ZARA: Sprinting past traditional retail

ZARA has developed a large-scale, super-fast supply chain to allow it to capitalize on trends as soon as they happen.

Amancio Ortega is no household name, but he was briefly the richest man in the world (he’s now #4). [1]  He’s the low-profile founder of Inditex, whose largest brand, ZARA, has taken the world by storm.

Inditex has outperformed the market nearly 4x over the past 10 years and has outperformed fast fashion and traditional retail competitors as well.
Inditex has outperformed the market nearly 4x over the past 10 years and has outperformed fast fashion and traditional retail competitors as well. [2]

In fickle world of fashion, it is increasingly important to be “on trend.”  But trendiness is elusive to most retailers, who hire teams of designers to predict styles a year or more in advance, when they lack real information (e.g. fashion shows, media buzz). [3] Compounding this is the fleeting nature of trends – often lasting only a few weeks before they become passé and leave retailers with a mountain of inventory to clear at rock-bottom prices. In this environment, the retailer with the fastest supply-chain wins.

New York Magazine spread, highlighting the fleeting fashion trends of the 2000's
New York Magazine spread, highlighting the fleeting fashion trends of the 2000’s [4]

ZARA is a leader in the emerging “fast fashion” space.  They aim to consistently provide quality, fashion-forward apparel at reasonable prices. ZARA achieves this consistency through carefully optimized merchant-centric operations, encompassing the entire production cycle from design to manufacturing to sales. [5] While an average specialty apparel retailer might take 6 months (often much more) to get products designed and in stores (and might be able to rush a small selection in 6-8 weeks at a high cost), ZARA takes as little as two weeks to achieve the same thing. [3] [6]

ZARA stores are “the axis around which the entire business pivots.” They also serve as the brand’s advertising (ZARA spends next to nothing on traditional advertising – you will never see a TV ad for ZARA).  Stores are on “only the best locations on the most outstanding shopping streets.” [5] Store managers place orders twice per week; these are reviewed and edited by HQ to include new products and ensure balance across the chain and within two days, the store has received the order. [7] The stores also provide crucial data to headquarters, providing tens of thousands of unfiltered customer reactions to product for design teams to leverage when creating new product. [5] [8]

Videos from ZARA web site describing store selection process, architecture, design, and customer service [5]

 

As a result of this customer-insight driven buying, quick turnaround, and fresh product, markdowns are rare. With very rare exception, the company does not use full-store promotions unlike many apparel retailers such as Gap or LOFT where it can be hard not to buy any given item at 40% off or more. [9] Instead, it orders only what it believes it can sell at full-price and focuses on displaying the product instead of using margin-eroding sales to move product.

 

 

 


So how do they do it?

ZARA is a merchant-centric organization. They do not win through more inspired design, rather they win because they can produce products quickly, allowing them to replicate the best designs in the market at any given time.

Design: Designers are constantly working on next season’s product and are reviewing current trends to develop a huge library of in-house design ideas. In parallel, they are “pulling” vendor-made designs for current/future use (giving Inditex exclusive rights to the design). ZARA’s scale grants them “first dibs.” Each year, over 30,000 designs are made for the Inditex brands (18,000 at ZARA alone).  With this huge database of styles “ready to go,” it is easy for ZARA to quickly develop something that matches a trend. [5] [6]

Fabric/Production: “Greige goods” (undyed fabrics/partially constructed base styles) are made in advance and sent to finishing mills once selected for production. This just-in-time production provides an edge versus traditional retailers who often do not buy yarns/fabrics until they have chosen the design. Fabric knitting/weaving is the longest process within the supply chain so pre-selecting fabrics is critical to ZARA’s fast turn-around times. Additionally, ZARA uses near-shore production for both fabrics and finishing, cutting out time in transportation to and from factories.

Logistics/Shipping: By owning its warehouses, ZARA maintains logistics flexibility based on demand.  Furthermore, ZARA air-mails products to stores (versus sending ships), which does add cost but also takes several weeks out of the supply chain. [5]

Videos from Inditex site describing design, merchandising, manufacturing, and logistics [5]


 

The implications of this efficiency are real. Compared to a traditional player, ZARA will spend more to produce a similar garment AND sell it more cheaply (at regular price). But fast turnover and lack of markdowns drive much higher productivity (gross margin dollars / square foot).

Illustrative productivity of ZARA vs. traditional specialty retailer
Illustrative productivity of ZARA vs. traditional specialty retailer [3]
As ZARA expands, it will face new challenges (e.g. shipping product from Asia to Spain and then back adds a level of cost/inefficiency).  Furthermore, traditional retailers with scale (e.g. Gap) are starting to catch up.  How will ZARA stay ahead of the pack?  Perhaps it will be with virtual dressing rooms and self-checkout or perhaps they’ll continue to innovate on the supply chain. [7]  Time will tell.

 

Sources:

[1] Forbes 2015 Billionaires list. Retrieved 12/07/2015. http://www.forbes.com/billionaires/

[2] Capital IQ. Share price data. Retrieved 12/09/2015.

[3] booz&co. “Keeping Inventory – And Profits – Off the Discount Rack.”

[4] New York Magazine. “Blink and you missed it.” Retrieved 12/05/2015. http://nymag.com/arts/all/aughts/62499/

[5] Inditex. Business Model description. Retrieved 12/03/2015. www.inditex.com/our_group/business_model

[6] Interview with former ZARA Buyer (employed by Inditex 2009-2012; interviewed 2015)

[7] The Telegraph. “How Inditex Became the World’s Biggest Fashion Retailer.” http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion-retailer.html

[8] The Financial Times. “Fashion: A Better Business Model.” http://www.ft.com/intl/cms/s/2/a7008958-f2f3-11e3-a3f8-00144feabdc0.html#slide0

[9] Pull from http://www.milled.com a promotional email aggregator

 

Other Sources Referenced:

Harvard Business Review. “Rapid Fire Fulfillment.” https://hbr.org/2004/11/rapid-fire-fulfillment

The Atlantic. “The Legend of ZARA – What the World’s Top Fashion Retailer Tells Us About Innovation.” http://www.theatlantic.com/business/archive/2012/11/the-legend-of-zara-what-the-worlds-top-fashion-retailer-tells-us-about-innovation/265126/

Quora. “How does ZARA’s Business Model Work?”https://www.quora.com/How-does-Zaras-business-model-work

The New York Times. “How ZARA Grew Into the World’s Largest Fashion Retailer.” http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html?_r=0

Forbes. “The Future of Fashion Retailing Revisited.” http://www.forbes.com/sites/gregpetro/2015/07/23/the-future-of-fashion-retailing-revisited-part-2-zara/

Forbes. “The Future of Fashion Retailing – The ZARA Approach.” http://www.forbes.com/sites/gregpetro/2012/10/25/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3/

Business Insider. “ZARA’s Genius Business Model and Retail.” http://www.businessinsider.com/zaras-genius-business-model-and-retail-2013-11

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6 thoughts on “ZARA: Sprinting past traditional retail

  1. Anna Marie – thanks for a fantastic post! Was an interesting read. I wonder how competitors are going to react in the longer term, especially large, established, multinational brands and conglomerates, which are far from nimble. Their purchasing departments have spent decades optimizing for low cost sourcing and manufacturing from Asian countries. While many recognize the threat that fast fashion poses, I think several of the household names are not in a position to quickly react to it – by their very nature they are slow fashion companies that take 1.5 years on a design cycle and at least as long to disseminate strategy and operations change from the top. It will be really interesting to see which other new entrants gain scale in the next few years and how prominent online and omnichannel becomes vs. physical stores, especially in the fast fashion world where every day cut out of the supply chain counts!

    1. This is the $64,000 question!

      Everyone is trying to speed up their processes. Some of the really big guys (e.g. Gap) can leverage their scale by committing to full plant utilization, thus speeding up production (vs. smaller competitors who have to wait for their turn in the production queue). Furthermore, they can create some easy efficiencies in the production process (e.g. consolidation and advance buying of yarns / fabrics). Others are moving their sourcing to the next level of low-cost countries (e.g. Central/South America) where they can ship goods faster. These things combined could cut out several months of the process. And while some of these things are no brainers, others (e.g. committing to yarns / fabrics before the design team knows what it wants to make) require huge cultural shifts in an organization – this will be the biggest challenge.

      But as physical stores become less and less productive every year (as online cannibalizes sales and new entrants come into the space), it is becoming VERY real and is a very active conversation in the space. My two cents… Retail will look VERY different in 10 years and physical stores (at least in urban areas) will act much more like showrooms / customer service centers versus points of sale.

  2. Thank you for this great post Anna Marie! Since Zara’s competitive advantage seems to be centered around its ability to offer great products for lower prices, I wonder if online retailers could not represent a threat to Zara’s competitive positioning as their low cost structure / high-margins would position them well to compete with a similar value proposition.

    1. Great question! A couple things I’d say in response:

      1. ZARA’s competitive advantage really focuses on the “great products” side of the equation. The prices are also competitive, but if you just want cheap junk, you go to Uniqlo or H&M. The supply chain speed is what really differentiates them and you need more than selling online to get speed.

      2. I’d argue that online is a bigger opportunity for them rather than a threat. Their real estate strategy will never allow them to build stores in random places (e.g. middle of nowhere Midwest USA) but online allows them to access fashion-forward customers in these locales.

      3. Selling online really only saves you money in a couple ways: 1) store rent and 2) [maybe] lower inventory needs (better balance across web vs. in any given store) – ZARA does pay for store rent but because they have such a consolidated footprint in flagship locations (granted, higher rent / sqft) – they have off-the-charts productivity (sales / sqft). Furthermore, ZARA spends no money on advertising so if you looked at the average retailers sales per dollar of rent + advertising, it would be MUCH lower than ZARAs. And (see point 1 above), until an online retailer can get the fashion right, it’s not a relevant threat.

      Thanks!

  3. Thanks Anna Marie – super complete!

    It’s incredible how this company has been able to become so reactive to the market, while still producing good quality products at competitive prices. My concern is that they do not seem to be at the forefront of fashion (more replicating model trends). This in turn means they could in a sense be “capped” in regards to consumer perception – they will never be a “top” fashion brand that dictates fashion trends. This being said, I think the could brand could focus more on new growth markets were this effect would be harder to perceive, thereby somewhat mitigating the issue and driving higher margins. I have seen that Zara in some emerging markets prices at significant premiums vs other retailers.

  4. Great post, Anna Marie, really enjoyed reading about Zara, which is a brand that I personally like a lot. I wonder what do you have to say about the Zara and Mango rivalry?

    Their business models are quite similar; they seem to have stores located in more or less the same places (even almost door to door in shopping areas and malls); they are very quick at catching up with the trends for the season; they’re price points and promotions are very similar (though Zara is a bit at a premium over Mango); quality is also comparable. Who do you think will win as a mid-market fashion brand? How is Zara positioned to gain an advantage over Mango?

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