Zara Fast Fashion Business Model PDF

The Fast-Fashion Business Model:
An Overview
O
Based
d on the
h Zara Case
C
Felipe Caro
UCLA Anderson School of Management &
Depto de Ingeniera Industrial,
Depto.
Industrial U.
U de Chile
fcaro@anderson.ucla.edu
Taller "Rocket Science" en Retail 2008,

Santiago,
g , 19 de Junio
The Fast-Fashion Business Model: An Overview Based on the Zara Case
2008 Felipe Caro
Presentation Outline
Motivation
Recent brand value data
How fast is Fast Fashion?
What is Fast Fashion?

Business strategy/Operations strategy
Two
T
F
Fastt Fashion
F hi
examples
l
Fast Fashion open questions
Research Collaboration with Zara

Inventory allocation model
Clearance pricing optimization
Conclusions
2008 Felipe Caro
Motivation: Recent Brand Value Data
Source: BusinessWeek / Interbrand (2007)
2008 Felipe Caro
Top
p Global Brands 2
2007
Zara and the Fast-Fashion Strategy
2008 Felipe Caro
2008 Felipe Caro
2008 Felipe Caro
Top Europ
T
pean Retail Brand
ds 2008
Source: Interbrand (2008)
2008 Felipe Caro
selling season
assortmentt
time
Fast--Fashiion
Retaiiler
Vs
s.
Trad
dition
nal
Reta
ailer
Motivation: Fast-Fashion Assortment Rotation
assortment
2008 Felipe Caro
Motivation

Two
T
F
Fastt Fashion
F hi
examples
l

Conclusions
2008 Felipe Caro
What is Fast-Fashion?
Business Strategy:
gy
Cutting-edge fashion at affordable prices
Operations Strategy: builds on Quick
Response
Quick Response: similar to what just-in-time
manufacturing
a u actu g has
as meant
ea t to the
t e auto
industry (Hammond and Kelly 1990)
2008 Felipe Caro
Fast Fashion Operations Strategy
Structural choices (tangible, hardware)
High
g level o
of vertical
a integration
g a o (includes
(
ud store
o ownership)
o
p)
Tight control of production (either through ownership or
permanent monitoring)
pp y chain (SC):
( )
Dual supply
Basic items: efficient SC (minimize cost)
Fashion items: responsive SC (minimize lead time)
p but effective IT systems
y
Simple
Modern distribution centers
Infrastructural choices (intangible,

(intangible software)
software )
Cross-functional decision making highly centralized

Fashion items produced in small batches
Frequent assortment changes trying to follow fashion trends
Daily information exchange with store mangers
Strong operations-driven organizational culture
2008 Felipe Caro
Two Examples of Fast-Fashion

Zara (Spain)
H&M (Sweden)
The Gap (U.S.A.)
Vertical Integration
(2007)
Fully integrated. Subcontracts

cutting, sewing, and shipping
Controls of every link in the

chain but does not own factories
From design to store but

outsources production
No. of stores worldwide

(2007)
1,361
1,522
>1,572
No. of Countries
(2007)
68
28
21
Distribution of Stores - Main

Locations
(2007)
13% North Europe

60% South Europe
7% East Europe
8% Latin America
5% Asia Pacific
63.5% North Europe

19% South Europe
5% East Europe
12% North America
9% United Kingdom
79% North America
7% Japan
Sourcing - Main Suppliers

(2006)
34% Asia
50% Spain & Prox.
14% Rest of Europe
>60% Asia
<40% Europe
97% outside U.S.A.
Assortment Composition
p
(2006)
40% Basic
60% Fashion
>70% Basic
<30% Fashion
99% Basic
Lead Times - Dual SC

(2006)
Efficient SC: 6 Months

Responsive SC: 2-5 Weeks

Responsive SC: 3-6 Weeks
Refresh Fashion Items

(2006)
Twice a week
Daily
y
Occasionally
y
Pricing
(2002)
Overall, higher than H&M

(especially out of Spain)
Lowest among Fast Fashion
Comparable to Zara, if not

higher
Marketing
g Expenditure
p
(2002)
0.3% of Revenues
3-4% of Revenues
Comparable
p
to H&M
Source: Annual Reports and Public Press
2008 Felipe Caro
Two Examples of Fast-Fashion

Inditex (Euro)
H&M (SEK)
Gap Inc. (US$)
Revenue (Net Sales)
9,435
9
435
8,196
78,346
78
346
68,400
15,763
15
763
15,923
Gross Margin
56.7%
56.2%
61.1%
59.5%
36.1%
35.5%
Operating (EBIT) Margin
17.5%
16.6%
23.5%
22.4%
8.3%
7.7%
Net Margin (ROS)
13.3%
12.3%
17.3%
15.8%
5.3%
4.9%
Working Capital /Sales
-6.1%
6.1%
-6.1%
9.7%
10.2%
10.5%
17.3%
Inventory Turns
4.06
4.36
3.83
3.84
6.39
5.72
Asset Turnover
1.33
1.43
1.88
1.92
2.01
1.86
ROA
17.7%
17.6%
32.6%
30.4%
10.6%
9.1%
Leverage
1.69
1.67
1.30
1.28
1.83
1.65
ROE
30.0%
29.3%
42.3%
38.9%
19.5%
15.0%
2007
00
2006
Source: Annual Reports

p
1 SEK = 0.107
1 US$ = 0.65
2008 Felipe Caro
Vertical Integration
Manufacturing
Zara
World Co.
Design
Distribution
Retailing
H&M
The Gap
Benetton
Mango
H&M does not own factories but has production offices next to the
main suppliers.
suppliers
Benetton subcontracts labor-intensive activities but has invested
g other production
p
activities. On the other end,,
heavilyy in controlling
most stores are franchised
Mango does not own the stock at the stores (same as Benetton) but
d
does
allow
ll
merchandise
h d
returns
2008 Felipe Caro
Achieving Shorter Lead Times
Source: Zara: Fast Fashion HBS Case 2003.
Sh t llead
Short
d times
ti
enable
bl quick
i k response to
t fashion
f hi trends
t d
but short lead times are (usually) achieved at a higher cost
2008 Felipe Caro
Selling at an Affordable Price

If procurement costs are higher, how can a Fast
Fashion retailer still sell at an affordable
affordable price
price??
Increase visits to
stores
Short lead times /

Small batches
Frequent
q
assortment
changes
Revenues increase
Better forecasts
Two-way information flows
(POS, store managers)
Sales increase
Minimize underage
& overage costs
Less and smaller

markdowns
2008 Felipe Caro
Fast Fashion, Retailing Panacea?

Does quick response guarantee superior performance?
Time to Market
World Co.
Zara
2-5 weeks
2-5 weeks
Net margins
2%
10%
Overhead ((% Revenue))
40%
20%
Source: Zara: Fast Fashion HBS Case 2003.
Is
I F
Fastt F
Fashion
hi a groundbreaking
db ki innovation?
i
ti ?
Debatable, but for sure it is a self-reinforcing system based on:
1) closed loop communications
2) rapid timing and synchronicity
3) appropriate capital investments to increase supply chain flexibility
2008 Felipe Caro
Fast Fashion Open Questions

Is Fast Fashion a retailing fad? Remember
Benetton?
Should every retailer adopt the Fast Fashion
b i
business
model?
d l?
Zara-H&M rivalry.
y What is the right
g balance
between basic and fashion items?
How much can a Fast Fashion grow?
Mature market
Will it work in the U.S. and China?
Are the operations scalable?
2008 Felipe Caro
Motivation

Two
T
F
Fastt Fashion
F hi
examples
l

Conclusions
2008 Felipe Caro
Inventory Management of Zaras Retail Network

Objective
Develop and measure the impact of an

optimization model that supports the
inventory allocation decisions in a large retail
network
Timeline
August 2005 June 2007
Results
Deployment
Status
Used to ship all items to all stores worldwide
34% sales increase

Less stock outs
M
More
time
ti
on display
di l
Less transshipments
2008 Felipe Caro
Zaras Supply Chain (2006)
Suppliers
pp
2 shipments/wk
24 - 48h transit
70% Europe
30% Asia
2 warehouses:
backroom display
900 Stores:
45.4% Spain
37.3% R. Europe
10.5% America
6.7% R. World
Arteixo and
Zaragoza
Source: Zara, Columbia Business School Case, 2002.

Caro and Gallien (2007)
2008 Felipe Caro
Former Inventory Allocation Process

store inventory
assortment decisions
Issues:
store
managers
inventoryy
in stores,
past sales
requested
q
shipment
p
q
quantities
for each reference and size
warehouse
inventory
warehouse
allocation team
Store
incentives
i
ti
information
resources
Warehouse
resources
decision rules
shipments
((a)) Former Process

2008 Felipe Caro
Brief Literature Review
Inventory management in distribution systems

w/random demand ((1 warehouse,, N retailers):
)
Salient features or Zaras problem:
Eppen and Schrage (1981): depot does not hold inventory

Federgruen and Zipkin (1984): several approximations
Erkip et al (1990): correlated demand
McGavin et al (1999): impact of balancing retailer
inventories
Lost sales and holding cost is irrelevant

Finite horizon with no re-ordering (only allocation)
Dependencies across sizes
Literature on fast-fashion retailing:
Cases: HBS (3), Columbia, Georgetown/Warwick/Sevilla

Caro and Gallien (2007)
2008 Felipe Caro
Proposed Allocation Process

store inventory
store managers
input
store
managers
inventoryy
in stores,
past sales
requested
q
shipment
p
q
quantities
for each reference and size
past sales data
forecasting
model
d l
warehouse
inventory
inventory
y
in stores
demand
forecasts
warehouse
allocation team
optimization
model
shipments
shipments
((a)) Former Process

warehouse
inventory
((b)) New Process Envisioned

2008 Felipe Caro
Proposed Allocation Process

store managers
input
Maximize: Global Revenues

By Changing: Shipments
Subject to: Inventory
Availability
y
past sales data
forecasting
model
d l
inventory
y
in stores
demand
forecasts
warehouse
inventory
optimization
model
shipments
((b)) New Process Envisioned

2008 Felipe Caro
Inventory To Sales Function

Expected store sales
ffor reference
f
th
thatt week
k
Expected
p
Demand
or
Max Sales Capacity
Stock of reference in
store at beginning
of week
2008 Felipe Caro
Store Level Display Policy

Not all combinations of sizes are displayed:
Sales vs.
vs brand perception
Key to inventory distribution
remaining
sizes
S M L
S M L
M L
S M
M
S
L
S
L
action
Keep on display
Keep on display
Keep on display
Keep on display
Keep on display
Move to backroom
Move to backroom
Move to backroom
2008 Felipe Caro
Store Level Display Policy: Validation

Adh
Adherence
tto Major
M j Size
Si Display
Di l Policy
P li
50%
Fraction of Stores
F
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
DPF/DPA (%)
2008 Felipe Caro
Final MIP Formulation
warehouse inventory constraints
approximate
inventory-to-sales
function
2008 Felipe Caro
Implementation
Forecast development
p
Model development and integration with IT

systems
y
Pilot test
2008 Felipe Caro
Pilot Test: Objectives

Prove concept feasibility through actual
i
implementation
l
t ti
Refine
fi
software
f
interface
i
f
and
d model
d l ffeatures
based on feedback from real users
Estimate the models specific impact on the
inventory distribution
How to measure improvements?

2008 Felipe Caro
Pilot Test: Metrics

Back to basics: newsvendor framework
Sales = min{ Shipments, Demand }
Sales / Shipments (S/S):

Shipments success ratio
Less overstock S/S closer to 1
Sales / Demand (S/D):

Demand cover ratio
Less understock S/D closer to 1
2008 Felipe Caro
Pilot Test: Distribution Performance Matrix
High
Sales / Shipments
=
Shipments
S
Success
R
Ratio
i
Low
not enough
inventory
everywhere
ideal
situation
too much inventory

in low-selling
stores, not enough
in high-selling
stores
too much
inventory
everywhere
Low
High
Sales / Demand = Demand Cover Ratio

2008 Felipe Caro
Pilot Test: Estimating Demand

Censored information: sales are observed, not demand
Example:
E
l
Weekly replenishments
Initial stock = 8 units
Item stocks out before next order is placed
Demand
Mon
Tue
Wed
Thu
Fri
Sat
8 units
7 day
Sun
D
Demand
d
Mon
Tue
Wed
Thu
Fri
Sat
8 units
3 day
Sun
2008 Felipe Caro
Pilot Test: Estimating Demand

For each size/store/week, we calculate:
Days when stock is not exposed (DSE) = days in which that size
stocks out, or one of the major sizes stocked out and no sales
were observed
If Sales > 0 and DSE < 7:
Demand = Sales x (7/(7-DSE))
(7/(7 DSE))
If Sales = 0 or DSE = 7:
Demand = most recent demand (otherwise, zero)
Finally, we aggregate demand across all stores and

references
2008 Felipe Caro
Pilot Test: Design

The model was only implemented at warehouse in Arteixo
The warehouse in Zaragoza was used to validate the
methodology
We collected sales and shipment data,
data before and after the
model was introduced
The analysis
y
is based on 10 references,, 4 basics y 6
fashionable (for the rest there was not enough data)
2008 Felipe Caro
Pilot Test: Methodology to Asses Impact
Objective
Estimate the impact of the

model on the distribution
performance metrics
Problem
We cannott observe
W
b
the
th
counterfactual (what if the
model had not been used)
Solution
Control Group +
Difference-in-differences
Slide courtesy of Shanna Rose
2008 Felipe Caro
Pilot Test: Control Group

For each reference in the pilot, we identify a control
reference
f
using
i
the
h following
f ll i
matching
hi
criteria:
i i
Basic with basic, fashion with fashion
The dates when both references were introduced differ at most in
one week
We minimize the difference in performance (measured by the S/S
and S/D ratios) the week before the allocation model was
int od ced (i
introduced
(i.e.
e the sta
starting
ting point must
m st be the same)
W
We repeatt the
th process for
f the
th same 10 references
f
in
i
Zaragoza
2008 Felipe Caro
Pilot Test: Difference-in-Differences

Pilot Start
Pilot End
Pilot Reference
PS
PE
C t l Reference
Control
R f
CS
CE
S
Specific
ifi Model
M d l Performance
P f
Impact:
I
t
Removes anything that happened before the pilot
(PE - PS ) - ( CE - CS )
Removes anything that happened during the pilot but is not due to the model
2008 Felipe Caro
Pilot Test: Example, Reference XXX/YYY/250

Metric S/S
Pilot Start:
week 33
Pilot End:
week 46
XXX/YYY/250 (pilot)
37.4%
78.3%
XXX/YYY/800 (control)
30.1%
65.2%
Specific Model Performance Impact:

Removes anything that happened before the pilot
(
(78.3%
- 37.4% ) - ( 65.2% - 30.1% ) = 5.8%
Removes anything that happened during the pilot but is not due to the model
2008 Felipe Caro
Pilot Test: Arteixo vs. Zaragoza
A larger fraction of what is sent is actually sold

A better match between supply and demand
Overall,, total sales increase by
y 3-4%!
2008 Felipe Caro
Pilot Test: Increase in Sales
2008 Felipe Caro
Pilot Test: Other Metrics

Returns / Shipments (R/S):
returns & transshipments ratio
Store Cover (SC):

proportion of sizes x days x stores with stock
Display Cover (DC):

proportion of sizes x days x stores on display
2008 Felipe Caro
Pilot Test: Additional Results
Less returns and transshipments

Less stock outs
More time on display
2008 Felipe Caro
Full Scale Implementation: Estimated Impact

Full scale model implementation: 1st half 2007
2008 Felipe Caro
Full Scale Implementation: Impact on Net Margin
Source: Inditex Annual Reports
2008 Felipe Caro
Whats Next Clearance Pricing Optimization
2008 Felipe Caro

Zara avoids price promotions during the regular selling
season.
New challenge: how to estimate price sensibilities?
Parameters
Parameters
Parameters
Parameters
Parameters
Parameters
Historic Data
Predicted
Parameters
Parameters
Current Season
2008 Felipe Caro

Optimization model: apparent temperature is
more important than the actual one
one
Most relevant metric:
% Markdown =
Revenue Clearance Sales

Initial Stock ($)
Valued at regular
season prices
Current project status:

Prototype implementation ready
g
Pilot test: 3 countries,, 4 categories
First pricing decisions are being implemented
today!
2008 Felipe Caro
Motivation

Two
T
F
Fastt Fashion
F hi
examples
l

Conclusions
2008 Felipe Caro
Conclusions
Key lessons from Academia-Industry collaboration
Main obstacles: lack of data & internal barriers

Need project champion and clear metrics
Initially,
t a y, expect
e pect results
esu ts to confirm
co
intuition
tu t o up to 90%
Retail is detail: behavioral aspects matter (e.g. store level
dynamics), but remain focused
High impact application of Operations Research

Direct impact
p
on p
profits
Scalable system that enables growth
Fast fashion is successful because it competes with

(and not in spite of) operations
2008 Felipe Caro

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The Fast-Fashion Business Model:

Taller "Rocket Science" en Retail 2008,

2008 Felipe Caro

What is Fast Fashion?

Research Collaboration with Zara

2008 Felipe Caro

Motivation: Recent Brand Value Data

Source: BusinessWeek / Interbrand (2007)

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Zara and the Fast-Fashion Strategy

Source: BusinessWeek / Interbrand (2007)

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Zara and the Fast-Fashion Strategy

Source: BusinessWeek / Interbrand (2007)

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Zara and the Fast-Fashion Strategy

Source: BusinessWeek / Interbrand (2007)

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Zara and the Fast-Fashion Strategy

Source: Interbrand (2008)

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Motivation: Fast-Fashion Assortment Rotation

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

What is Fast Fashion?

Research Collaboration with Zara

2008 Felipe Caro

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Fast Fashion Operations Strategy

Structural choices (tangible, hardware)

Infrastructural choices (intangible,

Cross-functional decision making highly centralized

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Two Examples of Fast-Fashion

The Gap (U.S.A.)

Fully integrated. Subcontracts

Controls of every link in the

From design to store but

No. of stores worldwide

Distribution of Stores - Main

13% North Europe

63.5% North Europe

Sourcing - Main Suppliers

97% outside U.S.A.

Lead Times - Dual SC

Efficient SC: 6 Months

Efficient SC: 6 Months

Efficient SC: 9 Months

Refresh Fashion Items

Overall, higher than H&M

Lowest among Fast Fashion

Comparable to Zara, if not

The Fast-Fashion Business Model: An Overview Based on the Zara Case

2008 Felipe Caro

Two Examples of Fast-Fashion

Gap Inc. (US$)