Zara is one of the largest fashion companies in the world. It is the crown jewel of Inditex, one of the world’s largest fashion distribution groups. Zara has over 2000 stores across 88 countries, and their mission statement is “striving to meet the needs of…customers at the same time as helping to inform their ideas, trends and tastes. The idea is to share responsible passion for fashion across a broad spectrum of people, cultures and ages.”
Zara has a very unique, and at the time of its introduction, relatively revolutionary business model. They coined the term in the industry of “fast fashion”. In fashion there are notoriously long lead times and predetermined production schedules, which cause most designers to plan their collections as far as a year in advance. Zara seeks to have high quality designs at affordable prices, all while refreshing the designs in its stores at least two times a week. This creates a sense of buzz and freshness for customers every single time they walk into a store creating a stark point of differentiation for Zara versus its traditional retail competitors.
Product scarcity to drive sales
By restocking their stores twice a week Zara is are able to hold very little in inventory at each location. This element of their business plan allows them to influence their shoppers purchasing behavior through scarcity principles. Customers are more likely to buy things in the spur of the moment, because unlike with traditional retailers, if they wait the design they like could be out of stock a week later. It also drives further engagement with the company as Zara shoppers visit stores on average 17 times a year versus just 3.5 times for their competition.
Low Ad Spend
This in turn allows them to spend significantly less on advertising. Instead the company funnels what would have been ad spend into high traffic, high visibility, upscale store locations. While the products they offer are reasonably priced, by investing heavily in their stores they create an image of high fashion and quality.
I think that Zara is a great example of a company whose business and operating models are extremely well aligned. Zara’s innovative operating model is the engine that has driven the company to be such an international success. When Amancio Ortega, the founder of Inditex, first created Zara he saw that there were inherit misalignments between most retailers operating and business models. He noticed that the designs his factories were producing never seemed to match what people on the street actually wanted to wear. He came to realize that the objective of a fashion company, should be to make clothes that people want to wear. Its tough to predict fashion trends way in advance so why continue to guess when you can iterate and get it right? In order to make this vision possible he pioneered several operating processes that Zara still uses to this day.
Eschewing the traditional model of seasonal collections and large batch sizes requiring a large reliance on external suppliers, Zara is vertically integrated and produces its most time-sensitive fashion items in-house using very small batch sizes. These items are then shipped to Zara’s central distribution centers in Spain which (for the case of Europe) are very close to their actual stores. Clothes would traditionally stay at the distribution center for only a matter of hours and none longer than three days. By vertically integrating in key elements of the supply chain Zara is able to stay lean and JIT, carefully aligning its production to actual demand in its retail stores. While transportation and logistic costs increase, by controlling multiple elements of the supply chain and virtually eliminating warehousing and storage costs Zara is able to create a sustainable advantage over its peers. Perhaps more critically it also allows designers to push products from the initial design phase to on store shelves in just four weeks.
With this drastic reduction in cycle time Zara’s design team continuously tracks consumer preferences, latest trends, and actual store sales to inform its design process. This involves establishing open communication channels between retail store employees and the design team to ensure that Zara remains consistently on the forefront of latest fashions. So through this operating process they meet the founders original goal, and while limited, the products they stock on the shelves, are clothes that people actually want to wear.