Short production runs create scarcity of given designs and that generates a sense of urgency and reason to buy while supplies last. As a consequence, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items. Zara has 12 inventory turns per year compared to 3 — 4 per year for competitors. Stores place orders twice a week and this drives factory scheduling. Such short term focused order cycles make forecasts very accurate, much more accurate than competitors who may order every two weeks or every month.
Clothing items are priced based on market demand, not on cost of manufacture. The short lead times for delivery of unique fashion items combined with short production runs enable Zara to offer customers more styles and choices, and yet still create a sense of urgency to buy because items often sell out quickly.
And that particular item or style may not be available again after it sells out. Zara sells 85 percent of its items at full price compared to the industry average of selling only 60 percent of items at full price. Annually there is 10 percent of inventory unsold compared to industry averages of 17 — 20 percent. In Spain customers visit Zara stores 17 times per year on average compared to 3 times per year for competitors.
Because their clothing designs change often, it is harder for people to see them clearly on the Internet and thus they are encouraged to come into the stores instead and try on the unique fashions that Zara offers screenshot below shows people at a Zara store in Madrid, Spain. Zara spends its money on opening new stores instead of spending a lot on ad campaigns.
Estimates vary on the number of Zara stores worldwide. Zara also uses a flexible business model where its stores can be owned, franchised or co-owned with partners. Zara buys large quantities of only a few types of fabric just four or five types, but they can change from year to year , and does the garment design and related cutting and dyeing in-house. This way fabric manufacturers can make quick deliveries of bulk quantities of fabric directly to the Zara DC — the Cube. The company purchases raw fabric from suppliers in Italy, Spain, Portugal and Greece.
And those suppliers deliver within 5 days of orders being placed. Inbound logistics from suppliers are mostly by truck. The Cube is , square meters 5 million square feet , and highly automated with underground monorail links to 11 Zara-owned clothing factories within a 16 km 10 mile radius of the Cube.
All raw materials pass through the Cube on their way to the clothing factories, and all finished goods also pass through on their way out to the stores. They do only 50 — 60 percent of their manufacturing in advance versus the 80 — 90 percent done by competitors. Zara does not need to place big bets on yearly fashion trends. They can make many smaller bets on short term trends that are easier to call correctly.
The Zara factories are connected to the Cube by underground tunnels with high speed monorails about kilometers or miles of rails to move cut fabric to these factories for dyeing and assembly into clothing items.
The monorail system then returns finished products to the Cube for shipment to stores. The screenshot below illustrates how the Zara supply chain is organized. Manufacturing is centered in northwestern Spain where company headquarters and the Cube are located. But for their main distribution and logistics hub they chose a more centrally located facility.
That facility is located in Zaragoza in a large logistics hub developed by the Spanish government. Then finished garments leave the Cube and are transported to the Zara logistics hub in Zaragoza. And from there they are delivered to stores around the world by truck and by plane. Zara can deliver garments to stores worldwide in just a few days: China — 48 hrs; Europe — 24 hrs; Japan — 72 hrs; United States — 48 hrs.
It uses trucks to deliver to stores in Europe and uses air freight to ship clothes to other markets. Zara can afford this increased shipping cost because it does not need to do much discounting of clothes and it also does not spend much money on advertising. Stores take deliveries twice per week, and they can get ordered inventory often within two days after placing their orders.
Items are shipped and arrive at stores already on hangers and with tags and prices on them. So items come off delivery trucks and go directly onto the sales floor. This makes it possible for store managers to order and receive the products customers want when they want them, week by week.
Zara stores respond practically in real-time as styles and customer preferences evolve. It is a great business model for success in the high-change and hard to predict fashion industry. It means about half of the clothing the company sells, which includes most of its high margin and unique fashion items but not its lower margin basic items , is manufactured based on highly accurate, short-term 2 — 6 week demand forecasts.
Because this business model tracks so closely to real customer demand from one month to the next, it frees the company to a large degree from getting caught in cyclical market ups and downs that ensnare its competitors those cycles are driven by boom-to-bust gyrations generated by the bullwhip effect. Turbulence in the global economy since has hurt sales at many competing fashion retailers, but Zara has seen steady, profitable growth during this time.
Supply chain planners and managers are always watching customer demand and making adjustments to manufacturing and supply chain operations. The company also runs Join Life, a scheme which helps consumers identify clothes made with more environmentally friendly materials like organic cotton and recycled polyester.
Additionally, Inditex takes wide-ranging measures to protect biodiversity, reduce its consumption of water, energy and other resources, avoid waste, and combat climate change. For example, it has outlined a Global Water Management Strategy, specifically committing to zero discharge of hazardous chemicals.
It has also been expanding its waste reduction programme through which customers can drop off their used clothing, footwear and accessories at collection points in 2, stores in 46 markets today.
Zara has a very entrepreneurial culture, and employs lots of young talent who quickly climb through the ranks of the company. Zara promotes approximately two-thirds of its store managers from within and generally experiences low turnover.
The brand has no fear in giving responsibility to young people and the culture encourages risk-taking as long as learning happens and fast implementation the mantra of fashion. The variable component amounts to up to half of the total compensation — making store level employees heavily incentive-driven.
The organizational structure is also flat with only a few managerial layers. Customers are the most important source of information for Zara, but like any other fashion brand, Zara also employs trend analysts, customer insights experts, and retains some of the best talents in the fashion world. The creative team of Zara comprises of over professionals.
For example, while many companies struggle with long lead times in discussions and decision making, Zara gets around this challenge by getting various business functions to sit together at the headquarters and also by encouraging a culture through structures and processes where people continuously talk to each other. The sales and marketing teams who receive trend feedback talk regularly with designers and merchandisers.
The production scheduling is also closely coordinated so that there is no time wasted on approvals. The design team structure is very flat and focuses on careful interpretation of catwalk trends that are suitable for the mass market — the Zara customer. The design and product development teams, who are based in Spain, work closely to produce 1, new styles every month. Zara has no chief designer. All its designers are given unparalleled independence in approving products and campaigns, based on daily data feeds indicating which styles are popular.
Due to the unwavering focus on the customer, the entire business model is designed in such a way that the pattern of needs for the finished goods dictate the terms of the production process to follow, instead of having the raw materials determine the nature of the production process — something that is very rare in multinational companies of similar scale. Zara has used almost a zero advertising and endorsement policy throughout its entire existence, preferring to invest a percentage of its revenues in opening new stores instead.
It spends a meager 0. This is indeed the mark of a truly successful brand where customers appreciate and desire the brand, which is over and above product level benefits but strongly driven by the brand experience. Instead of advertising, Zara uses its store location and store displays as key elements of its marketing strategy. By choosing to be in the most prominent locations in a city, Zara ensures very high customer traffic for its stores. Its window displays, which showcase the most outstanding pieces in the collection, are also a powerful communication tool designed by a specialized team.
A lot of time and effort is spent designing the window displays to be artistic and attention grabbing. To tap into the emerging e-commerce trend, Zara launched its online boutique in September More recently in March , the brand launched online in Australia and New Zealand. Today, its online store is available in 66 countries. As a fast fashion retailer, Zara is definitely aware of the power of e-commerce and has built up a successful online presence and high-quality customer experience.
Inditex has announced that it will be closing between 1, to 1, stores worldwide, focusing on smaller ones in Asia and Europe.
Amancio Ortega plans to spend USD 1. To achieve this goal, Zara will need to think of new ways to engage its customers digitally, not just through its online store, but through online communities and social media. Mobile commerce: Zara woke up late to the potential of mobile commerce and needs to catch up fast with competitors. Different forms of market analysis strongly point towards a scenario wherein spends on mobile commerce will overtake desktop based ecommerce by Price is not an advantage anymore: Offering the latest fashion lines at affordable prices continues to be a strategic advantage for Zara, but cannot continue to be the only one.
Across the world, and closer to home in Europe, competitors are cutting prices and refining their business models to cut the competitive advantage that Zara has. Again in its home market, it now faces increasing competition from brands like Mango, which cut prices and started focusing on fashion segments in which Zara enjoyed popularity.
Also with the rise of e- and m-commerce, the number of indirect competitors has mushroomed. We now have online fashion aggregators that bring in multiple brands under one single online platform and cut through borders and price segments. For Zara to effectively compete and maintain its strategic advantage, the focus needs to shift away from price but towards quality.
Even today the Zara brand enjoys high levels of appeal, which is evident by the serpentine queues outside its stores when it launches in new markets. There is a need for Zara to start investing in building a strong brand positioning and aggressively communicate it. Additionally, Zara needs to adopt, imbibe and leverage social media and digital platforms in its advertising and communication strategies deeper going forward.
Need for marketing strategy to evolve: As discussed above, Zara does not engage in advertising and instead uses its store locations as a marketing strategy. However, brand communication is crucial in attracting new customers to the brand to support its growth. Without advertisements, Zara relies heavily on word of mouth or social media. This causes the perception of potential customers towards Zara to be heavily shaped by family and friends, which may not be accurate.
Its videos on YouTube are also seeing very low viewership in comparison with its follower count, which is not ideal as videos are a powerful medium for brands in the fashion industry. This is a gap that Zara needs to plug immediately as the reach and impact of social media marketing gets stronger.
Family business planning and succession: With various technological and business disruptions in the past decade, leadership in the 21st century will be influenced by constant change, geopolitical volatility, and economic and political uncertainty.
Most fashion trends often start unexpectedly, originate from uncommon places and grow out of nowhere. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. Table of Contents Expand. Key Differences. Special Considerations. Zara vs. Zara is most prominent in its native Spain but has managed to expand globally, expanding its brand to include Zara Home. Uniqlo is particularly geared toward its native market in Japan but has expanded to include 19 markets worldwide.
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Top Stocks Starbucks vs. Dunkin': What's the Difference? Partner Links. Related Terms How Fast Fashion Works Fast fashion are clothing designs that quickly move from idea to prototype to mass production to consumers. Learn how fast fashion retailers make money.
What Is an Exclusive Assortment? When a retailer chooses to display only one manufacturer's or designer's goods, they are employing an exclusive assortment merchandising strategy. Franchisor Definition A franchisor sells the right to use its brand and expertise to one who will open another branch of the business to sell the same products or services.
What Is Electronic Retailing E-tailing? Electronic retailing e-tailing is the sale of goods and services over the Internet, which can include B2B or B2C sales. What Is Vertical Integration? Vertical integration is a business strategy to take ownership of two or more key stages of its operations to cut costs. Investopedia is part of the Dotdash publishing family.
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