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The Zara Gap: Digital Consumers and Analog Supply

During New York Fashion Week, the hot topic was little else than disruption of the fashion industry. From Burberry to Uniqlo, the dominant discussion by fashion insiders was how digital communications have overwhelmed industry calendars, and protocols and hierarchies are now out of rhythm with consumers.

The reasons are plain enough but the new consensus for how the old order of fashion retail and manufacturing will adapt is a subject of great debate from High Street and Main Street to Wall Street. Karl Lagerfeld of Chanel didn’t embellish when he said, “It’s a mess.”

We should have seen it coming.

In T Magazine in 2013, Suzy Menkes wrote, “Something is Wrong Here,” lamenting the disconnect of runways to retail, designers to demand, and customers that want to buy now. A closely related view is how fashion’s trend hierarchy has been dismantled by young people who ignore editorial guidance and post daily outfits on Instagram, accumulating likes and data points mined by designer brands. The mass following no longer marches in step, as noted by Cathy Horyn in T Magazine’s “Post-Trend Universe,” in 2015.

In fashion buzz and gossip, the system itself, not the style, color or creator, is now the debate.

Here are two formerly unfashionable topics—First is creativity, not as product but rather as process innovation, the second is a fog-lifting projection of a very positive future for profitability.

To start, let’s decode some new terms that insiders and press have loaded up with meaning: disruption, innovation, technology and newness. They are not the same thing. Hardly a day passes without a PR or trade story about this and that app shaking up stores and consumer habits. Pinterest, Instagram, sizing and fit, subscriptions, pricing, tailoring, 4-hour delivery, and so on, are innovative demand applications, but any one social media tool is unlikely to create a sustainable financial advantage.

Impressive, beneficial and directional, yes, but “disruptive?” Doubtful. Rapid adoption of the new, new thing is the rule to sell to influential Millennials and their tribes. Innovation, technology and newness are coins of the realm, to be exploited and superseded at the pace of change. “Disruption,” however, is different, and it’s what makes retailers, brands and suppliers either uncompetitive or lets them soar above average industry returns.

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Consider process innovation, perhaps the dullest phrase possible to those energized by fashion merchandising and marketing. Do you look to Zara (Inditex), Uniqlo (Fast Retailing), Walmart or Primark for insights of success? What about Amazon, eBay and Etsy? What distinguishes each of them is superior financial performance based on process advantage: Zara (fast fashion), Uniqlo (narrow and deep sourcing), Walmart (DC-to-store efficiency), and Primark (direct efficiencies via un-layered decision-making). Amazon’s advantage is distributed inventory, and eBay and Etsy front but do not design or own inventory.

Not one of these companies is known for singular style or product innovation. It hardly needs mentioning that founders of these companies are the wealthiest individuals in the world, especially the Walton family, Amancio Ortega and Tadashi Yanai. Not one is known for style, least of all Jeff Bezos.

The focus on process innovation is to suggest—no, shout—that that is where the money resides.

A digital consumer is served by analog supply. The former is mining for dollars and the latter is mining for dimes. That mismatch will only become more severe as online channels grow and as innovators invest in systems and cultures which minimize risk, accelerate offerings and delivery, and do so by optimizing inventory for global cost, speed and flexibility. If you are focused, as most are today, on lowest cost sourcing to protect incoming margins and to cushion demand uncertainty, then you have been “disrupted.”

I doubt Amazon’s expected entry into fashion will hinge upon its volume negotiation skills, rather, I think Amazon and suppliers will declare FOB price peace to jointly focus on final retail margin and speed of delivery. Unfortunately, familiar initiatives like near-shoring, lean manufacturing and fading echoes of VMI and QR are limited in addressing the cycles and velocity of season-less, frequent fashion demanded by trend-driven customers.

These observations are based in the experience of analyzing industry transformation through the lens of the “Zara Gap.” This Stanford-based perspective is inspired by Prof. Warren H. Hausman, one of the pioneers of understanding, managing and optimizing multi-echelon supply chains for style goods. That is a mouthful of a sentence, but it means fashion and short lifecycle products, including electronics.

For the past 10 years, and drawing particular lessons from “postponement” in the tech industry, Prof. Hausman and I have analyzed and quantified fast fashion benefits and related them to earnings and market capitalizations. That link is direct insight into retailers, brands and channels through supply flexibility versus conventional cost, margin and turn metrics. Our view is that the Zara Gap measure of opportunity, performance and capabilities will continue to be important in a horserace of retailers, brands and suppliers chasing global customers.

ZG Chart SJ

Horserace is not an inappropriate metaphor since it is supplier flexibility, or what we call Lead Time Optimization (LTO), that “changes the gamble” of designing, developing, sourcing, forecasting and selling fashion goods. Its process innovation neutralizes or minimizes total reliance on lowest price and manufacturing location, and capitalizes on reduced finished goods risk, working capital and unwanted markdowns and stockouts. In our research and cases, profits may increase as much as 28 percent, and market capitalization may increase by as much as 43 percent.

Bracket Chart SJ

Where does the Zara Gap lead us? For future profitability, its “opportunity gap” is good news, regardless of channel or customer. The new process mindset, model and metrics unlock untapped economics and align incentives across the supply chain. It is a fashion roadmap for the speed of our lives.


John S. Thorbeck, chairman of Chainge Capital LLC, is an expert on the application of Fast Fashion business principles at retailers and brands. He has collaborated extensively with industry leaders, including Warren H. Hausman, professor of management science and engineering, Stanford University. Thorbeck is a former CEO of Rockport (Adidas) and G.H. Bass & Co. (PVH), and senior marketing executive for Nike, Timberland and the Aspen Skiing Company. He is a graduate of Harvard Business School.