Zara has been a pioneer in fast fashion, a business model which minimizes the distance between when a fashion trend emerges and when it is made available to consumers at the store. The company has been successful because it has developed a revolutionary operating model which delivers on this value proposition.
Zara’s business strategy is built around three main pillars: product development and manufacturing informed by customer insights and latest fashion trends; frequently and quickly updated collections with around 300,000 new different SKUs produced on average every year; affordable pricing with profits sustained by high turnover and margins. The distinctive features of Zara’s operating model are aligned with these three pillars.
The communication loop
While traditional fashion retailers forecast trends 12 months in advance to develop their production schedules, Zara meets customer demand focusing on fashion trends as soon as they appear. Store managers collect hard data, such as orders and sales trends, and soft data, such as customer reactions and “buzz” around a new style. They transfer this information to headquarters, where designers, market specialists and procurement and production planners are sit together and constantly develop new products to meet fashion trends. Working in cross-functional teams increases both the speed and the quality of the design process. Though it is more expensive, Zara has three separate staffs dedicated to each of its clothing lines: women, men and children. This choice ensures that information flows fast, direct and unencumbered by problems in other channels. To close the communication loop from shoppers to designers and production staff, Zara controls the entire supply chain: it keeps around half of its production in-house; it manages design, warehousing, distribution and logistics functions itself; it runs nearly all of its retail shops instead of relying on franchises. This enables Zara to get direct access to the critical last step of the supply chain – customers. Constant flow of updated data throughout the vertically integrated supply chain mitigates the bullwhip effect. The latter would otherwise be especially severe as demand in fashion industry is extremely volatile and, while traditional retailers change a maximum of 20% of their orders once the season has started, Zara adjusts 40% to 50% of them.
Flexibility in operations
Once a new trend is identified, Zara can ramp up or down production of specific garments quickly and conveniently. Its highly automated factories normally operate only one shift and can easily run extra hours to meet seasonal or unforeseen demand. Zara tolerates lower capacity utilization in its factories and distribution centers, in order to react to unexpected demands faster than its rivals. The company indeed realized that waiting time increases exponentially when capacity is tight and demand is highly variable. Zara’s factories constantly create unfinished “greige goods”. Adopting a “just-in-time” approach, Zara sends “greige goods” to its network of finishing shops and turns them into products, as soon as a new design is developed. Complex and trendiest items are made in Zara’s own factories or within proximity to the company’s headquarters, so that production process, from start to finish, takes only two to three weeks. All finished goods pass through the distribution center in La Coruña, where operating hours are flexible to accommodate fluctuation in the orders. In a normal week, the facility operates around the clock four days and only one or two shifts on the remaining three days.
Low prices with high margins
Responsiveness to customer demand allows to keep high turnover and enables Zara to charge relatively low price without affecting its margins. The company typically sells its products just few days after they are made, operating with negative working capital. Zara manufactures and distributes products in small batches. Customers can always find new products but in limited supply. They are incentivized to buy immediately because products sell out very quickly and pricing is relatively cheap. Unsold items account for less than 10% of stock compared with an industry average of 17% to 20%. Short window of opportunity for purchasing items also motivates consumers to visit the stores more frequently – typical customers visit Zara’s shops an average of 17 times a year vs. an average of 4 visits a year to any other retailer. Zara’s strategy also allows to minimize the recourse to markdowns with positive impact on margins.
Alignment between business model and operating choices has translated into successful financial performance. Higher margins, turnover and reduced inventory risk makes Zara four times more profitable than the average retailer. Inditex, Zara’s holding company, posted a 26% jump in net earnings to €1.16bn in the first six months of 2015. Sales rose 17% to €9.42bn and 7% on a like-for-like basis. Gross margin has increased slightly from 57.6% to 58.1%. Iniditex’s share price has constantly outperformed the European market over the last 5 years. Zara’s founder, Amancio Ortega, is now the second-richest man in the world, surpassing even Warren Buffet.
As other fast fashion retailers, Zara has not been immune from critics for outsourcing half of its production to countries with cheap labor force (see link to Last Week Tonight with John Oliver episode on fast fashion).
However, I would argue that the source of Zara’s competitive advantage is not cheap labor but the execution of its business strategy: offering the latest customer trends by leveraging on agile operations.
 Fast Fashion Has Completely Disrupted Apparel Retail, Forbes, 05-21-2015
 Fast fashionista Inditex earnings accelerate 26% to €1.16bn, Financial Times, 09-16-2015
 How Instagram is helping Zara take over the fashion world, Business Insider, 09-17-2015
 How Zara became the world’s biggest fashion retailer, Telegraph, 10-20-2014
 How Zara Grew Into the World’s Largest Fashion Retailer, The New York Times, 11-09-2012
 Rapid-Fire Fulfillment, Harvard Business Review, 11-2004
 The Future Of Fashion Retailing, Revisited: Part 2 Zara, Forbes, 07-23-2015
 This clothing company whose CEO is richer than Warren Buffett is blowing the competition out of the water, Business Insider, 07-13-2015
 Last Week Tonight with John Oliver: Fashion, 07-26-2015