Zara Case Study
Reference Article from www.thirdeyesight.in
T HIRD EYESIGHT
© D evangshu Dutta, 2002
retail
@ the speed of fashion
By Devangshu Dutta
The middle-aged mother buys clothes at the Zara chain because they are cheap, while her daughter aged in the mid-20s buys
Zara clothing because it is fashionable. Clearly, Zara is riding two of the winning retail trends - being in fashion and low prices - and making a very effective combination out of it.
Much talked about, especially since its parent company's IPO in 2001, often admired, sometimes reviled, but hardly ever ignored, Zara has been an interesting case study for many other retailers and fashion brands around the world. We set out to understand what are the winning elements in Zara's business model, and probably only scratched the surface of the key to their success.
Here's the quick-n-dirty on Zara's recipe for growth.
case
STUDY
Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated performers in a soft retail market in recent years. When Inditex offered a 23 per cent stake to the public in 2001, the issue was over-subscribed 26 times raising
Euro2.1 billion for the company. What makes Inditex so tasty?
Well, for a start, it seemed to show higher profit margins than comparable retailers, and secondly, the trend seemed sustainable.
Good bet for most investors.
The Awkward Factor in the Profitability Formula
Buy low, sell high. Buy on credit, sell on cash. Retail profitability often seems like a no-brainer.
If you sell at X dollars and buy at Y dollars, as long as your operating and financial costs are lower than the gross margin i.e. the difference between X (selling price) and Y (cost), you should be making money. And what with retailers running around with gross margins of 50-60 per cent (that is more than half of their retail price), making money should be no problem, right?
Wrong. In highly perishable goods such as
T HIRD EYESIGHT
© D evangshu Dutta, 2002
retail
@ the speed of fashion
By Devangshu Dutta
The middle-aged mother buys clothes at the Zara chain because they are cheap, while her daughter aged in the mid-20s buys
Zara clothing because it is fashionable. Clearly, Zara is riding two of the winning retail trends - being in fashion and low prices - and making a very effective combination out of it.
Much talked about, especially since its parent company's IPO in 2001, often admired, sometimes reviled, but hardly ever ignored, Zara has been an interesting case study for many other retailers and fashion brands around the world. We set out to understand what are the winning elements in Zara's business model, and probably only scratched the surface of the key to their success.
Here's the quick-n-dirty on Zara's recipe for growth.
case
STUDY
Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated performers in a soft retail market in recent years. When Inditex offered a 23 per cent stake to the public in 2001, the issue was over-subscribed 26 times raising
Euro2.1 billion for the company. What makes Inditex so tasty?
Well, for a start, it seemed to show higher profit margins than comparable retailers, and secondly, the trend seemed sustainable.
Good bet for most investors.
The Awkward Factor in the Profitability Formula
Buy low, sell high. Buy on credit, sell on cash. Retail profitability often seems like a no-brainer.
If you sell at X dollars and buy at Y dollars, as long as your operating and financial costs are lower than the gross margin i.e. the difference between X (selling price) and Y (cost), you should be making money. And what with retailers running around with gross margins of 50-60 per cent (that is more than half of their retail price), making money should be no problem, right?
Wrong. In highly perishable goods such as