Zara Business Model & Understanding Zara Business Strategy

Zara Business Model & Understanding Zara Business Strategy – UE

Zara Business Model
Zara Business Model

About Zara, Founders and Facts

Zara is wrongly pronounced by every one.  Well this is what seems to be a rage these days in the up-market society of Mumbai.  That led me to wonder how Zara’s business model compares that of traditional retailers of fashion accessories and thus this post and I must say this is one of the finest business models I have seen recently for a completely offline company and yeah I was bored of writing about stupid internet business model examples.

Business model of Zara is impeccable in terms of design to outlet efficiency which leads to their immense cost savings and Zara’s business strategy in terms of positioning themselves as a premium brand is also helping them gain significant traction with the middle class mall buyers of the country.  Let’s see business model of Zara in detail.

Zara Founders, Owners : Zara is a Spanish clothing and accessories retailer based in Arteixo, Spain.  The company was founded in 1975 by Amancio Ortega and Rosalía Mera. It is the owned by the Inditex group, which incidentally is the world’s largest fashion retailer. Inditex also owns smaller brands such as Massimo Dutti, Pull and Bear, Bershka, Stradivarius, Oysho, Zara Home, and Uterqüe.  Zara contributes to 90% of the company’s revenues (2016).  Funny story about the founder is, because of the fluctuation in the stock markets, he became the richest man on the planet for couple of minutes and then was back at number 2.  His networth as of 2016 is appx $75 Billion.

Zara Revenues : $16 Billion Dollars (2016) = 2X of FlipKart 🙂

Zara Business Model

How does Zara Make Money
How does Zara Make Money

Zara’s Business Model is one of the finest the fashion retail industry has ever seen.  When majority of the large retailers like GAP and all are struggling in many operational countries, business model of zara is giving them handsome returns in the form of a 20% yoy growth in majority of the segments (Store vs Store, QoQ etc).

Before knowing the exact business model of zara, we must know one thing from the fashion industry i.e. FAST FASHION (similar to FMCG – Fast Moving Consumer Goods).

Fast Fashion & Zara Business Model

Fast Fashion : Similar to FMCG – this fashion comes and goes.  Primarily targetted towards YA crowd to MA crowd (YA – Young Adults and MA – Middle Aged) this fashion never goes out of style – it simply goes out of stock!

Basic assumption here is that the girl / lady buying the stock will never wear it more than 6-8 times on an outing.  So the quality is in such a way that it withers out within 2-3 months and our girl / lady friend is back in the store again – till that time the entire range has undergone a change and thus she buys new stock and the cycle continues.

Fast Fashion also means that the impulsive nature of the buy transaction is highly impulsive, because girls know that what ever I am seeing today – may not even be in stock in the next 15 days – so if I like it to the extent of buying it later – I might as well buy it now – BRILLIANT!

Business Model of Zara

H&M, Forever 21, Topshop, and Primark are also pioneers of Fast Fashion but there is something about Zara Business model that has catapulted it from zero to TOP and the rest of the fast fashion companies have remained where they are or are dwindling.  It all comes down to zara’s excellent business strategy and very agile business model.

Lot of advantages with Zara Business model : They quickly spot new fashion trends, they always under predict the forecast of stock requirements which reduces discount wars on leftover stock and artificially drives demands to the sky, quick churning of the stock which keeps ladies coming back for new everytime. They are also extremely responsive to factors like the weather, and competitor trends and designs.”

Zara business model is a factory set up which means their factories push out the newest products to the stores with ZERO customization option to every one (take it or leave it) and no products are ever made to order.

Zara Business model is a very supply chain intensive business model. From the first design up to the final production and ultimately distribution to the stores happens all within 7 days flat.   Since the lead time is less than a week from design to doors, they do not have to stock stuff and then sell – they can adapt to the weather and other conditions and change their entire collection within a week.  This means Zara Business model can respond to immediate fashion changes, reduce or increase production as necessary, introduce new lines and so forth.

Zara Business Strategy

Zara Business Strategy
Zara Business Strategy

Zara Business Strategy is pretty clear and straight forward.  Roll over the inventory at such a fast pace that consumers are actually scared that if they like anything – will it stay till the next visit so that they buy it off immediately on seeing.

They do this in a continuous loop:

  1. Fashion Spotting newest trends based on fashion, weather etc.
  2. Design
  3. Produce in Factories
  4. Ship to Stores
  5. Sell to Consumer & REPEAT.

Zara Business Strategy on Production and Supply

Zara’s team of designers, has about 200 professionals, 12,000 different models for sale in its stores (that’s a huge SKU number). Some of the factories are owned by the company, and an equally wide range of external vendors help Zara to fabricate a model and to have it ready for sale in its stores worldwide within the average term of approximately one week (door to door time is about 15 days).

Garments, in-house manufactured ones & those purchased from vendors, arrive at the Zara’s warehouses in Spain, from there material is dispatched to the worldwide stores.

Zara Business Strategy on Positioning

Zara Business Model spends NEAR ZERO on DIGITAL ADVERTISING.  They regularly do promoted posts of one of their designs for a small duration till gathering viral mass and it then spreads on its own.  They have the following components of their vital business strategy.

Zara Business Strategy of Fast Fashion : Zara’s Fast Fashion is not the run of the mill chinese copy-cat production. Zara has an awesome global trend spotter feedback system from the lowest level of employees to quickly alter and improve upon its existing clothing lines.  The fresh design is then sent to manufactures in Asia & Europe who will get this feedback into a new line of clothes ready to sell within a week.

Zara Business Strategy of Supply Chain : Zara does not outsource anything to Chinese manufacturers. The availability of cheaper Spanish labor, Asian and Middle Eastern labor, Zara can put its new merchandise in stores within a week.  Zara focuses on fast fashion items being produced in and around Spain (to reduce TAT) and outsourcing more shelf life products to cheaper labor markets.

Zara Business Strategy of STORE FRONTS : Smart People at Burger King knew that McDonalds has invested millions into researching the best locations with high foot falls to open McDonalds fast food joints. Thus Instead of putting in money into that Burger King decided to open up new stores – right next to McDonalds.  Similarly Zara will pay a higher rent and brokerage for stores adjacent to the luxury apparel brands.

Disclaimer on Zara Business Model and Zara Business Strategy : Authors Views, Use information carefully.  Indemnification is understood and agreed by use of the website.

 

7 Comments

    1. Hi Nikhil – pls read this para – Zara’s team of designers, has about 200 professionals, 12,000 different models for sale in its stores (that’s a huge SKU number). Some of the factories are owned by the company, and an equally wide range of external vendors help Zara to fabricate a model and to have it ready for sale in its stores worldwide within the average term of approximately one week (door to door time is about 15 days). – Then I would say this is how they keep the fashion fast : if you really see this would take more time for all the stocks put together – but really if design a is spotted on 1st and ready on 7th and dispatched by 8 so that it reaches stores by 10 and after tagging and etc. it is available by 14-15 : by this time the new design b is spotted and is worked upon so that gets delivered and is ready by 21 so ultimately the design to door is calculated for 2 diff designs.

      1. this is an awesome research done on one of my favorite brands. From a customer stand point i completely agree with you on the entire business strategy & model. good research & precise presentation.

    2. Hello,
      Well your presentation is quite interesting.
      I’m a French Consultant and focus on Marks&Spencer which is in a great reorganisation as you know (lots of own outlets in Europe, and especially in France).
      Do you have information of M&S, and the differences between these two Groups (M&S vs Inditex)?
      Thx in advance,
      Didier

      PS : sorry for english mistakes;)

      1. M&S is a stupid brand. Sorry to say. I was actually doing a post on them – it bored the hell out of me. Absolute ZERO Business sense they have I must say, No offence to anyone they have made a good brand but to stay at the top you have to evolve – which my friend they are not doing. I will not do a post on them anytime soon. 🙂

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