Zara: a Retailing Force to Be Reckoned With
From fabric to fashion: a vertically integrated operation engineered to maximize relevancy and minimize costs.
Once a tiny lingerie store in La Coruna, Spain, Zara has transformed into a retail giant, with 2,000 stores, $20bn in sales, and a headquarters supported by a sprawling network of underground tunnels.
The retail industry was swinging and missing – and founders Amancio Ortego and Rosalia Mera knew why. Consumers wanted to wear current couture designs at non-couture prices. Zara made the runway accessible; from a cost, quality, and speed perspective. Many companies claim “fast fashion” – few can claim instant fashion.
Zara’s feats, such as in 2012 when the retailer debuted pieces inspired from the fall runway shows just two weeks earlier, have forced industry leaders figure out how they can compete with Zara’s masterful operational execution. Renowned Louis Vuitton Fashion Director Daniel Piette seemed to have echoed industry sentiments when he said that “Zara is quite possibly the most innovative and devastating retailer in the world.”
VERTICAL INTEGRATION AND SUPPLY CHAIN OPTIMIZATION
Most apparel retailers determine 50% of their designs for a seasonal line 6 months in advance, with 80% of the inventory committed by the beginning of each season. These retailers are generally paying for rented factory time; scheduling beforehand cuts costs, eliminates the need for rush orders, and ensures the factories will be available for their production. These retailers are effectively betting on trends half a year in advance, hoping the tide hasn’t turned by the time the season approaches.
Contrarily, Zara determines only ~20% of a season’s line 6 months in advance, entering the season with ~50% of committed inventory. For the remaining 50% of its line, Zara adopts Toyota’s Just-in-Time system, responding real time throughout the season. Zara’s operations enable the global Company to be nimble with regards to quantity, frequency and variety of new products to be launched.
Zara masterfully pulls this off through its vertical integrated, highly centralized operating model. Zara uses state-of-the art distribution systems in its design and manufacturing headquarters, located in La Curuna, Spain. The Cube (i.e. “command central) is linked through underground tunnels to its 11 Zara-owned factories, all within a 10-mile radius. The tunnels are fitted with high speed ceiling rails to transport garment racks, 400+ chutes, conveyor belts, and optical scanning and sorting devices.
Zara’s thorough logistics and scheduling feed into the supply chain and distribution rhythm. Raw materials, delivered from European suppliers, are received within 5 days of being ordered – the Company manages this mainly by buying fabrics in only four basic types and doing all the cutting and dying in-house. The materials are transported from the Cube via rail to the factories for production, and later returned to the Cube as finished products for shipment to stores. Zara can deliver items to stores worldwide in just a few days (48 hours to reach the US). Items, which are already on hangers, tagged, and priced, go straight from the delivery trucks to the sales floor.
“INVENTORY = DEATH”
Through its Just-in-Time production model, the Company is able to order in small batches during the season based on current trends. Small batches not only minimize losses if the trend doesn’t materialize, but also lends itself to the customers’ perception of “exclusivity”. Inventory optimization models are used at corporate to assist in determining appropriate volumes for each retail location. Zara lines rarely stay on shelves for more than a month – the Company captures 12 inventory turns per year compared to the industry average of 3-4 per year.
STRIPES ARE IN? STRIPES IT IS!
Giv
en seasonality and continuously changing fashion trends, the general issues that come along with forecasting demand are often exacerbated in the retail industry. Zara’s Just-in-Time model alleviates the pressure of changing based on demand, since change is part of the system. The centralized structure and scheduling allows store managers to order and receive clothes twice a week, often 2-3 days within order placement.
Besides placing orders, store managers provide data on popular styles and customer feedback to Zara headquarters daily, which is then relayed to the design team who incorporates the ideas real.
TRANSLATION TO BUSINESS MODEL
The intricate operating and distribution model, aside from solving the pain points of the customer, feed into other aspects of the business model that both bolster the customer experience and increased profitability. New shipments of clothing arriving throughout the week, coupled with limited quantities of each line, “creates an environment of shortage and opportunity,”1 encouraging frequent customer visits (an average of 17 visits per year). While other retailers rely on discounts to unload excess inventory, Zara is able to push its limited inventory at full price; Zara sells 15-20% of its products at less than full price, versus 30%-40% for competitors. The low inventory costs allow Zara to swallow premium pricing on rush orders, wage rates, and capital investments – something other retailers are too cash-strapped to invest in.
If Zara can continue to balance the forces of quality, cost, efficiency, and speed while demonstrating high fashion relevancy, the retailer will have very little competition to fend off.
(1) http://blog.scmglobe.com/?page_id=1513
https://www.tradegecko.com/blog/zara-supply-chain-its-secret-to-retail-success
http://web.mit.edu/jgallien/www/ZaraInterfacesPaperAugust3.pdf
http://www.nytimes.com/2012/03/29/fashion/at-zara-in-midtown-its-all-a-tribute.html?_r=1
http://www.forbes.com/sites/walterloeb/2015/03/30/zara-leads-in-fast-fashion/
http://www.bloomberg.com/bw/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge
Zara is pure genius. If they choose to stay within their current product offering, I’m confident they will continue to win. However, over time most brands strive to create their own brand aesthetic and often evolve towards higher price points. I worry both pursuits would remove many of Zara’s competitive advantages. For the first concern, they would have to plan for a much more robust design and product development phase, instead of copying others’ designs straight from the runway. This would inevitably length their lead time and remove their first-to-market advantage. For the price concern, the current production cycle does not allow time for expert sewing and detailing – thus justifying the lower price points. To evolve into a higher priced brand, they would have to dedicate much more time to the production cycle. If Zara can stay disciplined and avoid these 2 prominent temptations, I believe their success will be continued for quite some time.
Natasha, this is amazing. I hadn’t thought very much about operations in the retail space (aside from Dore-Dore, obviously), and Zara is clearly using a well-designed operating model to support their business goals. Having their factories within a 10-mile radius of “the Cube” is an unusual move–most clothing is designed and manufactured in separate facilities, and Zara’s geographic proximity is clearly creating huge advantages for them.
Excellent article Natasha. I liked the amount of information you were able to include in the article without it being overwhelming. Having been developing prime retail shopping centers in Mexico, getting the Inditex group as a tenant was always a priority of ours. It is very interesting to dive into one of Zara’s major competitive advantages and understand why it, along with it’s sister brands, has been growing as fast as it has. I wonder though if the other fast fashion brands that have been also gaining market share worldwide (Uniqlo, H&M, Forever 21) share the same production process or have other strategic strengths.
Great article, Natasha! So well put! @Sebastian, you bring up an interesting point — I wonder how similar other fast fashion brands’ operating models are. I came across this Oliver Wyman paper about the supply chains of fast fashion (http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2015/aug/2015_OliverWyman_Fast_Fashion_screen.pdf). Seems like a lot of fast fashion players carefully segment their products into traffic generators and evergreens, and then they tailor manufacturing costs accordingly. I never realized so much thought when into those silly sequin tops!
Hi Natasha!
Nice post! I’m a huge Zara fan. From a business standpoint, I can see why exclusivity is important and how quick turnarounds encourage repeat buyers to keep checking in. All the same, it can be incredibly frustrating to buy a sweater one year and then realize that I probably won’t be able to find it again — it’s gone, forever! I’m wondering if Zara’s just-in-time system could ever get to the point where people can reference prior designs and pay a premium to have the item recreated. I would certainly consider paying $$$ for that sweater.
Next, do you happen to know if Zara’s online operational model differs from its in-store operational model? I get the feeling that there are many items, which seem to be of better quality, that are sold exclusively in the store. I used to make all my purchases at the retail store when I lived in NYC, but since I’ve moved away I have had to make purchases online — the items, while good, are just not the same.
Finally, how does Zara’s operational model work internationally? It seems as if operations are broken down regionally. A blazer size 32 sold in the US is NOT the same as the same blazer of the same size sold in Argentina. I have also heard this criticism from other Zara enthusiasts. I think this could be a flaw in the company’s global operations model. Just a thought.
Thanks again for the great post!
Best,
Alex
Zara is a brilliant case study in ops – glad you wrote about it! What amazes me is how they’ve managed to scale globally while keeping manufacturing largely centralized and have not bowed down to outsourcing pressures to cut costs. It will be interesting to see how they maintain this going forward.
Love the post Natasha. The ‘Cube’ facility is mind blowing. Keeping manufacturing centralized seems to be the main competitive advantage in their operating model. I wonder what prevents other big retailers from following the same process to reduce inventory and turnaround time. Scale could be one issue but then there are quite a few retailers that have the scale to make this model work!
Zara has absolutely mastered fast fashion. This was a fun read! I am most surprised by how they continue to attract young people across the world and across economic lines. I’ve seen affluent and middle income friends and acquaintances shopping at or talking about Zara. Loved reading about how they do this, particularly the JIT process which imbibes change as a part of it. I also imagine that this constant inventory shuffle means there is not much stress of huge leftover inventories at season end, since seasons for Zara are one rolling list of new items.