Research Blast

Demand for industrial real estate could rise further as manufacturers 're-shore' production

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April 30, 2011 – the day after the Royal Wedding. As the UK recovered from the street parties (and a fair few hangovers), Zara's factory workers were just getting down to work. Kate Middleton stepped out for her first post-wedding photo shoot in a blue Zara dress launched earlier that year and, naturally, the garment sold out within 24 hours. Fortunately for Zara, their factory is located in Orteixo just a 25 minute drive from their head office in La Coruna, allowing them to replenish the garment far quicker.

The purpose of this piece is not to discuss Zara's production process rather identifying a good example of how speed to market can sometimes make higher labor costs worthwhile.

The company's supply chain is run in-house with 60% of product produced in Spain or nearby countries enabling them to bring product to market in 4-6 weeks. This model is gaining popularity among fashion retailers, particularly with some of the newer online disruptors. Boohoo.com sources 50% of all their products within the UK, while ASOS's CEO has stated he expects a growing resurgence of onshore manufacturing as lead times become quicker and fashion trends change rapidly. While this process means higher overhead costs, there are some benefits. Due to the long lead times involved in outsourced supply chains, retailers on average mark down 50% of product once it comes to market, while the equivalent for 'fast fashion' retailers is just 15%.

This stands in stark contrast to the traditional outsourced production model, where designers have to try and anticipate demand 12 months ahead to allow for production and distribution back to Europe. This model is beginning to look dated in a social media age where demand is difficult to forecast and consumers have high expectations when it comes to levels of customer service and speed of fulfilment. As a result, global supply chains are under greater pressure to source, produce and distribute much closer to the end-user, even if it involves higher production costs. 

Source : UBS AG

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