Zara - A unique business model

Zara has proved to be a maverick of its time – it came at a time that the apparel industry was fragmented there was no integration, the costs incurred were enormous it was highly labor-intensive leading to outsourcing to save on costs and the business model prevalent was not proving to be highly successful as compared to the models of other industries. In came Zara and showed that strategic imperatives depended on how a retailer sought to create and sustain competitive advantage through its cross border activities and seamless operations, the power of integration and the importance of sticking to your positioning without adding too many frills. Zara’s factories were heavily automated, specialized by garment type and focused on the capital-intensive parts of the production process.
Zara’s fantastically integrated supply chain has enabled them to deliver on their positioning and promise to offer affordable, trendy clothes to its fashion conscious target market in quick time. With Zara you don’t have to be a millionaire to look like a million dollars.
Zara’s global strategy is to offer cutting edge fashion at affordable prices by identifying which styles are “hot” at fashion shows and moving simulations into production even before the original designer can. This is made possible by exerting a strong influence over almost the entire garment supply chain from design to retail. Product differentiation, variation in styles and speed to market has been the main sources of competitive advantage for Zara.
Segment
Zara offers clothes, footwear and accessories to women (60%) and men (25%), as well as clothing and accessories for children (15%). People at Zara do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara’s global target market is a young, educated one that likes fashion and is sensitive to fashion, but is price-conscious.
Target
Zara's target market is based on women and men aged 15 to 45, and children. The target market is fashion-conscious, educated and relatively middle-class, including students, young professionals and young families. Zara recognized a gap in the market for making medium quality, low cost, designer clothing adaptable to the tastes of the local clientele.
Positioning
Target market provides a demand for good variety, high fashion, low cost clothing within a short timeframe and regular turnover of designs. The main competitors are Gap and H&M. Because it produces its own goods, Zara is far more flexible in responding to the demand of its consumers than its competitors. Zara reacts rather than creates new designs, the skirt a famous rock star wore at a concert will be quickly available for the teeny bopper proving that Zara is at the pulse of the fashion scene and knows what its customer base would want and provides it economically. It uses sale staff for market intelligence better than its competitors. Its main difference is the ability to respond quickly to the market
Business Model
At the heart of Zara's success is a vertically integrated business model spanning design, just-in-time production, marketing and sales. This gives the group more flexibility than its rivals to respond to fickle fashion trends. Zara’s unique approach to product development is instrumental to their success. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. The result is a super responsive supply chain exquisitely tailored to Zara's business model. The local strategic partnerships that Zara maintains with manufacturers in Europe allow for shortening the throughput time of a product to 4-5 weeks for new designs and 2 weeks for modifications of existing products, in comparison to the industry standard, which is 6 months. The company makes this happen by designing and cutting its fabric in-house and it acquires fabrics in grey to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior and responding quickly to shifts in consumer demand. It also decreases costs of holding inventory. Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Coruña. Zara designers continuously track customer preferences and then placed orders. Designers talk daily to store managers, to discover which items are most in demand.
At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara’s products. Zara produces approximately 11,000 new styles per year. Zara’s short cycle time reduces working capital intensity and facilitates continuous manufacture of new merchandise – Zara undertakes 35% of design and purchase of raw materials, 40-50% of the purchases of finished products from external suppliers and 85% of the in-house production after the season had started compared with only 0-20% in the case of traditional retailers. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores.
The result is that Zara can make a new line from start to finish in three weeks, against an industry average of nine months. Moreover, Zara's business model makes it highly price-competitive, allowing it to offer mid-market chic at down-market prices. And it protects against slip-ups, too their mistakes are easy to reverse since they are no more than 2 to 3 weeks forward.
Distribution
Zara’s centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. Zara’s internally or externally produced merchandise goes to the distribution center. This is cost-effective due to the close proximities of the distribution center in Arteixo and their factories in Coruña. In the distribution center, products are inspected and immediately shipped, since Zara’s distribution center is a place where merchandise is moved rather than stored. Then, to increase delivery speed, the shipments are scheduled by time zones and shipped by way of air, and land. The typical delivery time within and outside Europe is between 24 to 48 hours.
Advertising and Marketing / Store Operations
As Zara doesn’t spend as much on advertising as its competitors, [Zara spends only 0.3% of total revenues on advertising and marketing] hence maintaining a cost advantage in comparison to their to their competitors in marketing activities so it must enhance customers’ shopping experience to increase repeat purchases and word-of-mouth “promotion” by existing customers. Store layout and interior design are key, as well as superior customer service and so its stores are in visible locations and designed beautifully. Zara strategically locates all of their stores in prime retail districts for visibility marketing. Each Zara store is remodeled every 5 years in order to keep up with current trends.
Additionally, because of the product development cycles mentioned earlier, customers are trained to visit Zara stores often because new items are presented weekly and are often not restocked. This feeling of scarcity encourages customers to come to the stores and buy frequently. Lastly, in order to keep the stores looking fresh and trendy; Zara invests heavily in their store layouts. The store managers are incentivised to perform better by linking commission to the store performance – the staff itself fits the target audience so they are able to ‘feel’ the Zara woman and respond to customers as well as give inputs on design.
Zara does not invest heavily in direct marketing, though their efforts in image/brand marketing do a great deal to attract a loyal customer base. Their cost advantage and ability to maintain brand recognition and customer loyalty are essential elements of Zara’s capabilities that build value in the company.
Information and Communication Technologies
Ortega who was a gadgeteer by inclination relied on computers from the start even when he had just four factories and two stores and when the IT industry had not pervaded into our lives – this give him enormous advantage and showed that what other buyers ordered from his factories was different from what his store data told him customers wanted. Zara also has major investments in Manufacturing logistics and IT and an advanced telecommunication systems.


IS ITS BUSINESS MODEL SUSTAINABLE?
Acquiring market share and sustaining it, is highly dependent
on positioning – how well you have crafted your positioning in people’s minds and how consistent you have been about it. Whether you are staying ahead of the curve and constantly monitoring where you are going. You have to constantly redefine benchmarks and do what others do better than they do it.
Many retailers still regard the supply chain as the back end of their business, but the modern supply chain has a much bigger contribution to make – it can help companies differentiate themselves from the competition and achieve greater, sustainable growth as demonstrated by Zara.
With its innovative business model and operations concentrating on key differentiating capabilities; improving the effectiveness and efficiency of their core operations; and focusing on their target customers to deliver a tailored offering. One of the core goals of retailers is to run their merchandising and supply chain functions as cost-effectively and efficiently as possible which is what has made Zara so profitable.
Zara’s concept, capabilities, and value drivers, as demonstrated through their business model, have proven to be extremely successful. Fundamental to Zara’s success is their commitment to rapid response in customer trends in fashion, producing clothing often and with short life spans (10 wears). Their commitment to this goal and the capabilities that they have developed to achieve it, have provided significant competitive advantage to Zara especially in the areas of product development, strategic partnerships and cost of production, advertising and marketing, and information technology infrastructure.
But with all advantages come the inevitable trade-offs, in keeping its manufacturing vertically integrated they have opened themselves up to certain vulnerabilities namely diseconomies of scale – since they do not produce in large quantities they have to forego discounts. Inditex has to support high capital investments and major investments to support their unique business model. Since they do not outsource they have to bear the extra cost for ‘made in Spain’, which is around 20 times more expensive as compared to made in Asia.
As Zara expands globally there will also arise issues in distribution it will have to open more distribution centers incurring more cost. But Zara is in a comfortable position due to its strong history and best practices that have aligned customer wants and operational efficiency remarkably. They give the customers what they want and as compared to its competitors Zara keeps its operational expenses down as seen in exhibit 6 although revenue are not as high as Gaps’ but net income is almost 400 times greater.
A firm is profitable when it keeps it operational expenses down and despite not giving into outsourcing or it has still managed to keep costs down.
Its fast and responsive tightly integrated supply chain has put it on a slid ground to compete globally and expand into other markets. The only drawback here is that Zara management will have to exercise caution in their expansion schemes – take small step and not be over ambitious in their plans because the more their model will be stretched the more their supply chain which in concentrated in Spain will be put to the test. Although they have been pretty successful in the Middle east the America market is another ball game where there will be fierce competition and many competitors – so the positioning for expanding in America will have to be extremely well thought out but to date Zara has been a glowing example of operational efficiency and combining giving the customer exactly what they want at the price they want with no extra burden to the organization.
It is customer demand that drives Zara’s supply chain, Zara’s smart use of customer data enables it to translate today’s couture fashions into tomorrow’s must-have outfits in turnaround times of four weeks, shipped to the stores via road or air, as appropriate.Thanks to their customer-driven approach, Zara has won a huge following in the notoriously fickle world of high fashion.