From unlikely beginnings as the son of a railroad worker, Amancio Ortega Gaona, founder of Inditex and its flagship brand, Zara, has built his company into a global fashion powerhouse since its first store opened in the northern Spanish town of La Coruña in 1975. Over the past decades, Inditex has grown its now-colossal headquarters in this sleepy coastal town to accommodate a world-class, vertically-integrated supply chain that designs, produces, and delivers apparel to over 2000 Zara stores in 88 countries in under three weeks. With 8% revenue growth in 2014, Zara continues to outpace its competitors and its success has made Ortega the fourth-richest man in the world at the age of 79.
Setting the context: the fast fashion business model
To achieve its stated mission of “meeting the needs of its customers at the same time as helping to inform their ideas, trends and tastes,” Zara has positioned itself as the first-mover in delivering new trends affordably to its many customers around the world. Whether in Stockholm or São Paulo, the core Zara customer is fashion-conscious men and women in their twenties and thirties living in urban settings. These consumers have a limited income but sophisticated tastes and tend to shop for seasonal and occasion-driven merchandise.
Traditional retailers have typically found this demographic extremely difficult to serve. As it is, demand for short-life-cycle products such as fashion apparel is notoriously challenging to forecast. Delivering on trends at the appropriate volume is critical, but the traditional apparel company is forced to make design and production decisions several months before an item hits stores. Designers often spend weeks to months on ideation, after which designs are sent to sub-contracted factories in developing countries and shipped by sea to retail stores. Collections are typically shipped only two to five times per year so quarterly performance depends heavily on a given shipment. Any demand miscalculation drives stockouts or markdowns, the latter of which can be particularly devastating: Stanford University’s Dr. Warren H. Hausman estimates they can be as much as 33% of cost of retail sales for many apparel companies. For trendy apparel, this variability is exacerbated as the likelihood that an item is a surprise hit or a major miss is much higher than for a brand that stocks predominantly basics.
Zara’s operating model innovation
Ortega and his team at Zara successfully disrupted the traditional fashion retail model by driving unparalleled responsiveness to trends and minimizing inventory and financial exposure when a trend inevitably goes bust. This operating model is predicated on the idea that Zara can bring its most high-fashion merchandise from ideation to market in just under three weeks. Each step of the supply chain is optimized for this explicit purpose. At headquarters, Zara’s designers and regional sales managers sit together in a large, open-plan space to facilitate rapid iteration. They are also in close proximity to the factories themselves as Inditex owns a significant percentage of its manufacturing facilities and co-locates them in Spain. The majority of their independent suppliers are also in the region. Products are air-shipped to stores in small batches twice weekly and only go out once they are assembled onto hangers or displays. Even the security tags are attached in the factory.
You may be wondering how Zara can be successful given the many high-cost elements in this supply chain. After all, factories are located in relatively expensive, developed labor markets, air shipping is multiples more costly than sea, and Zara’s insistence on delivering small batches and pre-hanging merchandise implies they are likely not optimizing container space. However, these were actually conscious operational strategy choices that serve as prerequisites for more significant savings. While Zara may eat some margin on shipping, they control relative COGS through vertical integration of their factories. The small batch system drastically reduces inventory holding and markdown costs and drives store visit frequency by providing novelty for consumers throughout the year. By reducing the need for demand planning, Zara can push down decision-making to the individual store level: store managers use handheld electronic devices to re-order best-selling merchandise from its factories real-time. As a result of these innovations, Dr. Hausman estimates Zara is four times more profitable than traditional apparel retailers.
Conclusion: A bright future ahead
Not only does Zara’s operating model make sense for its many business benefits—increased turnover and margins, lower inventory risk, and lower overhead at headquarters among them—but it is also uniquely positioned to take advantage of the major consumer trends facing fashion in the 21st century. As fashion bloggers and digital influencers become more prominent and drive an accelerated trend cycle, there is simply no bricks-and-mortar retailer better prepared to deliver on a global scale.
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6. https://www.inditex.com/brands/zara. Accessed December 9, 2015.