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The Zara Gap – And Retail Denial

The Fast Fashion invasion is upon us. Beyond endless trade and consumer press on the topic, Fifth Avenue in NYC is filling with international fast fashion retailers: Uniqlo, Topshop, H&M, and, of course, Zara. They are more than mere presence, now considered forces which hastened troubles at Abercrombie & Fitch, American Eagle and Aeropostale, and the decline or demise of others deemed uncompetitive.

Seismic change continues and it will be led by international competitors poised to conquer the prized landscape of American retailing, not just Fifth Avenue. The latest arrival is Primark, the Irish entrant with its value styles, which also presented in Selfridge’s.

Why is competitive response to fast fashion in the U.S. happening so slowly?

In nearly a decade of work with Warren H. Hausman at Stanford University to design and quantify supply chain speed and flexibility, I believe I have heard every reason to avoid or minimize the reality of process competition in apparel and footwear. Our experience began with a case study on one of the largest specialty apparel retailers that had completed a pilot trial for supply flexibility, certainly one of the first in the industry. The success and returns of the pilot were dramatic, driven by a 90-day lead time reduction. The executive vice president leading the initiative was convinced of speed-to-market benefits where demand forecasts improve with time. However, the case experience was not rapid roll out of the pilot, but rather the description of organizational rigidity, which confronted the EVP. The proven “pot of gold” was not enough to motivate consensus and change across company functions. This Stanford Case Study is still being taught in business schools and private seminars as insight into difficulties in cultural change.

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In 2015, faced with international entrants, rising Asia costs, e-commerce velocity and investor discontent, the disavowals are ever current. What is it that slows, or even denies, speed and flexibility to be competitive? Is there a topic discussed more, yet achieved less? Here are real-time conversations — unattributed to avoid embarrassment —which may sound familiar.

“That’s not our customer. We don’t worry about getting from the catwalk to the stores in the same way.” The denial here is that fast fashion is a customer or segment of business. The opportunity to learn about how demand uncertainty is managed is lost, as if this is a niche of customers that does not threaten those outside teen and tween competition. Zara may look like fashion, but the real insight is how it achieves four times more profitability than most apparel retailers. Zara’s performance is more than higher turn and margin; its model reduces inventory risk in a highly uncertain business.

“Our factories don’t have that capability. We’re not vertical.” Have you visited a factory partner lately? Is postponement, adapted from the electronics industry, familiar to you as a joint strategy option? While Zara has a history of owned factories and close collaborations, most of their sourcing is contracted, similar to the entire industry. Whether vertical or virtual, what matters is the mindset to share total inventory risks, not transfer them. The result can be remarkable speed and flexibility since any factory knows that actual garment manufacturing time is measured in minutes and hours, not months. Vendor Managed Inventory, or VMI, is not a meaningful or sustainable strategy for supply speed and flexibility.

“Speed-to-market is something we’re thinking about for next year.” This quote comes from a direct competitor to Victoria’s Secret whose CEO, Les Wexner, speaks publicly about his 90 percent open to buy at the beginning of the season. “Out of all of our improvements, most are transactional,” he says. “But speed, for us, has been transformational.” Wexner’s benchmark for competition is international retailers, with hardly any mention of American mall retailers on Investor Day. Incremental approaches to improve 12-month concept to store cycles, mostly delegated to the supply chain team, do not qualify as strategic initiatives. In an era of retail disruption, operational improvement is not enough.

“We have met the enemy and he is us.” This quotation from Pogo is related by the CEO of one of the largest sourcing companies. His meaning is that we are not constrained by manufacturing or technology, but rather it is ourselves. Industry habits and metrics emphasize cost minimization, lowest FOB costs and executive incentives mated to these goals. Metrics and decision-making for speed differ — forecast accuracy, cash conversion cycles, negative working capital and total profit versus Cost of Goods Sold alone. The pressure to buy at lowest cost and to focus on Free On Board prices (ignoring costs of markdowns and lost sales) reflects outdated industry culture. Speed-to-market is a merchant and financial mindset, requiring cultural commitment in order to be competitive in U.S. and international retailing. The “Zara Gap” explains the magnitude of opportunity for those who are able to merchandise in shorter and shorter cycles.

The “Zara Gap” opportunity

Pioneering research by Dr. Hausman, professor of management science and engineering at Stanford University, on sequential decision-making for style goods was the earliest model of non-stationary demand in production problems. The research forecasts can be revised so that demand uncertainty is a function of the forecast horizon. That management challenge has exploded in importance, as our walk on Fifth Avenue attests. Hausman’s work has made it possible to quantify the financial value of supply flexibility to reduce unwanted markdowns and lost sales, or stockouts. As a result of this research, a promise of exceptional business value has emerged for retailers, brands and suppliers that adopt postponement techniques from electronics and other industries. Hausman documents through financial analysis that supply flexibility (or postponement) in retail can achieve the following:

  • Increase profits by as much as 28 percent
  • Increase market capitalization by as much as 43 percent

To draw these conclusions, Hausman analyzed public data available from 53 retail and short-product life cycle businesses. The research illustrates the “Zara Gap,” so-called because of Zara’s ability to vastly outperform category averages for department stores, wholesale brands, specialty retailers and athletic brands:


Hausman concludes that Zara’s performance suggests, despite highly visible new investment in demand management and generation, a significant “opportunity gap” remains. He says the most powerful lever to improve markdown/stockout performance is a combination of business process and analytics for supply flexibility.

Zara’s outsized performance, as captured in its parent company’s market capitalization, is a prominent example that the battlefield today has shifted to total supply chain performance. According to Hausman, “Supply chain performance refers to the extended supply chain’s activities in meeting end-customer requirements, including product availability, on-time delivery and all the necessary materials and capacity in the supply chain.” He emphasizes that supply chain performance crosses company boundaries, as well as traditional functional organization lines.

What is fast fashion?

The fast fashion phenomenon is redefining both sales and profit opportunity by focusing on how quickly product design trends can be correctly translated into multichannel mass product. To respond, the new product engine is primarily, though not exclusively, driven by supply flexibility which links upstream inventory commitments with a brand’s downstream profitability (full-price sales, markdowns, stockouts and unwanted inventory). Postponement is a well-known concept in supply chain management, although its successful application in fashion companies is rare. Its critical elements are:

  • Postponing finished good commitments to reduce lead times and finished goods inventories.
  • Staging capacities and hedging materials to exploit improving forecasts during the selling season.
  • Optimizing total profit to incorporate financial impacts of markdowns, stockouts and unwanted inventory versus focus on cost minimization alone.
  • Integrating demand for fresh, more frequent new product with rapid replenishment.

The culture gap

In an era of seismic technological change, the consumer and financial imperative is a rapidly transformed and collaborative supply chain. While many retailers excel at low cost sourcing and warehouse-to-store distribution, the unexploited management area to master is product speed, cost and flexibility across the enterprise supply network. How will industry culture transform itself? As Pogo instructs, “We have seen the enemy and he is us.” To illuminate that view, I’ll return to the Stanford Case Study experience. A Stanford engineering student assisted the authors in its data collection and case development. She was thrilled to participate to observe and analyze a well-known retail brand, saying it was her dream to be in the fashion industry. After graduating from Stanford, she worked in fashion operations for two years and then attended Harvard Business School. In leaving the industry, she told me, “John, whenever I had an idea in fashion, the answer was always why and how much. In tech, the answer is always, how fast can you do it?” She is now senior product manager at LinkedIn.


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.