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Fast Fashion: Zara in India

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

Facebook: Log In or Out?

Retailwire raised a pertinent question recently about social media and marketing. In marketing as in life, it is all about timing. The question was whether retailers and brands should be concerned that they are moving to Facebook at a time when large numbers of teenagers are abandoning it? 

I believe it’s horses for courses. Marketers of teen brands should definitely be concerned about teens exiting or reducing their usage of Facebook, as they have done with other social platforms in the past. However, there are plenty of others for whom the Facebook audience is apparently becoming more relevant than ever. Facebook reports 400+ million users as of February. According to them, 50% of the active users login on any given day. That’s impressive stickiness.

Having said that, I’d like also to take a different look at those stats. Demographics and physically addressable market aside, the question is what proportion of your potential customers are receptive to the brand in that environment.

At the moment, Facebook is not a medium amenable to classic interruption marketing. (Although it may become that in the future, just like Youtube, with Google ads popping up across the bottom of the video.)

Neither is the Facebook user’s primary purpose brand loyalty or looking at marketing messages. The average Facebook user has enough to keep him/her busy or distracted, without getting on to a brand’s page. That video of a mother with laughing quadruplets is far more likely to get viewed and shared than any of your marketing messages.

If your brand isn’t interesting, engaging, and open, you can’t have the conversations that a platform like Facebook facilitates. If there’s no on-going conversation, your chief Facebook officer is wasting the company’s time, money and internet bandwidth. Logout. Now.

The entire discussion on Retailwire is here: “Marketers Move to Facebook As Teens Move Away” (needs a free sign-up).

Fan-tastic idea from Dyson

It’s curious how James Dyson consistently gets “more” (price) for “less” (components). First it was the bagless vaccum cleaner, now it is a bladeless fan. The retail price is currently pegged at £200, and the product is initially being targeted at the US and Japanese markets, which obviously have more people facing hotter temperatures for more weeks in the year than Dyson’s home country, the UK. Or perhaps a bigger market segment for the latest tech toys that perform well in addition to looking cool.

Branded the Dyson Air Multiplier, it is certainly a fan-tastic idea, and the uphill struggle should be significantly less than when he was trying to sell bagless vacuum cleaners. If anything there is now a “Dyson premium” available to him on the price.

However, in this case, the prices definitely need to be more accessible, or he’ll be facing clones within months. Fans are already a more acceptable reality in income poor countries, and the market significantly larger in those countries. At some lower price point the addressable market will be exponentially larger, and someone else will definitely tackle it. Patent or no patent.

Here’s a Youtube video of Dyson explaining how the fan works. Share your thoughts below, after you’ve watched the video.

Taking the High Road

By Taneesha Kulshrestha

OUTLOOK BUSINESS , July 10, 2010

When Jesus saw the multitude, he was well pleased. And he hoped to sate the hunger in each one of those who milled around him. As he made his way around South Delhi’s City Walk mall, Jesus Echevarria, spokesperson for Inditex, the parent of apparel brand Zara, was all smiles. “Indian customers seem ready for Zara. Their choices of colours, the attitude, all makes me confident that we will do well here,” he says.

Not long after, Zara opened its first Indian store in the same mall on May 28, 2010. By 1.30 pm that day, nearly 500 women had visited the store. Three days on, the steady stream of people continued and there were long queues extending to the store’s doors. “I came on the first day and I cannot find the designs I saw then. I should have just bought them that day,” laments one lady. Jesus would have been well pleased to hear her. Zara, clearly, had arrived.

The Spanish brand’s entry symbolises a change that is quietly sweeping India’s high-end apparel segment. What began as a trickle in 2004-05 has now become a steady stream—foreign brands are lining up to enter the Indian market. In addition to Zara, others such as Diesel, Vero Moda and 7 For All Mankind have also set up shop in India this year. They join Tie Rack, Promod, S Oliver, FCUK, Guess, Next and Calvin Klein, among others, who have been in India for the last three or four years.

Indian shoppers, long starved of genuine international designs, have the country’s WTO membership to thank for the sudden spurt in choice. The sharp reduction in import duties on apparel (from around 100% in 1990 to around 30-35% across categories now) and the government’s decision to allow 51% FDI in single-brand stores in January 2006 have resulted in several foreign apparel companies making a beeline for India.

Although many have positioned themselves as premium brands, most have become prudent enough to ensure that the prices are not beyond the reach of the Indian consumer. And the timing of their entry has been perfect. Over the last few years, Indians have shown a willingness to spend more for value. “A customer who would quibble over parking charges a few years ago now pays Rs 50 for parking, Rs 300 for a movie ticket, Rs 20,000 for a mobile phone and Rs 1 lakh for an LCD TV. Why then can’t he pay Rs 2,000 for an international fashion brand? He surely can!” says Gaurav Sehgal, S Oliver, India COO.

In a sense, the premium segment is seeing a confluence of sorts, where brand price points, consumer incomes and the market ecosystem have dovetailed to create scenes such as the one in Zara’s Delhi store.

Consulting firm Technopak puts the worth of the premium fashion retail segment at around Rs 2,000 crore today. The segment’s value has doubled since 2005, when it was worth about Rs 1,000 crore, says the consultancy. Technopak expects it to grow 25-30% annually over the next five years to over Rs 6,000 crore.

The premium segment’s growth has been driven by the economic boom of the last decade, which has resulted in a surge in the country’s middle-class and upper middle-class numbers. The tremendous potential of the market has made foreign brands flock to India, giving consumers the benefit of greater choice.

Getting The Price Right

Ironically, although they are considered premium brands in India, many foreign labels, including Mango, Zara, Promod and FCUK, sell as mid-market brands in their home countries. According to Devangshu Dutta, CEO of Third Eyesight, a Gurgaon-based retail consulting firm, they have been forced to go premium in India for two reasons. One: import duty, which can be as high as 30-35%. Two, the market itself has lower price levels. For instance, a basic white shirt would cost Rs 500-1,500 in the mid-level segment and Rs 1,500 onwards in the premium segment. As a result, foreign brands, which retail closer to the Rs 1,500 mark, have no choice but to be in the premium segment. In a sense, the ‘premium’ is often because the products have a higher price tag.

Full Steam Ahead

High street fashion brands are looking at major expansion in the next few years.

In many cases though, foreign brands have also realised that the Indian retail consumer is extremely price sensitive. Marks & Spencer (M&S) is a case in point. In its earlier avatar, its products were way too expensive for Indian buyers. M&S positioned itself as a premium brand in India despite being a mid-market brand in the United Kingdom. The strategy did not work well. Premium segment buyers found the prices too high. Mark Ashman, former CEO of Marks & Spencer India, admitted as much. Result: M&S stores had barely any footfalls. Now, the British retailer is working to correct that and making efforts to woo mid-to-premium segment shoppers. In 2009, it formed a 50:50 joint venture (JV) with Reliance Retail to expand its network. It also cut prices by 20-30% across categories and repositioned itself as a mid-to-premium segment retailer.

Benetton, which entered India in 1991 through a 50:50 JV with the DCM Group, also struggled to find its footing. By 2004, its revenues had only reached a modest $9 million or so. A lack of focus and poor-quality merchandise had seen its fortunes suffer. The Italian company turned the corner in December 2004, when Chairman Luciano Benetton decided to convert the JV into a wholly owned subsidiary. The Indian unit went on a big expansion exercise, improved quality, increased local sourcing and optimised its supply chain. The efforts resulted in huge cost savings, better trend forecasting and, importantly, lower prices. By 2009, Benetton had expanded to 106 outlets in 45 cities. Its revenues had crossed $100 million.

Others learnt the same lesson. In 2001, Mumbai-based fashion distributor Major Brands brought Spanish women’s apparel brand Mango into India. The first store opened at the Crossroads Mall in Mumbai. Mango charged prices that were three to four times higher than local brands. The starting price of its T-shirts, tops, denims and other apparel was around Rs 1,400 and the upper limit could be as high as Rs 15,000. Not surprisingly, Mango was viewed as a luxury brand, although it isn’t actually one. Only Bollywood actresses, models or the social elite were seen sporting its threads. In 2007, in an effort to record more footfalls, the brand rationalised prices, cutting them by nearly 25%. Today, the starting price of a Mango T-shirt can be as low as Rs 500. At the same time, it also has expensive designs, priced at Rs 10,000 or more, for the patrician brigade.

The price cuts have helped Mango grow. “Our South Delhi sales are at par with international markets like Dubai and Singapore. In the last one year, we’ve seen a 20-25% increase in sales,” says Kamal Kotak, Country Head, Major Brands.

Heavier Wallets

While the brands have cut costs and are rationalising prices in line with the Indian market, the Indian consumer, too, has moved up to higher price points. “Prices in India have trebled over the last 20 years,” says Dutta of Third Eyesight.

“These higher price points are the new mid-price points as buying power and disposable income have increased many times over in the last decade,” says S Oliver’s Sehgal. His words ring true if one looks at the country’s premium jeanswear market. In 1999, Levi’s 501 jeans, an “international bestseller”, cost Rs 995. Today, they cost around Rs 3,000. The willingness to spend is also reflected in the increasing average bill value and average basket size figures. As per industry estimates, the average bill value has risen from around Rs 1,500 in 2007 to Rs 4,000 in 2010.

The average age of the premium buyer has also come down. Pradeep Hirani, owner of premium and luxury fashion stores Kimaya and Viva Kimaya, says that earlier, 30-plus women made up the premium and designerwear segment. “Now, it is the 20-plus age segment that drives growth,” he adds. The consumer’s profile has also undergone a change. “Earlier you expected only a certain set to visit a store like Kimaya. Today, a girl may come in a Maruti 800 and pick up a dress for Rs 5,000 or Rs 10,000,” says Hirani. A clear indication of how the customer base has expanded.

Spreading Out

Expansion is next on the anvil for most players. Tommy Hilfiger, for instance, plans to open 35 new stores this year, while Lerros plans to add 10 more to its current count (see: Full Steam Ahead). And, it’s not going to be restricted to the metros and large cities—tier-2 towns are also on the radar. Benetton says its sales in tier-2 towns are growing faster than in metros and Sec-A cities. Market experts say that small towns are coming of age. Income and awareness levels are rising and organised retail has come in. “There is a lot of money in tier-2 towns. And there is an aspiration to sport a lifestyle that is global,” says Tommy Hilfiger India CEO Shailesh Chaturvedi.

The brands are also more confident of the Indian market today, going by the change in their entry strategy. Earlier, franchising was the preferred mode of entry. In 2009, most of the brands entering India opted for wholly or partially owned subsidiaries or joint ventures. Now, even the brands already in the market are looking to take greater control over their retail operations.

And, each is going all out to build customer loyalty. Chaturvedi of Tommy Hilfiger says that his brand has decided to follow the 80:20 rule. It will aim to get 80% of sales from a loyal customer base of 20%. For this, the company has launched a customer loyalty programme that will offer customers personal privileges and services.

Focusing on the store as the brand builder is another strategy. “We do not advertise. We let our store work for us,” says Zara’s Echevarria, referring to its plush interiors. He says that the brand will also churn inventory twice a week. “Customers will find fresh styles every time they come to the Zara store,” he explains. Currently, most brands churn inventory twice a month.

Challenges Aplenty

Despite the optimism, new entrants will still face many challenges in the Indian market. With organised retail space in short supply, getting the ideal location for a store will be difficult. And while the downturn did correct rentals for existing players, the new ones may find themselves paying more as the real estate market has picked up.

Investment per store remains high. S Oliver spent Rs 3 crore for a 7,000 sq ft store in South Delhi’s Select City Walk mall. But a similar store in Pune cost Rs 80 lakh. There’s also room for improvement in sales. “Sales per store in India are still less than half of what one can expect to sell in, say, Dubai,” says Chaturvedi. And so, break-even will take longer. Most stores take at least two or three years to break even, if at all.

Product sourcing will also make a huge difference when it comes to profitability. Now, most international fashion brands do not source clothes locally but import them. But with an eye on cutting lead time and earning higher profits, brands like Marks & Spencer, Puma and Esprit have increased local sourcing. Puma sources close to 80% of its clothes locally while Benetton sources its entire range locally.

With so many brands coming in, competition will hot up and a shakeout could well be in the offing. But, for now, the market is ripe for the picking. And Jesus, for one, is hoping that the faithful will help him reap a rich harvest.

Find this article in Outlook Business of 10 July, 2010