Since its launch in 1975, Zara has made a habit of shaking up the trendy apparel industry with its hyper-fast global supply chain and steady stream of style-setting fashion. So it wasn’t too much of a surprise when Inditex, its Spanish owner, announced in September that Zara will finally open its first online shop with the launch of next year’s autumn-winter season. But the announcement has raised eyebrows among experts in the sector, who wonder what strategy Inditex will use for its online channel. The success of the Spanish apparel chain’s latest venture will hinge on its ability to translate its innovative fast-fashion business model into online sales, they say. That’s a tall order.
But the announcement was well timed, coming as Inditex released a set of strong results for the first half of 2009, despite the economic woes hitting the entire sector. For Europe’s biggest clothing retailer, earnings before interest, tax, depreciation and amortization (EBITDA) in the six months to July 31 reached 799 million euros, beating the average market forecast of 780 million euros. Net profit of 375 million euros also beat the average forecast, of 355 million euros, while sales were 7% higher year on year and in line with forecasts at 4.9 billion euros (of which Zara contributed more than 3 billion euros).
As for the online venture, the company has been tight-lipped about its plans since the September announcement, only revealing that the launch will involve six European countries — Spain, France, Germany, the U.K., Italy and Portugal – with other countries following suit later. Despite the lack of detailed information being made public, what’s clear to outside observers is that the transition online will be a formidable challenge for the company. The way Roberto Manzano, professor of marketing at IE Business School, sees it, Inditex must “bring everything that differentiates it [from competitors] to the Internet," using the web as tool "not just like those of its competitors,” but one that strengthen its position as a top global retail chain.
Fast Forward
In fashion circles, most everyone now knows Inditex as the company with a business model based on speed and efficiency, rolling out 20,000 new designs a year and delivering two new collections to its 4,430 shops worldwide every week. All told, a collection’s entire cycle — the design, production and distribution to shop floors — takes four weeks to complete, a remarkable feat considering that competitors take several months to do the same.
And it has achieved this by going against conventional wisdom about retailing efficiency, notes Christoph Zott, professor of entrepreneurshipat IESE Business School, in a paper titled, “Innovation in the business model: Creating value at times of change.” He writes, “Many of the generic activities take place to a great degree [within Inditex], such as cutting and sewing the fabric, washing it and ironing it, etc. [It] subcontracts the needlework to small workshops located near their manufacturing plants in Spain.” In contrast, many of its competitors — Hennes & Mauritz and Benetton, to name just two — outsource many of those activities offshore in order to lower costs and increase flexibility throughout their supply chains. But as Zott explains, the strength of Inditex’s business model is its use of real-time, customer-driven information flowing swiftly between its sales outlets and designers.
However, if there is one area where Zara has been slower than competitors it’s been in moving its business online. That’s not necessarily a bad thing. Diana Gavilán Bouzas, professor of marketing at Complutense University in Madrid, says a number of other fashion retailers have already latched on to the Internet. Yet she questions whether there’s a first-mover advantage. Traditionally, "the existence of a market with unsatisfied demand is considered a good reason for [a company] to at least consider entering it," she says. But on the Internet, it’s not that straightforward.
She cites data released in June by Spain’s Ministry of Industry, Commerce and Technology, which shows online sales in the country are concentrated in travel and vacation packages, followed by theatre and concert tickets then books, magazines and music. Fashion’s online sales are miniscule in comparison. Forrester Research estimates that fashion sales worldwide over the Internet represent only about 3% of the sector’s total revenue.
Research from Gavilán Bouzos and professors Maria Avello and Francis Blasco supports that estimate and reveals part of the reason for fashion’s low Internet presence. Having studied the purchasing patterns of fashion’s biggest customer segment in Spain – women between 30 and 50 years old — they found that only 2.7% go online to shop for clothes. As Gavilán Bouzos notes, this segment comprises working women who typically have "an acute feeling" that they don’t have enough time and enjoy buying their clothes from a variety of establishments, but prefer locations that have a broad selection.
Gavilán Bouzos cites another socio-cultural factor: physical contact with merchandise. As the online sales data verifies, products selling well on the Internet don’t require a customer to have physical contact with them before making a purchase — airline or theater tickets, for example. As a result, she explains, “there doesn’t seem to be a massive demand for fashion online."
Nonetheless, she sees a bright future for online fashion. "The fact that the market is not massive today does not [necessarily] mean that it is not going to be in the future," she says. "Forrester Research predicts that 10% of revenue in fashion retailing could [eventually] come from the Internet." Her conclusion: fashion retailing on the Internet "will emerge when conditions line up the right way.”
According to her, the total number of Internet users in Spain — both men and women — is growing, with the brightest prospects being among the younger generation, who are between 15 and 24 years old. The latter represent 12% of the country’s total population but 19% of Internet users, and don’t have a problem with "not trying before buying".
Maybe yes, maybe no
But regardless of a consumer’s age, the online channel that is the most successful is what Manzano calls functional shopping, which involves repetitive purchases with minimal risk of making a wrong choice.
Therein lies the rub for Zara. Up until now, it hasn’t catered to functional shoppers, but rather to customers looking for fashion that’s "different, current and ahead of the curve," says Manzano. Like other virtual fashion retailers, it will probably offset the risk that a customer cannot try on a garment by providing rapid delivery and an easy returns process. But that solves only part of the equation.
Given the downturn-related decline in consumption, Gavilán Bouzas wonders whether Inditex is capable of attracting a new type of customer, which uses the Internet to compare product features and prices. "The online purchasing decision is about simplifying purchasing, acquiring the essential information about better pricing conditions," she says. "When it comes to women, they start to eliminate or postpone purchases they consider dispensable. Clothes and accessories are the first things on that list.”
Traditionally, Gavilán Bouzas says one of Zara’s fortes has been its ability to avoid the offline equivalent of such shoppers, those who wait for the best moment in the fashion season to get a bargain. Unlike its competitors, Zara’s stores don’t hang on to their stock and eventually mark down their prices. “Zara customers know that if they like an item, they have to buy it quickly because the supply could be exhausted and it won’t return [to the shelves]," explains Gavilán Bouzas.
Now what Gavilán Bouzas and other Zara watchers want to know is how – or even whether — it will translate that strategy online.
Lost in Translation?
The Internet is not entirely new territory for Zara. In 2007, it launched an online version of Zara Home, which according to Manzano, has helped the company deepen its logistical skills and communications about its products over the web. But he says Zara Home has had limited success in using the web to convey the fashionable, upscale aspects of its products. “If it does the same thing with Zara as it did with Zara Home, the Internet is going to limit its positioning when it comes to continuously renewing fashions," he says.
Viewed from a strategic vantage point, however, Zara’s online vision makes sense, says Gavilán Bouzas. For example, it will make the brand more accessible in more ways and to more customers. In the short term, “the prospects for profitability are small," she adds, "but the [investment risks] are low beyond the development and maintenance costs." Meanwhile, in the medium term, the strategy allows Zara to "prepare itself to compete when this channel is an authentic source of revenues and profits,” and longer term, it could strengthen its image among customers as a dynamic technological innovator.
But it’s a two-pronged challenge. “On the one hand, how can the company manage inventory and distribution — achieving very fast stock turns and optimizing the globalization of its supply chain? On the other, how can it translate its [offline] branding position as fast-changing fashion retailer … to the Internet, where the vision is much more segmented", he asks. Being online, he says, means it will have to strengthen the image it has offline as a master of continuously renewed fashions on a medium that not only lets people navigate quickly around different sites to view and compare many products, but also is very segmented, which is completely different to what it is used to.
Time will be the judge, he says. “If it winds up showing 80 designs on its website [at once], it will project a very poor image. But if it can create [an overall] image of providing both a selection and continuous product renewal, it will strengthen what it has.” On the Internet, he adds, “it is about the way you express the entire range of products by showing a very limited selection…. This is exactly the opposite of what Zara is doing in the [offline] marketplace, where it is pushing its competitors, growing through launches that take place in continuous waves. Now, it will have to see how it can translate that approach on its website.”
As Gavilán Bouzas concludes, “We will be watching carefully to see how [Inditex] responds.”
