Zara Fast Fashion
1. Features of Zara’s business model that affect its operating economics: •Zara owns much of its production and most of its stores, while competitors Gap and H&M own all of their stores but outsource all of their production. Benetton, on the other hand, owns all of its production but goes to market through licensing agreements. •Zara places more emphasis on backward vertical integration. Production runs are short and inventory is strictly controlled. This is in contrast to industry trends of high volume production. Zara’s product cycle time from the design phase to the manufacturing phase is 4 to 5 weeks while the industry average is 6 to 9 months. The short cycle time enables Zara to commit to a bulk of its product much later than its competitors. 85% of Zara’s in-house production occurs after the season has started in contrast to 20% in-house production of traditional retailers. •Zara’s pricing is lower than its competitors, but profit margins are higher due to direct efficiencies gained from a shortened, vertically integrated, supply chain.
At Zara, a high inventory turnover rate results in minimal obsolescence costs, clearance sales or mark downs. Zara estimated 15%-20% of total sales as markdowns/close-outs vs. 30% to 40% for its competitors. This helps to preserve a strong profit margin and bolster market image as a “must buy now” destination. •Zara’s advertising expenses are minimal (avg. 0. 3% of revenue) compared with 3% to 4% for other specialty retailers. These helps lower expenses and preserve strong profit margins. Zara, in turn, invests more money in renovating its storefronts and buying prime real estate for store locations. At Zara, 75% of display merchandise is turned every 3 to 4 weeks which corresponds to the average time between customer visits. The average Zara shopper visits the chain 17 times a year. In contrast, the competition records an average of 3 to 4 customer visits per year. Zara’s image creates a “sense of urgency” and forces loyal customers to check in frequently for the latest fashions. 2. Zara’s Quick Response Capabilities – Upstream and Downstream activities: •Zara’s quick-response capability is based on improving coordination between retail stores and product manufacturers.
This coordination allows Zara to respond faster to fashion trends, thus creating a competitive advantage for Zara. Effectively utilizing information technology and vertically-integrated manufacturing facilitates Zara’s quick response capability. Upstream Activities: •Design Teams continuously track customer preferences via data sent electronically from individual storefronts. Additionally, sales data is sent upstream from the stores to give instant feedback on Zara’s new product lines generating replenishment orders for sold product.
This instant upstream feedback, coupled with Zara’s rapid product development gives Zara a compelling market advantage. •Zara sources fabric and finished products from external suppliers using purchasing offices in Europe and Hong Kong. 50% of the fabric remains undyed to facilitate in-season updating via Comditel, a subsidiary of Inditex that manages the dyeing and patterning of unfinished fabric. Delaying production of unfinished fabric allows information flowing upstream to influence Zara’s production. 40% of all garments are manufactured internally or by subcontractors located near Zara’s headquarters. This 40% represents the most fashionable, time-sensitive garments that Zara considers risky. Zara’s local production network facilitates flexibility and risk-taking on fashion trends. Downstream Activities: •Zara owns its own distribution center in Arteixo. All merchandise from both internal and external suppliers passes through this distribution center. Shipments occur twice a week to each store. Items move through the center very quickly.
For example, a vast majority of items are at the center only a few hours and no item stays at the center for more than three days. •On average, Zara spends 0. 3% of its revenue on media advertising, which is focused on opening season and end of season sales. •Product cycles through the stores rapidly, with new designs arriving every three weeks. This fast turnover results in a significant reduction of discounted merchandise. •Display shelves are sparsely stocked creating a sense of urgency (“buy now”) in the minds of shoppers, resulting in immediate sales. Location is critical for Zara to attract repeat customers. Stores are occasionally relocated in response to ever-shifting popularity of shopping districts and traffic patterns. 3. Why might Zara fail? Zara could fail due to falling into what is known as the “growth trap. ” In the beginning, Zara established itself as selling medium-quality fashion clothing at affordable prices. Zara went on to gain a competitive advantage in the industry by developing a quick response capability while at the same time maintaining low customer pricing.
As Zara begins to expand internationally, the potential to lose their competitive advantage increases. For example, in South America, Zara had to present a high-end rather than a mid-market image. This goes against the image of medium quality fashion at affordable prices that Zara had built and maintained since their inception. As Zara continues to grow, their stores may eventually be found on every street corner around the world. As a result, Zara runs the risk that their products may become less unique in the eyes of the consumer.
According to the “growth trap,” efforts to grow can blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In the end, Zara runs the risk of becoming an ordinary retail chain as they lose sight of their competitive advantage and become more like every other retail player. In order to maintain their market share, Zara should remember their roots and focus on the excellence of their existing chain with very minimal increases in selling space.