the biggest source of sales. Routing all its products to a small town in Spain to be sorted, may require changing this to a small town in China. Inditex's Business model appears quite straightforward; which begs the question—why has it not been successfully copied?

The Questions

1. What type of international strategy would you say Inditex is following? Justify your answer.
2. What is Zara’s business strategy? Explain.
3. How is the international strategy of Inditex related to the business strategy of Zara? Explain.
4. Why is it that no other fashion retailer can match Zara's performance?

Answer 1