In recent years, the concept of fast fashion has emerged as an important trend. Fast fashion ensures that the clothes being manufactured follow the ongoing trends and follow the customer’s demands. Zara is a Spanish company that retails in clothing and accessories. Zara specializes in fast fashion, and products constituting clothing, accessories, shoes, swimwear, beauty, and perfumes.
A Brief History
Amancio Ortega, a Spanish businessman opened the first Zara store in 1975 in Galicia, Spain. The first store presented low-priced lookalike products of high-end clothing fashion brands. After this, more stores were opened in Spain. During the 1980s, Ortega changed the design and distribution model to reduce lead times and react to new trends in a quicker way, which he called “instant fashions.” He incorporated the use of information technologies and using groups of designers instead of individuals.
Further growth of Zara can be explained below.
- In 1988, the company began its international expansion by entering into Portugal.
- In 1989, it entered the markets of the United States.
- During the 1990s, Zara spread to Mexico (1992), Greece, Belgium and Sweden.
- In the early 2000s, Zara opened its first stores in Brazil, Japan and Singapore, Russia and Malaysia China, Morocco Estonia, Hungary and Romania (2004) the Philippines Costa Rica and Indonesia South Korea,
- In 2010, it opened its first store in India.
- On September 2010, Zara launched its online boutique. The site began in Spain, Portugal, the UK, Italy, Germany and France. In India, it began in 2017.
- Zara introduced the use of Radiofrequency identification technology(RFID) in its stores in 2014. The RFID chips work as security tags, which are extracted from clothing when it is purchased and can be reused. The chip allows the company to assess better about the inventory left. When an item is sold, the stockroom is immediately informed, so that a new item can be brought. An item that is not on the mantelpiece can quickly be found with the help of RFID tag.
- In 2015, Zara was placed on 30th number, on Interbrand’s list of best global brands.
- In 2019, Zara updated its logo.
- In 2019 the Global Fashion Business Journal declared that while the textile commerce of the world had gone down by 2.38%, in case of Zara it had risen by 2.17%.
Business Model of Zara
A business model is a description of how a company or an organisation makes money. It’s an explanation of how the company delivers value to the customers at an appropriate cost. A business model is an exploration of what costs and expenses involved in making a product. Business models are necessary for both new and already existing businesses. They help budding companies attract investment, recruit talent, and motivate management, and create a niche.
Business Model of Zara
The Business model of Inditex or Zara is perfectly structured, and there isn’t a single business operation that is solely responsible for the success of this brand. The business model of Zara can be seen below:
Zara uses ideas like vertical integration, business strategy, efficient supply chain management, etc. that turn to be instrumental in the development of Zara. Because of its model, Zara has become one of the most successful clothing brands in the world.
Zara is mainly based on a concept called fast fashion. It is similar to the idea of FMCG i.e., Fast moving Consumer Goods. Fast fashion is used to target an audience which majorly comprises young adults and middle-aged people. The cycle of fast fashion ends early as the fabric of the cloth withers. Various brands like Forever 21, H&M have incorporated this idea into their business model.
The primary objective of Zara is to contribute to the sustainable development of society. It also contributes to the conservation of the environment. It ironically does not mention clothing and instead, incorporates the three principles on which Zara is based. Due to the company’s success in setting-up businesses in countries like the USA and China, it has been quite successful in providing products at a price range which many find acceptable. Zara focuses on integrating fronts like designing, manufacturing, distributing, and supplying adequate raw material. The strategy of Zara can be seen from the chart below.
Vertical integration makes the Business model of Zara stand out. Via this, Zara manages the design, production, distribution, management, shipment, promotion, and sales all on its own. After being vertically integrated the brand can hold a lot of control over every aspect of it. This technique makes the design, manufacturing, and transportation efficient.
Tradeoffs in Logistics
Zara manufactures mostly in Europe, which becomes a costly affair. But it also has the benefit of logistical trade off, Zara makes most of its revenue through sales in Europe. According to data, Europe contributes approximately 66%, Asia provides about 20%, and America contributes about 14% of the total sales. Hence, by incurring maximum sales from Europe itself, Zara can circumnavigate the cost of vertical integration. Other companies cannot orchestrate this circumnavigation due to their substantial reliability over cheap labor from Asia.
Close contact between manufacturing and management units
To keep control over the design and manufacturing fronts, Zara keeps these two verticals close to the management centres. It uses only higher-quality clothing, high-quality equipment, and skilled employees
Quick product replacement cycle
Zara can continuously change designs according to the changing trends as all the products are manufactured in Europe. The product replacement strategy of Zara is its master strategy. This replacement cycle helps the brand to stay in touch with the ongoing trends, and in adapting to the demands of the customer. Moreover, this cycle encourages customers to purchase clothes periodically according to the trends.
This product cycle consists of the following step-
- Observing and recognizing patterns, newest styles, customer demand, weather, etc
- Design and manufacture
- Distribute and redistribute
- Sell to the customer and repeat
Less cost on advertisement
Zara does not resort to advertising as one of its strategies. This model works well for the brand as it helps in maintaining the authenticity, luxury, and uniqueness of the brand. The price range of Zara’s products is much lower than that of luxury brands, but the lack of advertisement helps to maintain its luxury impression.
Various factors contribute significantly to the success of the Business model of Zara. Some of these factors are listed below-
- Being vertically integrated, Zara enjoys control over all its verticals like design, manufacture, distribution, shipment, promotion, etc. It makes it easier for the company to manage and maintain fluid communication between the various stages of the company.
- In spite of there being a clash between the various strategies implemented, Zara tries to synchronize all these strategies to work out a useful Business model of Zara.
- Since it incurs most of its benefits from Europe, it can circumnavigate the cost of vertical integration. Other companies cannot implement this circumnavigation.
- It maintains the high quality of products by keeping its design and manufacturing fronts near management.
- It uses the location strategy to increase sales by a setting-up store near luxurious brands to encourage people to purchase clothing and accessories from Zara.
- Zara also utilizes proprietary software to analyze the various upcoming trends in fashion.
- The workforce utilized by Zara in association with high-quality machines can provide high-quality clothing and accessories.
These are the key partners of Zara:
- Manufactures from different companies
- Shop centres
- Corporate social responsibility organisation
These are the key activities of Zara:
- Customer service
- Trends and forecasting
Zara works according to the demand of the customer.
If I had to condense the foundations for Zara’s success, I would say it comes down to agility and flexibility,” Neil Saunders CEO of the firm.”
The customer relationship of Zara is:
- Brand awareness
- Free shipping. Free return.
- Customer impulse
The customer segment of Zara is as follows:
- Young market
- price-conscious customers
- people sensitive to latest trends
- women-60%, men-25%, fast-growing children-15%
The key resources of Zara are:
- Experienced store managers
- RFID technology
- Supply chain excellence
- Effective production and logistics process
- Using high-tech software
Zara produces about 12,000 styles per year (compared to the retail average of 3,000). It means that fresh fashion trends reach the stores immediately. The key channels of Zara are:
- Gift card
Cost-Structure of Zara
The expenditure of Zara goes on:
- IT cost
- HR cost
- Goods cost
Competitive strategy of Zara
It maintains a position of superiority over its contemporaries because it gives importance to the management of customer and potential client relationships. Zara also maintains a close relationship with its suppliers.
Marketing strategy of Zara
Zara has raised a loyal customer who visits about six times per year, as compared to other retailers in the contemporary market. Loyal customers for retailers are responsible for 80% of the sales. These brand loyalists are also less price-sensitive.
Revenue Model of Zara
The Spanish fast-fashion store Zara generated online net sales of around US$2 billion in 2018. For 2019, revenue of up to US$2.5 billion is projected. Zara revenue generation is based upon its selling of more than 450 million products per year, i.e, it works on economy of scale. Zara has 1700 stores in more than 86 countries around the world.
Total sales of the company are around the US $13 billion that makes it one of the top 3 largest fast fashion brands in the world. Key strategies that help the company generate good revenues are-
- In-time production and distribution- Makes are the production and distribution are at the right time.
- Trendsetter- becoming a trendsetter at the right time
- Effective distribution management- by reducing the delivery time
- No costs on the advertising and marketing
Zara’s model of Fast fashion has worked well for it. Its model of vertical integration and logistics trade-offs have played a significant role in the success and global recognition of Zara. Zara is able to allow smooth and fluid communication between different verticals. Zara’s other strategies like location specificity of stores, synchronization, and coordination among various policies also help Zara is getting more recognition.