What Are the Unique Features of Zara's Business Model?

Q 1. What are the unique features of Zara's business model ?

Zara is one of the six retailing chains owned by Inditex (Industria de Diseilo Textil) of Spain who designs, manufactures, and sells apparel, footwear, and accessories for women, men, and children through Zara and five other chains around the world.

The traditional global apparel chain had been characterized as a prototypical example of a buyer-driven global chain, in which profits derived from "unique combinations of high-value research, design, sales, marketing, and financial services that allow retailers, branded marketers, and branded manufacturers to act as strategic brokers in linking overseas factories"' with markets. Apparel production is generally fragmented with individual apparel manufacturing firms employing only a few dozen people on average, although internationally traded production, in particular, can feature tiered production chains comprising as many as hundreds of firms spread across dozens of countries. About 30% of world production of apparel was exported, with developing countries generating an unusually large share, about one-half, of all exports. Trading companies had traditionally played the primary role in orchestrating the physical flows of apparel from factories in exporting countries to retailers in importing countries. Irrespective of whether they internalized most cross-border functions, retailers played a dominant role in shaping imports into developed countries: thus, direct imports by them accounted for half of all apparel imports into West Europe. Retailing activities themselves remained quite local: the top 10 retailers worldwide operated in an average of 10 countries in 2000. Against this baseline, apparel retailing was relatively globalized, particularly the fashion segment. Apparel retailing chains from Europe had been the most successful at cross-border expansion, although the U.S. market remained a major challenge.

The above is in stark contrast to Zara's model which simply put is based on a vertically integrated demand and supply chain, while most other textile chains rely more on outsourcing and cheap labour. Zara studies its customers demand in the stores, through fashion shows of others, its own trend spotters, employees to name a few and tries to deliver the products. This allows them to have a particularly appealing value proposition: A collection that, although not 'created', is in line with the very latest fashion. The Economist, for example, writes: "When Madonna gave a series of concerts in Spain, teenage girls were able to spot at her last performance the outfit she wore for her first concert, thanks to Zara". It takes the company only 5 weeks to come up with a new garment from design to delivery and only 2 weeks for modifying an existing model.

Zara's shops use Information Technology to report directly to its production centers and designers in Spain. Shop managers use PDAs to check on the latest clothes designs and place their orders in accordance with the demand they observe in their stores. Thus, they directly contribute to a streamlined fashion collection of the entire company.

Generally, a traditional retailer such outsources most if not all of its production while focusing on distributing and retailing those goods. This is due to the fact that the global apparel industry is "highly-labor intensive" rather than capital intensive and Fashion retailers and apparel manufactures are always seeking to lower costs by outsourcing production to developing countries where the lowest labor rates are found. Zara on the other hand works through the whole value chain, is very vertically integrated and highly capital intensive which has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this production is done through the season, which allows the chain to constantly provide its customer with very updated products. Traditional retailers lack this flexibility. and are obliged to place production orders to manufacturers overseas at least 6 months in advance of the season.

Zara's in-house production purposely creates a rapid product turnover since its "runs are limited and inventories are strictly controlled". This rapid product turnover creates a climate of scarcity and opportunity in Zara's retail stores. The climate also increases the frequency and rapidity with which consumers visit the stores and buy the products. Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Therefore, Zara's scarcity climate allows the company to sell more items at full price. This strategy minimizes Zara's total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer.

Furthermore, Zara's unique quick response system, composed of human resources as well as information technology, allows Zara to respond to the demand of its customer better than the competition. Zara, who focuses on the ultimate consumer, places more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies. It is extremely important for Zara to speed the information flow of consumer desires to their apparel designers. For that reason, Zara has human resource teams in the retail and manufacturing environment that work exclusively toward this goal.

In the manufacturing environment, Zara's product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Also throughout the season, Zara's product development teams are constantly

researching the market by traveling to universities, and clubs around the world to track customer preferences. Additionally, the young, fashionable, and international staff helps to interpret the desire of the moment.

In the retail environment, Zara's managers and sales associates are in charge of transmitting the sales analysis, the product life cycles, and the store trends to the designers. This allows the designers in Spain to develop the right products within the season to meet customer demand. The transfer of this communication is also accelerated by IT software that is specifically