Zara: Upscale, on-demand fashion

Zara is one of the world's most successful fast-fashion retailers. What sets it apart?

Zara is a global fast fashion retailer for men, women, and children. Owned by Spain-based fashion group Inditex, Zara had 2,085 stores worldwide at the end of 2014, revenues of 12B Euros [1], and a robust EBIT margin of 18% [2].

Business model

Zara was a first mover in the “fast fashion” retail segment, which sells fashion items inspired by luxury designs to the mass market at more affordable prices. New designs are introduced frequently to reflect the latest trends; Zara stores order clothes and receive new deliveries from the Zara distribution center twice weekly. Other leading brands in this segment include Mango, H&M, and Forever 21; in comparison, Zara brands itself as more upscale and high-quality and is correspondingly somewhat more expensive.

Operating model

Zara’s operating model is highly aligned with its business model. The operating model is designed around just-in-time production for its trendiest items, which is critical for a company whose value proposition is selling the latest fashions. A few key operational decisions enable this flexibility:

  • Centralized decision-making: Zara’s headquarters, “The Cube” in Spain, co-locates business operations with centralized design, manufacturing, and distribution processes. At this single point, key supply chain decisions are made based on real-time information about global demand and Zara’s inventory levels. Since it is co-located with many parts of the supply chain, decisions can flow through the chain quickly, allowing Zara to respond in a rapid and coordinated way to changing fashion trends.
From SCM Globe blog
  • Design timing: Unlike most apparel retailers, Zara only selects about half of its designs by the beginning of a season. New designs are created throughout the season based on information about what is selling well or poorly, as well as what the latest trends are.
  • Localized manufacturing: Zara owns several of its factories and outsources its remaining production nearby, to Portugal, Morocco, and Turkey. This proximity facilitates the rapid flow of information and physical product through the supply chain. In addition, the company outfits these factories with high-tech equipment and additional capacity to allow rapid response to demand fluctuations.
  • Frequent and rapid distribution: Once clothes are quality-checked at The Cube, they are typically delivered to stores within 48 hours. This fast turnaround allows stores to consistently stock new and in-demand fashions.

While these operating decisions support the business model, the business model also enables these operations. Zara’s greater production flexibility is costlier than a traditional, less dynamic manufacturing process, since Zara must allocate more resources to real-time decision-making, excess production capacity, and frequent and small-batch distribution. Zara’s business model of offering more upscale and expensive items, combined with less discounting and a policy of no advertising, provides funding for its unique operations.

Finally, Zara uses its just-in-time supply chain wisely. Only about half of its inventory goes through its European production facilities; more basic items, such as t-shirts and sweaters, are produced through a separate and more traditional supply chain. These items are ordered about 6 months in advance, sourced in low-cost countries, and sent to Zara’s distribution factory by ship. This approach minimizes costs for more traditional items whose demand is unlikely to vary with fashion trends [3].

As a result of its innovative and nimble supply chain, Zara continues to be one of the top apparel companies in the world and, as of fall 2015, a key driver of Inditex’s growth [4].

Sources

[1] Zara 2014 Annual Report. http://www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36-6458f55ac099

[2] Forbes, 2015. http://www.forbes.com/sites/walterloeb/2015/03/30/zara-leads-in-fast-fashion/

[3] Bloomberg, 2013. http://www.bloomberg.com/bw/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge#p1

[4] Bloomberg, 2015. http://www.bloomberg.com/news/articles/2015-09-16/inditex-first-half-profit-rises-on-zara-owner-s-store-expansion

[5] SCM Globe Blog. http://blog.scmglobe.com/?page_id=1513

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4 thoughts on “Zara: Upscale, on-demand fashion

  1. It is really interesting to know that Zara’s choice to own some of its factories and outsources its remaining production to nearby location fits really well for its emphasis on upscale quality without inflating its production cost too much. Whilst most clothing companies choose to outsource their operations to Bangladesh, India, and China, Zara avoided this approach (and reputational risks associated with the working conditions of factories in these countries) with its strong value proposition as an affordable upscale brand.

  2. I have always wondered what makes Zara successful–so much so that Amancio Ortega, founding chairman of the Inditex Fashion group, is the fourth richest person in the world! It sounds like supply chain and distribution are key facets of the company’s success. I didn’t know that Zara places orders twice a week and picks new designs throughout the season. That’s a really interesting choice and such a contrast to many other retailers, including Nic+Zoe (even though they picked all designs at the beginning of the season, they still had trouble getting items delivered on time!). I’m still not sure that I understand the secret sauce that enables Zara to achieve such operational efficiency in their distribution system, compared to other retailers. I wonder whether H&M, Forever21, and others are trying to replicate this system and if so, whether they will be real threats to Zara. On the other hand, I think Zara’s brand equity is remarkable and will probably enable the company to stick around in the uber-competitive landscape of fast fashion.

  3. I find Zara a fascinating company and as someone from Spain Ortega really is a legend that has focused on Zara and an extremely humble life. What I find most interesting is how quickly Zara introduces new designs during each season and how good they are on picking up the trends. We use to have a Zara on my corner and every week it had a different window and a whole new set of clothes at amazing price points. For many women, it has become and after work drop in where they always leave with one item for 20 dollars. Amazing business model only made possible buy its incredible supply chain and quick design turnaround.

  4. Zara is a PHENOMENAL business and I’ve enjoyed watching them take the U.S. by storm over the last few years, a time when most retailers here have really been struggling – just look at all the 40% and 50% off sale signs at the mall!

    What I love most about this business is how well aligned the operating model is to not only its business model but also to imperatives of the industry. Success in the fashion industry relies on being on trend, and Zara’s entire model (from the very beginning) was set up to pick up, execute and deliver on trends for their customer all in the matter of weeks! To answer Komal’s question above as to why it’s so hard to copy Zara’s model, I think it’s because the supply chains of traditional B&M retailers such as the Gap, J. Crew or Ann Taylor have been set on 9-month or 12-month production calendars for so long, it’s really hard to change such ingrained behavior. Not to mention, there’s A TON of execution risk associated with changing out suppliers and setting up a bunch of small mills like Zara has. H&M, Primark and Forever 21 have somewhat different value props that are really about delivering cheapness, so with them, it’s really their massive scale that allows them to offer their products at such a low price

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