Zara - Unique Business Model

Q 1.: What is unique about Zara's business model?

Zara has proved to be a maverick of its time - it came at a time that the apparel industry was fragmented there was no integration, the costs incurred were enormous it was highly labor-intensive leading to outsourcing to save on costs and the business model prevalent was not proving to be highly successful as compared to the models of other industries. In came Zara and showed that strategic imperatives depended on how a retailer sought to create and sustain competitive advantage through its cross border activities and seamless operations, the power of integration and the importance of sticking to your positioning without adding too many frills. Zara's factories were heavily automated, specialized by garment type and focused on the capital-intensive parts of the production process.

Zara's fantastically integrated supply chain has enabled them to deliver on their positioning and promise to offer affordable, trendy clothes to its fashion conscious target market in quick time. With Zara you don't have to be a millionaire to look like a million dollars.

Zara's global strategy is to offer cutting edge fashion at affordable prices by identifying which styles are "hot" at fashion shows and moving simulations into production even before the original designer can. This is made possible by exerting a strong influence over almost the entire garment supply chain from design to retail. Product differentiation, variation in styles and speed to market has been the main sources of competitive advantage for Zara.

Segment

Zara offers clothes, footwear and accessories to women (60%) and men (25%), as well as clothing and accessories for children (15%). People at Zara do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara's global target market is a young, educated one that likes fashion and is sensitive to fashion, but is price-conscious.

Target

Zara's target market is based on women and men aged 15 to 45, and children. The target market is fashion-conscious, educated and relatively middle-class, including students, young professionals and young families. Zara recognized a gap in the market for making medium quality, low cost, designer clothing adaptable to the tastes of the local clientele.

Positioning

Target market provides a demand for good variety, high fashion, low cost clothing within a short timeframe and regular turnover of designs. The main competitors are Gap and H&M. Because it produces its own goods, Zara is far more flexible in responding to the demand of its consumers than its competitors. Zara reacts rather than creates new designs, the skirt a famous rock star wore at a concert will be quickly available for the teeny bopper proving that Zara is at the pulse of the fashion scene and knows what its customer base would want and provides it economically. It uses sale staff for market intelligence better than its competitors. Its main difference is the ability to respond quickly to the market

Business Model

At the heart of Zara's success is a vertically integrated business model spanning design, just-in-time production, marketing and sales. This gives the group more flexibility than its rivals to respond to fickle fashion trends. Zara's unique approach to product development is instrumental to their success. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. The result is a super responsive supply chain exquisitely tailored to Zara's business model. The local strategic partnerships that Zara maintains with manufacturers in Europe allow for shortening the throughput time of a product to 4-5 weeks for new designs and 2 weeks for modifications of existing products, in comparison to the industry standard, which is 6 months. The company makes this happen by designing and cutting its fabric in-house and it acquires fabrics in grey to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior and responding quickly to shifts in consumer demand. It also decreases costs of holding inventory. Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Coruсa. Zara designers continuously track customer preferences and then placed orders. Designers talk daily to store managers, to discover which items are most in demand.

At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara's products. Zara produces approximately 11,000 new styles per year. Zara's short cycle time reduces working capital intensity and facilitates continuous manufacture of new merchandise - Zara undertakes 35% of design and purchase of raw materials, 40-50% of the purchases of finished products from external suppliers and 85% of the in-house production after the season had started compared with only 0-20% in the case of traditional retailers. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores.

The result is that Zara can make a new line from start to finish in three weeks, against an industry average of nine months. Moreover, Zara's business model makes it highly price-competitive, allowing it to offer mid-market chic at down-market prices. And it protects against slip-ups, too their mistakes are easy to reverse since they are no more than 2 to 3 weeks forward.

Distribution

Zara's centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. Zara's internally or externally produced merchandise goes to the distribution center. This is cost-effective due to the close proximities of the distribution center in Arteixo and their factories in Coruсa. In the distribution center, products are inspected and immediately shipped, since Zara's distribution center is a place where merchandise is moved rather than stored. Then, to increase delivery speed, the shipments are scheduled by time zones and shipped by way of air,