The Key to Success? Yup, it’s at the Mall.

Who will be the first vape billionaire? If you’ve raised your hand, then you might want to get familiar with Spanish billionaire Amancio Ortega and his fast fashion retail brand Zara. Though not a household name, Ortega recently bumped Warren Buffett down a rung when he became the second richest person in the world, after Bill Gates. According to the Bloomberg billionaire index, his estimated net worth stands at $71.5 billion.

In part, Ortega owes his fortune to his innovative production and distribution model. Zara is unique among fashion retailers because it can take products from concept to store shelves in three weeks. With capabilities like these, it can adapt rapidly to ever-evolving consumers’ needs and tastes. In 2008, the Spanish brand over took Gap, that other shopping mall stalwart, as the largest fashion retailer. Where as Gap focused on wardrobe staples with a preppy, static style, Zara focused on introducing up-to-the-minute imitations of runway fashion to provide customers with high style at low prices.

Much like Zara, vape manufacturers tend to cycle through product iterations rapidly. For instance, if a tank model sells well then version two and a mini-version won’t be far behind. The upside of this agility is two fold. First, the general quality of vape products has improved steadily through frequent iterations. Many of the initial problems that were common in open system devices just a couple years ago (leaking tanks, weak vapor, difficulty in changing wicks, etc.) have at least been addressed if not mostly eliminated. As well, both hardware and e-juice have evolved to provide more consumer satisfaction. You want a tank that provides just the right amount of airflow for the way you inhale? You want a 50-watt battery that fits in your shirt pocket? You want e-juice that tastes like it was excreted by a mythical creature? It’s all available at your local vape shop.

However, without appropriate channel coordination, this fast turnover comes at a cost. One of the biggest challenges that distributors and retailers face is contending with the constant flow of new products. In an ideal world, these channel partners would have the right products at the right time in the right amount, selling out just in time for the next wave of new products. But as it is, they often don’t know which products to invest in, have trouble buying them at wholesale, and are often left eating the cost on outdated inventory when consumers have moved on to the next new thing. All of these problems lead to economic waste so the market is not as efficient as it could be.

What can Vape learn from Zara?

One of the criticisms of the vape industry as an investment is that it is hard to build a brand to take significant market share. There are low barriers to entry, not much enforceable intellectual property, and thus, products tend to be copies of each other. However in fashion, Zara faces a similar market environment but focuses on distinguishing itself though capabilities, not product. By anticipating consumer demand, producing and distributing products rapidly, and adapting as needed, Zara has build an industry-leading brand.

Zara can better deal with distribution challenges because it is vertically integrated, with all production taking place in house. Near constant communication from the retail level to headquarters is a key component of their operations. That’s great for the future Andrew Carnegie of vape but as it is, the vape industry is highly fragmented both vertically and horizontally. What are the keys to Zara’s success and can they be replicated in the vape industry?

Responsive Supply Chain

Zara’s supply chain is optimized to get new products on store shelves as quickly as possible for two reasons. First, Zara’s core consumers know that products inspired by the latest styles from major fashion houses will be available at their favorite store. As well, constant rotation of styles keeps customers coming back more frequently to see what’s new. So continually changing product serves as a kind of marketing in itself.

While vape brands produce new products rapidly and are able to generate buzz online, anecdotal evidence from distributors and retailers suggests that the vape supply chain often doesn’t link up. Many buyers don’t know where to get the latest products or to source a steady stream of the best brands. This confusion often leads to lost sales.   

Forecasting and Intelligence Gathering

For vape retailers, knowing what to purchase is a major challenge. They can’t buy and stock every new product that hits the market because of their limited budgets. But without reliable demand forecasts, purchasing decisions are a gamble. Sure, it’s got buzz on ECF but will that prosciutto-flavored e-juice be a hit at the local vape shop?

Contrast this uncertainty with Zara’s operation. The retailer does extensive market research and forecasting to make educated guesses about what will sell in upcoming seasons and how many to produce. As well, the company has a communication system that allows retail managers to communicate directly with designer to communicate customer feedback and ordering needs. With this system, designers and production can adapt rapidly to the market place.  

Outsourcing vs. In-house

Part of Zara’s success is due to a strategy that Ortega employed early in the Zara story. While most clothing manufacturers around the world were outsourcing production to Asian contractors, he continued to use in-house and contracted production facilities in Spain and Portugal because the advantage of rapid communication between designers at the Spanish headquarters and the production facilities was more important than saving on labor costs.

It could be said that Chinese device brands like Aspire and Kangertech also have this advantage because managers, designers, and manufacturers are geographically close. However, Western brands that white label China-made products may be more susceptible to delays in new product development because of the geographic distance.

So back to our original question. We don’t know who the first vape billionaire will be but we might know what the business will look like. In this unregulated environment, having a organization that can get innovative, highly demanded products to the market quickly would be an enormous advantage.