Zara is one of the leading fashion brands that compete with other major fashion retail brands such as H&M, Benetton, etc. It is one of the largest holdings and revenue earners of Inditex. In 1963, Inditex started its operations in La Coruna as garment wholesalers (McAfee, Dessain, & Sjoman, 2007). However, it was not until 1975, when a German customer cancelled a sizable order, that Inditex opened its own retail store and named it Zara (Berfield & Baigorri, 2013).
Initially, the aim of the company was to have a retail outlet for their cancelled shipments but soon they realized the importance of the alliance between retail and manufacturing. This initial experience brought forth the philosophy on which the whole business model of Zara is based on – customer base and manufacturing base should be closely mixed in order to achieve optimal success.
The brand enjoys international presence and is the largest selling brand in Spain. The business model of Zara is different from most of its competitors and its strategic decisions and competitive advantages have been a question of curiosity for academicians. This essay is an exploration of the business model, strategy, and competitive advantages of Zara. Most importantly, the paper strives to answer the question, what is the business model of Zara?
Business Model of Zara
Zara caters to an extensively competitive fashion retail industry where consumer demand and preference fluctuate considerably. The main aim of Zara is to control the tastes and preferences of the customers and change their styles before their taste and preferences change (Hansen, 2012). In order to achieve this, Zara ensures that its stores are up to date in their clothes selection and they have to order at least twice a week to revamp their stock.
The case study on Zara shows that the company has almost no promotion and advertisement cost as opposed to other retail chains like Gap or Benetton who spend heavily on advertising their products and they believe in owning the best retail space (McAfee, Dessain, & Sjoman, 2007). Retail location is an important element of Zara’s business model as it allows the company to reach its target market more easily (McAfee, Dessain, & Sjoman, 2007).
Instead of advertising its products, Zara conducts market research to identify the right locality where they may find the largest pool of their target market in the market segment (Hansen, 2012; McAfee, Dessain, & Sjoman, 2007). This strategy makes opening a store in a new location financially viable.
The business mode followed by Zara is essentially called the disruptive innovation model, which is unlike the traditional business model followed by the traditional retail companies. Therefore, before studying the business mode of Zara, the paper discusses the traditional business model of the fashion industry.
Fashion Industry Traditional Business Model
The business mode of the traditional fashion industry is essentially based on designing of clothes and retailing them. However, the time lag that prolongs the designing process and availability of finished products in-store are acute in most of the cases. Fashion brands concentrate more on creating designs for a specific season and making them available in a period of 4 to 5 months. Hence, a fashion brand revamps its design offerings only in 4 months:
The traditional fashion industry calendar introduces two new collections per year. One is the spring/summer collection unveiled in January and February and the other is the fall/winter collection, which unveiled in August and September. The actual design work often takes place a full year before the launch. (Ireland, 2013, para. 4)
The advantages of the traditional model are that it allows considerable time to plan and execute the strategy. It allows companies to book a manufacturing plant in advance at a cheaper cost and help in developing the designs. However, the disadvantages of the traditional model are that the designs have to be perceived in advance and the whole order is locked earlier in advance. Hence, any changes in trend of fashion cannot be incorporated in the fresh seasons’ style.
For instance, after the order has been placed if the company realizes that it has gone ahead with a set of design that are not in fashion then they might have to reduce the prices to clear the stock. Retailers like The Gap have to offer their products at reduced prices as they have a high inventory of products that were not in demand, often face this problem.
Gauging the right trend of the season is also a problem for designers and if they are unable to the products become redundant. Hence, it can be asserted that the traditional business mode of fashion industry often creates supply chain bottlenecks and increases inventory costs (Ă–zlen & Handukic, 2013 ). Further, obsolete style show the fashion brand negatively among the upbeat, fashion conscious customers who easily tire away from older fads.
Zara Business Model
The main contention of Zara is to sell fashion and not clothes and hence, the company strives to change its product offering as early as possible so that every time a customer enters their store, they are offered something new:
Zara’s strategy requires the generation of a great deal of product variety throughout the year… As part of this fashionably exclusive (yet low cost) image, stores hold very low levels of inventory – typically only a few pieces of each model – and this often means that a store’s entire stock is on display. Because of the low inventory, policy it is not unusual to find empty racks by the end of a day’s trading and therefore stores are completely reliant on regular and rapid replenishment of newly designed products. (Ferdows, Lewis, & Machuca, 2003, p. 63)
The supply chain process of Zara consists of four broad categories – designing and order administration, production, distribution, and retailing. However, the process followed is less generic as it may sound.
Designing is one of the cornerstones of Zara’s success (Ferdows, Lewis, & Machuca, 2003). The process of effective, profitable designing of products that sell within a short time, is possible only if the products are replenished with new designs and fashion to the stores in a short time. The focus of the company is to hire designers who can come up with design ideas in a very short time. Hence, Zara has dedicated teams for designing and product management (Ferdows, Lewis, & Machuca, 2003).
There are focused teams to look into specific areas of their products (Zara’s Secret To Success: The New Science Of Retailing, 2013). For instance, the company has a dedicated team for the women’s sportswear division (Zara’s Secret To Success: The New Science Of Retailing, 2013). The product team is also responsible for collecting trend data on the in-season fashion and fad and accordingly presents it in their product designs. Thus, Zara has a short-term policy of replenishing its fashion line:
Zara is renowned for its ability to deliver new clothes to stores quickly and in small batches. Twice a week, at precise times, store managers order clothes, and twice a week, on schedule, new garments arrive. To achieve this, Zara controls more of it’s manufacturing than do most retailers: About half its clothes are made in Spain or nearby countries. For Zara, its supply chain is its competitive advantage. (Berfield & Baigorri, 2013, para. 2)
The short designing and production cycle provided the strategic competitive advantage for the company to revamp its fashion line very two weeks while the company’s competitors replenishes their line in three or four months.
Zara, unlike its competitors, does not spend on advertising its products. The business model of Zara is solely dependent on logistics and designing. Zara believes in setting up shops in prime locations in large cities where the market segment represents its target customers, thus, making the need to advertise redundant.
The financial model of Zara is also different from its competitors (Ireland, 2013). Usually fashion retailers make payment to the vendors when giving them contract for manufacturing a particular batch of products, thus, restricting their cash. Zara follows similar model for its Asian vendors who supply their steady, basic garments, while the more trendier and short-term designer clothes are delivered by the Spanish, Portuguese, and Turkish vendors. Hence, the level of restricted cash for Zara is much less than its competitors.
Disruptive Innovation
The business model of Zara is popularly known as the disruptive business model that allows companies to create a fresh market along with their value network. The model is a self-sustaining mechanism that in future moves ahead to disrupt the market and the new technology simply displaces the older ones.
Usually, the mistake that companies make is to counter competitive forces, upgrade their product offering, and trying to increase their market share. Zara created a niche in the fashion retail market where its competitors were not catering. For instance, Zara catered to the customers that its competitors like H&M, Gap, and Benetton were not supplying. Thus, it whittled a market for itself in the existing market.
The competitive advantages of a company following a disruptive model are selling to customers and just-in-time production. Zara followed these two strategies completely. Direct selling to the customers allows Zara to understand the taste and preference of its customers and the probable changes that it may face and just-in-time production allows the company to replenish its offerings at a very short time, reducing inventory cost considerably (Levine, 2013). Levine therefore points out:
Zara focuses on understanding the items that its customers actually want. This differs from traditional prediction of seasonal trends, and then promoting the line. Inditex does not advertise. Instead, the company invests heavily in the beauty, historical appeal, and location of its shops…The company monitors customer reactions carefully. It notes what they buy and don’t buy. It records their feedback to the staff and is reported to headquarters daily. It is transmitted to a vast team of in-house designers, who quickly develop new designs. (2013, para. 4)
Demand from customers, therefore, is the chief driver for the deliveries to the stores. Usually Zara ships limited pieces to its stores initially, and follows up quickly if the product fetches good response from the customers.
Though most of the fashion retailers rely on vendors from South Asia where labor cost is cheap, Zara relies on making of the trendiest of its fashion attires from costly local vendors as it reduces its response time to just 2 to 3 weeks. This allows great flexibility to the company reducing its inventory cost considerably and enabling faster turnaround (Levine, 2013). Thus, the business model of Zara relies mostly on its logistics and value chain, which helps it to manage and cater to customer preference and demand.
Works Cited
Berfield, S., & Baigorri, M. (2013). Zara’s Fast-Fashion Edge from Bloomberg Businessweek.
Ferdows, K., Lewis, M., & Machuca, J. A. (2003). Zara. Supply Chain Forum , 4 (2), 62-66.
Hansen, S. (2012). How Zara Grew Into the World’s Largest Fashion Retailerfrom The New York Times.
Ireland, P. (2013). Zara’s Disruptive Growth Strategyfrom Tycoon Playbook.
Levine, S. R. (2013). How Zara took customer Focus to New Heights from Credit Union Time.
McAfee, A., Dessain, V., & Sjoman, A. (2007). Zara: IT for Fast Fashion. Harvard Busienss Review , 1-23.
Ă–zlen, M. K., & Handukic, I. (2013). Fashion Industry Supply Chain Issues: Zara. European Researcher , 47 (4), 999-1008.
Zara’s Secret To Success: The New Science Of Retailing. (2013) from Forbes.