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Expecting Zarafication?

My first brush with Zara and Inditex (Zara’s parent company) was in the 1990s, when we were comparing product development and supply chain best practices for another European retailer.

In 2002, after writing a case study on the Zara business model, I was (and continue to be) surprised at the number of downloads from the website (referenced at the bottom of this article).

In 2004, the interest at the Images Fashion Forum was so intense that the Q&A after the presentation exceeded the allotted time, to the extent that I was almost declared persona non grata by the organising team!

I’m glad to say that we’re all still friends and, together, witness to the logical next phenomenon: the much anticipated Zara store launch in India in May 2010. And what a phenomenon! On a high-footfall day, at full price, the Delhi store looks as if the merchandise is being given away for free.

In 2006, India was the 8th highest source of traffic to the Inditex website (more than half a million, almost 2 per cent of the total); incredible, considering that the other Top-10 countries already had Inditex stores. Although Zara finally signed a joint-venture with the Tata Group, I’m pretty sure that those thousands of other rejected prospective Indian licensees and franchisees must be getting their Zara-fix now as customers.

What does the Zara launch mean for the Indian fashion and retail sector? Is this the beginning of a new era? Should we expect Zarafication of the market, where the customer is driven by fashion, and the supply chain will turn and churn products faster than ever before? Should other international brands and Indian fashion brands be worried?

A peek at history is useful here. It is said that when Spanish conquistadors landed on the shores of the Americas they managed to conquer the land and the people through a combination of guns, germs and steel. [Credits to Jared Diamond for that evocative phrase.] That is, the Spanish carried guns and fine steel swords but, most importantly, they also carried diseases that were alien to the local population. In many places, the weakened and leaderless indigenous people were simply too battered psychologically and physically by disease, to fight the colonisers.

Keeping that in mind I would say, Zara’s entry is a warning bell only if your business is suffering from recent financial and operational illnesses. It is only dangerous if your team are psychologically weak, and would be overwhelmed just by the thought of the supply chain wizardry that Zara has deployed in its business internationally. It may be fatal for sleepy marketing teams whose only strategy has been to spend lots of money on advertising in season and on mark-downs after the season.

But it’s not doom and gloom for brands and businesses that have a competitive spark of life. If you’re prepared to learn, Zara’s business can provide lessons on how to create a product mix that doesn’t stay on the shelf for months, and on how to create the buzz and excitement around the brand.

Zara’s business success in India is not a foregone conclusion. Let’s look at the facts.

Zara’s business model in its home market was built on getting up-to-date fashion into the market before anyone else, and at lower costs. Its prices encouraged fashion-conscious consumers to buy more frequently, and though its limited production quantities were a way of reducing risk, it added to the allure of the brand. In most overseas markets, however, Zara is a somewhat more premium brand. The “value-for-money” for the brand rests on fashionability rather than product quality.

The Indian consumer base, on the other hand, is less fashion-sensitive than the European consumer. This is not equivalent to being less sensitive aesthetically – Indian consumers can tell good design from bad; allowing, of course, for varying taste! However, value consciousness drives many consumers to buy during discount sales with delay of 2-3 months, rather than buying current fashions at full price. This can be a problem for a brand that thrives on change.

Zara will initially have a limited physical footprint. It is targeted at the premium to luxury end of the market, fitting a certain physical profile of customer. Its products that are imported are disadvantaged by a hefty import duty and shipping costs, as well as the shipment lead time. So, there is time available to Indian businesses that want to adapt their business model, and learn from this new competitor.

With the product development strengths and the agility that Indian apparel companies have displayed in the past, there is no reason why Indian brands cannot compete effectively with Zara on their home turf. When it comes down to it, I think Indian businesses (the small ones, with less “organisation” and “process” orientation) are fast on their feet in identifying design trends and are able to responding to the trends with products being available in the market very quickly. I would call them the Indian “baby Zaras”.

So the real question is this: can these Indian “baby Zaras” learn to be disciplined and structured, and learn to scale up their businesses?

Could we, perhaps, even see some people creating copies of Zara’s styles and bringing them to the market quickly at much lower prices (in effect doing a Zara on Zara)? Let’s not forget, what is today an 11-billion Euro business was once a contract manufacturer to other retailers, and Zara started with one shop carrying low-priced versions of products inspired by those of high-fashion designer brands.

The coming years promise to be interesting and I think we should watch out for an Indian version of an Inditex emerging in the next few years. It remains to be seen whether it will be from among the existing players in the domestic market, an exporter who is a contract manufacturer for western retailers (as Inditex once was), or someone totally new.

The people who should be really worried are those international brands whose product mix in India is weak, whose prices make you want to marry a rich banker, and whose brand ethos is totally unclear. To them I would say: Zara has you in its gun-sights.

Taming the CEO’s Nightmare

REVIEW: BEATING THE COMMODITY TRAP: Richard D’Aveni (Harvard Business Press)

In his latest book, Professor Richard A. D’Aveni focusses on a topic that most businesses should be acutely concerned with: the problem of commoditization. In interviews he has accurately described commoditization as “the black plague on modern corporations” and “a deadly disease that’s spreading like crazy”.

Certainly, if one had to pick the ultimate nightmares to keep CEOs awake at night, commoditization would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the last couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. Prof. D’Aveni suggests that maintaining differentiation alone is not enough to sustain business.

A product or service becomes a commodity when it is not distinguishable from competing offerings and therefore not valued above the competition. Prof. D’Aveni views commoditization along two key attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face:

  • Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditization in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalize itself to a niche where it can protect its margins.
  • Proliferation:  According to Professor D’Aveni, a proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. Professor D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
  • Escalation: This form of commoditization is possibly the most prevalent in industries that are prone to disruptive changes (such as technology, consumer electronics and communications). Simply put, extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price, the same benefits for a lower price, or at its most extreme, higher benefits for a lower price. Prof. D’Aveni suggests that companies try and control this downward momentum.

The book suggests competitive strategies that a business could take to avoid getting caught in the commodity trap.  These strategies can be boiled down to the biological choice: fight or flight (escape). Professor D’Aveni echoes the basic warfare strategy laid out by many military and business strategists through the ages. He suggests that businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles entirely, or initiate the battle of commoditization and control its direction and momentum.

In fact, anticipation and pre-emption is the key to avoiding the commodity trap. To help with this, Prof. D’Aveni offers a relatively simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.

The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute between office and home. The easy to understand framework gets the messages across quickly. In analysing the variations of commoditization, both in consumer and business oriented industries, the Professor also offers up something for everyone.

However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places the book risks losing coherence of thought.

Some short books are like downhill hairpin bends on a mountain road; Prof. D’Aveni’s book is one of those. Much as you might be tempted to go fast, it’s advisable to go slow. If you speed through it, you might miss a nugget that actually makes sense to your business.

One of the other grouses I had was with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience – the Professor presumes the reader will know the company and its context well enough to understand the lessons being discussed. In some cases the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are a cornerstone of Zara’s offer, not the cheapest price. Others would possibly be far more accurate examples of commoditization in the context of price.

However, if you are sufficiently concerned about the possibility of being commoditized out of profitability, or being marginalised out of market share, I would suggest that you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore. [Beating the Commodity Trap on Amazon]

(This review was written for Businessworld.)

Fast Fashion – The Sustainable Competitive Strategy – Seminar – 30 April 2008, New Delhi, India

In the business of fashion, time has always been important. However, speed and efficiency are now both a strategic imperative and a tactical necessity. With greater unpredictability in the market, it is critical to have the correct product at the correct time in the right quantity. Fast fashion requires completely different thinking in the way product is developed, how pre-production processes are undertaken and how production is organised. The Fast Fashion Seminar will draw upon the live experiences of leading practitioners from the area of product development and supply chain. It will be structured as an interactive session. This Third Eyesight Fast Fashion Seminar will provide you with a valuable insight into how to effect rapid changes in the market to your benefit.

Among other aspects, it will:

  • Describe in detail the concept of fast fashion

  • Identify key strategic actions to meet fashion consumer demand

  • Detail how leading brands such as Zara operationalise the concept

  • Discuss how to achieve less than 1% inefficiencies in their processes from design to delivery, including inventories and markdowns substantially below the industry average.

  • Understand the underlying principles of the fast fashion model and how these might be applied to retail and fashion business models in India

More details also on http://thirdeyesight.in/events/ff.htm. Discounts can be availed through ‘early-bird registrations’ for business delegates, and also by academics (students and faculty) by providing a proof-of-occupation.

Attendance is strictly by pre-registration. Registration information is also available over phone (please contact on phone +91-124-4293478 or +91-124-4030162).

Fast Fashion

Fashion is, by definition, perishable. Like, bread, eggs and milk. Or is it?

When bread turns stale, eggs turn rotten or milk turns rancid, you do have to throw it away. Fashion is different, because its perishability is artificial, driven by popular perception that something is “out-of-date” or that something else is “the look of the day”. You don’t really have to throw that blue peasant skirt out in the garbage or in the Salvation Army bin…but you do anyway, because it is so yesterday…or that’s what everyone else is saying.

Earlier, perceptions took time to spread, today they can be spread instantaneously through the web, TV and cell phones, and pretty quickly, even through slow media like print magazines.

So ‘Fast Fashion’ is really a product of fast media and communications technologies.

Having said that, it is here to stay, and regular (mainstream) slow-coaches do need to be worried about customers being seduced away by the ever-fresh look of a Chico’s or a Zara.

I can’t even begin to estimate the millions of dollars that must have been spent on “studying the Zara model”. However, while Zara’s model seems to scream “best practice” and everyone wants to emulate it – is it really for everyone?

Inditex (Zara’s parent company) has grown over 40+ years of evolution, in a specific market and business context. It may have “exploded” on the global scene when it floated its IPO in 2001, but the business model has been brewing a long time.

It has such significant investments in production that Inditex is as much a manufacturer as a retailer. Its people and process model almost diametrically opposite the command and control, “buying director – driven” model of other retailers. Its technology investments are focused better than most of its peers. (See case study and presentation)

Would your company’s DNA allow you to invest in and manage fabric and apparel manufacturing? Would it allow young people to be sent out to take bigger-ticket purchase decisions with fewer approvals than they do now? Would your design team really trust your frontline store staff with feeding them relevant trend information every day?

And yet, and yet…As labour costs rise in Europe, Zara is also being forced to rethink its model of local or regional production. As it does move more production to places like India and China, the big question is whether it can maintain the sanctity of its business model.

I won’t advise other retailers to breathe easy, but they don’t need to roll over and die just yet.