By Saumya Roy

FORBES INDIA, Jul 29, 2010

Seema Kakkar has followed a simple routine for the past few weeks. At least once a day, without fail, she makes sure she pops over to her Mecca, a glittering new store that's opened next to hers. As the entrepreneur who launched Remanika, a women's wear brand, Kakkar has modeled her entire business concept on Zara, one of the most successful fashion retailers in the world, known for getting the latest designs into the market before anyone else. More than five weeks ago, Zara opened its first store in Delhi, followed soon by Mumbai. The Mumbai store in the Palladium mall is a few meters away from Kakkar's shop-in-shop outlet inside Pantaloon department store in High Street Phoenix. The chance to observe Zara's has proved hugely beneficial. "I wanted to be an Indian Zara, so this is like a school for me," says Kakkar.

Kakkar's response isn't surprising. Zara is indeed the Coca-Cola of the fashion world. Starting sometime in the mid-Seventies in Spain, Inditex, the Euro 11 billion (revenue) company that owns Zara and some other labels, built a hugely successful business model of taking the latest catwalk designs and converting them into affordable high street fashion in a matter of three weeks. Zara focuses on rapid product development and design and outsources the manufacture in small batch sizes to a network of dedicated suppliers. Its ability to bring changing fashion quickly to market has meant that while customers in Europe visit other fashion stores just three times a year, they visit Zara 17 times, according to one study.

Many entrepreneurs have tried imitating Zara, but none of them have been quite as successful. For most part, Inditex remains notoriously secretive. It attends very few industry conferences and is guarded in revealing too much about its business model.

Zara's track record on globalization has been enviable. Its flexible, high-speed business model has traveled from Spain to 77 markets around the world, including China. It entered mainland China in 2006 and has close to 44 stores there. Pablo Isla, the 46-year-old chief executive of Inditex, is now betting big on India. In earlier media interactions, he has also made it known that it may well be among its most challenging market entries yet.

Zara's global model will be tested in India on three counts. One, there aren't too many seasonal variations. In most parts of the country, winter is non-existent or at best lasts barely a couple of months. So driving new fashions every season isn't easy. Two, there is the cultural issue: Although the new mall culture is inducing buying habits to change, Indians still don't change their wardrobe that quickly. And it is Zara's ability to get customers to visit and buy several times a year that enables it to achieve scale. Three, as a concept, Western women's wear is still catching on. For most part, traditional Indian wear tends to dominate the wardrobe. And there is a strong preference for bright colors as opposed to the limited color palette--black, white and browns--in the West.

So far, Zara has cranked out all its designs from a hub near Madrid and airlifted the finished product to its stores around the world twice a week. The added costs have been defrayed by charging a higher price in each of these foreign markets. In India, most foreign retailers have struggled to build a strong franchise based around import-led premium pricing strategy.

This is why Isla is clear that he isn't hoping for a quick ramp-up in India. Apart from the two stores in Mumbai and Delhi, Zara will in all likelihood add two more stores in Delhi and Bangalore--and then learn from its experiments, before it begins expanding. A 2002 study says Zara follows what it calls an "oil stain" strategy. It means Zara opens its first few stores in a country to get an understanding of a market and then uses that knowledge as it expands into that market. "The most important thing for us to enter a new market is the existence of potential customers: People sensible to fashion phenomenon. And, in an operational sense, the availability of suitable locations," says Inditex's official spokesperson via email.

Now let's look at its initial performance. The fact is that Zara has had an opening few foreign brands have had in India. Through the opening weekend, there were long queues outside its trial rooms as women jostled to try out clothes. According to industry sources (Zara itself is famously reticent about sharing numbers), it had sales of close to Rs. 1.25 crore in the first weekend in Delhi and nearly the same in its Mumbai store. Delhi's Select Citywalk mall recorded 40% more footfalls than it usually does and Mumbai's Palladium mall recorded close to 30% higher footfalls.

"Any mall owner will want Zara now for free because it has an ability to bring more people of a certain kind into the mall," says Arjun Sharma, promoter of Delhi's Select Citywalk mall.

"Their opening has been far beyond expectations," says Govind Shrikhande, chief executive of department store chain, Shoppers Stop. He credits the brand with opening up the premium women's wear market in an unexpected way. Industry executives such as him pin Zara's initial success to the fact that it faithfully brings its famously international brand appeal and experience without having the higher prices that foreign brands typically have in India on account of high duties.

At more than 16,000 sq ft, the stores look and feel exactly as they do internationally. The merchandise is also the same as is available in international stores currently, except that these stores have more of its "Basic" and casual wear collections rather than the higher end "Collection" clothes and accessories.

Industry sources say price points are mostly below its international competitors in India, including Mango, Guess, Esprit, and French Connection. They are also in line with Zara prices in other markets including Singapore, Dubai and some European markets. This has come as a surprise to customers because international brands have tended to price above Singapore and Dubai prices because Indian duties could add 30-40% on retail prices, while duties in these countries are much lower. Devangshu Dutta, managing director of Third Eyesight, a retail consultancy based in the capital, reckons that Inditex may be taking a long-term view of the Indian market and relying on strategic pricing.

The attention to detail was telling. Its shop windows were elegantly laid out and the shop attendants were well groomed and sophisticated. To keep its loyal customers hooked, the stores in Delhi and Mumbai had different merchandise every few days after it opened its doors. Store and mall staff worked through the night to replenish stores before their early opening at 10 a.m. To keep up this constant churn in merchandise, Zara stuck to its unique model of every store manager communicating their store needs to the design team in Spain. Accordingly, twice a week the design team flies down a consignment for every store.

However, the initial euphoria may not last forever. Pankaj Ghemawat, professor of global strategy at Spain's IESE Business School, says it may be too early to judge how the stores will do over the longer term. In fact, expanding in Asia, and India, could force Inditex to confront some of the issues that face its centralized model that has brought it much success.

While designs are all made and shipped out of Spain, it is the interaction between store managers and designers that leads to some degree of localization in store merchandise. For instance, Asian stores may get smaller sizes and more cotton clothes than stores in Europe. But as the chain gets larger, this could prove harder to do and add expenses to Zara's supply chain, says Kasra Ferdows, co-director of programs for global logistics at Georgetown University's McDonough School of Business.

This is because clothes manufactured across the world, including India, Bangladesh, Sri Lanka, Turkey, Spain and Indonesia, are shipped to Spain and then sent to stores according to the specifications of the design team and store managers. This could well add to costs as Zara seeks to expand in Asia. At the end of fiscal year 2009, Zara had 1,608 stores worldwide, of which 219 stores were in Asia. More stores have opened since, but merchandise comes in from Spain. So, for instance, there are clothes in the Indian store that are made in India, Bangladesh and Sri Lanka, presumably shipped to Spain and then sent back to the store here.

Zara started expanding internationally with a store in Portugal, as early as 1980, to access larger markets and soon opened stores in New York and Paris to establish its positioning as a fashion forward retailer. It has expanded very quickly over the last more than a decade and India is the 77th country it is in. Still, more than 61% of its stores are in Europe, says Ghemawat, who has written a well known case study on Zara.

"If they are to make a serious play in the Asian market they will need a second hub there," he says. But given that the Spanish design team works with each store manager to localize the merchandise, moving the business model away from this will not be easy, he says. Although Inditex runs several labels, Zara contributed 63.8% of its Euro 11 billion revenues for the fiscal year 2009.

In fact, several international retailers, including Marks and Spencer and Benetton, have started to source Indian products for their Indian stores to meet Indian demand for quality and value as they see the potential for growth in the Indian market. "Supply is creating demand and the market is getting created for women's Western wear now," says Shital Mehta, COO of premium men's and women's wear label, Van Heusen.

Even till a couple of years ago, there were few women's Western wear brands. Technopak, a leading retail consulting firm, estimates that Western wear accounts for just Rs. 3,000 crore of the Rs. 49,000 crore women's wear market, which includes ethnic wear, woollens, intimates, etc. But now, the entry of Indian and international brands is helping drive change. The segment is growing at a faster rate than the overall market. Van Heusen's women's wear sales growth has been double that of men's wear in the last few months, albeit on a smaller base, he says.

Other international wear brands faltered earlier because either they were too expensive or the Indian franchisees did not invest in growing the brand, says Arvind Singhal, Technopak's chief executive. He thinks Zara could well look at earning revenues of $500 million in India over the next 10 years or so. But to fully realize the potential of the Indian market, it may have to source locally. For that, Zara will need to have at least 100 stores in India, says Ferdows, who co-wrote another well-known case study of the Zara business model. "Otherwise it is too much of a hassle and expense for a few stores," he says.

Even as Zara settles in, the rest of the Indian fashion retail sector is hoping for an immediate rub-off. Third Eyesight's Dutta reckons a lot of smaller players will now be encouraged to work harder, be more customer focused and look at things which they may have overlooked earlier.

On her part, Kakkar is hoping that Zara's coming will create a market for different styles and more frequent shopping. In the past, whenever she tried to drive the market by offering several new styles, customers saw it as too experimental. But, she says, a brand such as Zara will make it acceptable to experiment and wear different styles. "I feel Indian customers want to experience great shopping and Zara will make people buy more." That's something Isla would be hoping for too.

SIDEBAR: The quick change artist

Zara's ability to quickly bring the latest designs to its stores rests on its unique business model.

1. Zara's design team monitors fashion trends and store sales. Based on this they come up with 1,000 designs a month.
2. They send these out for manufacturing around the world.
3. Completed designs are shipped back to Spain.
4. Local store managers in each country tell the Zara head office in Spain what the store needs and how much.
5. The design team then flies or trucks out consignments for each of Zara's over 1,608 stores based on local needs and trends. A store gets consignments twice a week.

Find this article in Forbes India Magazine of 30 July, 2010