Cracking down business models: ZARA

Zara, if not the most successful is definitely one of the world’s most successful fashion retail brands. Zara aspires to create responsible passion for fashion amongst a broad spectrum of consumers, spread across different cultures and age groups, with its dramatic introduction of the concept of “fast fashion” retail since it was founded in the year 1975 in Spain. Zara’s success can’t be measured by any one factor but one of its key strength which has played an important role in it becoming a global fashion powerhouse, is its ability to put customers first. There’s no doubt that Zara is obsessed with its customers, and they have defined the company and the brand’s culture right from the very beginning.

BY NANKIE BAWA | 10 MIN READ 

The Zara brand offers men and women’s clothing, children’s clothing, shoes and accessories. The sub-brand Zara TRF offers trendier and sometimes edgier items to younger women and teenagers.

A Brand Story: ZARA

Amancio Ortega and Rosalía Mera in 1975 as a family business in downtown Galicia in the northern part of Spain started Zara. The name came to be Zara because Amancio Ortega’s preferred name Zorba was already taken. Its first store featured low-priced lookalike products of popular, higher-end clothing and fashion. In the next 8 years, Zara opened 9 new stores in the biggest cities of Spain, as its approach towards fashion and its business model gradually generated traction with the Spanish consumer.

Inditex which was incorporated in 1985 as a holding company, was introduced so that could react to shifting market trends extremely quickly which laying down the foundations for a distribution system . Ortega created a new design, manufacturing, and distribution process that could reduce lead times and react to new trends in a quicker way, which he called “instant fashion”. This was driven by heavy investments in IT and utilising groups designers for the critical “design” element.

Zara began aggressively expanding into global markets, which included Portugal, New York, Paris, Mexico, Greece, Belgium, Sweden, Malta, Cyprus, Norway and Israel, in the next decade. Today, there is hardly a developed country without a Zara store. Zara now has 2,266 stores strategically located in leading cities across 96 countries. It is no surprise that Zara, which started off as a small store in Spain, is now the world’s largest fast fashion retailer and is the flagship brand of Inditex. Its founder, Amancio Ortega, is the fifth richest man in the world according to Forbes magazine 2019.

Today, Inditex is the world’s largest fashion group with more than 170,000 employees operating more than 7,400 stores in 202 markets worldwide including 49 online markets. The revenues of Inditex was USD 29.4 billion in 2018.

A Brand Strategy: ZARA

On global brand consultancy Interbrand’s list of best global brands Zara was ranked 25th. Four simple terms form its core values: beauty, clarity, functionality and sustainability.

The ability of Zara to keep up with rapidly changing fashion trends and showcase it in its collections with very little delay is the secret to its success. Zara found a significant gap in the market that few clothing brands had effectively addressed, that was to keep pace with latest fashion trends, but offer clothing collections that are a combination of high quality and yet, are affordable. The brand keeps a close watch on the changing trends around the world and based on latest styles and trends, it creates new designs and puts them into stores in a week or two whereas, most other fashion brands would take close to six months to get new designs and collections into the market.

It quickly became the people’s favourite brand, especially with those who want to keep up with fashion trends through this strategic ability of introducing new collections based on latest trends in a rapid manner. Famously known for his views on clothes as a perishable commodity, Founder Amancio Ortega says, people should love to use and wear clothes for a short while and then they should throw them away, just like yogurt, bread or fish, rather than store them in cupboards. The media often quotes, the clothes which the this brand sells and survive fashion trends for less than a month or two as “freshly baked clothes”. Zara concentrates on three areas to effectively “bake” its fresh fashions:

1.      Shorter lead times (and more fashionable clothes): Shorter lead times allow Zara to ensure that its stores stock clothes that customers want at that time. In comparison many retailers try to forecast what customers might buy months in the future.

2.      Lower quantities (through scarce supply): By reducing the quantity manufactured for a particular style, Zara not only reduces its exposure to any single product but also creates artificial scarcity. Similar to the principle that applies to all fashion items (and more specifically luxury), the lesser the availability, the more desirable an object becomes. Another benefit of producing lower quantities is that if a style does not generate traction and suffers from poor sales, there is not a high volume to be disposed of. Zara only has two time-bound sales a year rather than constant markdowns, and it discounts a very small proportion of its products, approximately half compared to its competitors, which is a very impressive feat.

3.      More styles: Zara produces more styles, rather than producing more quantities per style. Even if a style sells out very quickly, there are new styles waiting to take up the space. This means more choices and higher chance of getting it right with the consumer. The practice of allowing its designs to remain on the shop floor for three to four weeks pushes consumers to keep visiting the brand’s stores because if they were just a week late, all the clothes of a particular style or trend would be gone and replaced with a new trend. At the same time, this constant refreshing of the lines and styles carried by its stores also entices customers to visit its shops more frequently.

Here are the key components of Zara’s winning formula in the fashion retailing industry: 

Zara’s principal designer is the customer (Customer co-creation)

At the core of the Zara’s success there is unrelenting focus on the customer

and the heights it has achieved today. Here’s a fascinating story around how Zara co-creates its products leveraging its customers’ input. This was around 2015, a lady walked into a Zara store in Tokyo and asked the store assistant for a pink scarf, but the store did not have any pink scarves. Simultaneously the same happened in Toronto, San Francisco, and Frankfurt, who all walked into Zara stores and asked for pink scarves. All of them left the stores without any scarves. This was an experience many other Zara fans encountered globally in different Zara stores over the next few days.

A week later, in more than 2,000 Zara stores globally started selling pink scarves. About 500,000 pink scarves were dispatched and were sold out in just 3 days. How did such lightning fast stocking of pink scarves happen?

The more companies know about their customers, the better they can innovate and compete, therefore customer insights are the holy grail of modern business. But to have the right insights, at the right time, and have access to them consistently over time can prove challenging. Using Radio Frequency Identification Technology (RFID) in its stores is one of the secrets to Zara’s success. The brand uses cutting-edge systems to track the location of garments instantly and makes those most in demand rapidly available to customers. Moreover, it helps to provide greater flexibility to launch new designs, reduces inventory costs and allows fulfillment of online orders with stock from stores nearest to the delivery location thereby reducing delivery costs.

The brand trains and empowers its store employees and managers to be particularly sensitive to customer needs and wants, and how customers enact them on the shop floors, this is another secret of Zara’s success.

Zara’s sales associates and store managers intently listen and note down ideas for cuts, customer comments fabrics or a new line, and keenly observe new styles that its customers are wearing that have the potential to be converted into unique Zara styles. 2 basic rules build the Zara empire : 

1.      “To give customers what they want”, 

2.      “Get it to them faster than anyone else”.

Zara’s product offerings across its stores globally reflect unique customer needs and wants in terms of physical, climate or cultural differences, due to Zara’s competitive customer research capabilities. Zara offers, special women’s clothes in Arab countries, clothes of different seasonality in South America and smaller sizes in Japan. All this is greatly facilitated by the frequent interactions between Zara’s local store managers and its creative team.

A trend starts small, but develops fast, In the fashion world. Zara employees are trained to watch, listen and be attentive to even the smallest seismographic signals from their customers, which can be an initial sign that a new trend is taking shape. Zara knows it’s more likely to succeed in supplying the right fashion merchandise at the right time across its global retail chain if it can respond quickly. There are sophisticated technology driven systems at Zara stores, which enable information to travel quickly from the stores back to its headquarters in Arteixo in Spain, enabling decision makers to act fast and respond effectively to a developing trend. Its design teams regularly visit nightclubs; university campuses and other venues to observe what young fashion leaders are wearing. The design team, in its headquarters uses flat-screen monitors linked by webcam to offices in Shanghai, Tokyo and New York (the leading cities for fashion trends), which act as trend spotters. The ‘Trends’ team tracks bloggers and listens closely to the brand’s customers but never goes to fashion shows. 

The fact that Zara’s customers and designers are inextricably linked is a crucial part of the brand strategy.

The super-efficient supply chain at ZARA

Zara’s vertically integrated and highly responsive supply chain enables the export and shipping of new products to stores twice a week. It takes around 10 to 15 days to reach the stores after the products are designed. All clothing items are processed through the distribution center in Spain, where new items are inspected, sorted, tagged, and loaded into trucks. Majority of the time within 48 hours clothing items are delivered to stores. Zara retains control over areas like dyeing and processing and have fabric-processing capacity available on-demand to provide the correct fabrics for new styles according to customer preferences due to vertical integration design of management. It helps reduce the impact of demand fluctuations and also eliminates the need for warehouses. Zara launches around 12,000 new designs annually and produces over 450 million items, so the efficiency of the supply chain is critical to ensure that this constant refreshment of store level collections goes off smoothly and efficiently.

The characteristics of Zara’s supply chain that highlight the reasons behind its success:

1.      Frequency of customer insights collection

2.      Standardization of product information

3.      Product information and inventory management

4.      Procurement strategy

5.      Manufacturing approach

6.      Distribution management

Zara can also modify existing items in as little as two weeks and shortening the product life cycle means greater success in meeting consumer preferences. The design is withdrawn from the shops of it does not sell well within a week, further orders are canceled and a new design is pursued. This is done by closely monitoring changes in customer preferences towards fashion. It has designs which are in-vogue, high fashion, inspired by latest trends items can stay on the shelves for less than four weeks, which encourages Zara fans to make repeat visits but it also has a range of basic designs that are carried over from year to year. Zara, expects its customers should visit around 17 times in a year, in comparison an average high-street store in Spain expects customers to visit thrice a year.

This expectation for such a high frequency of repeat visits is evidence of Zara’s confidence that it is keeping on top of changing consumer needs and preferences and is helping them shape their ideas, opinions and taste for fashion.

Sustainability at the core of Zara’s operations

Sustainability is now a must-have hygiene factor for companies that want to resonate with and win the loyalty of its global customers. For Inditex, this means having a commitment to environment and the people.

Commitment to environment: Inditex makes efforts to ensure that the environmental impact of its business complies with UNSDGs (United Nations Sustainable Developmental Goals), especially after being in a business where it taps on natural resources to create its products. Inditex has pledged to only sell sustainable clothes and that all cotton, linen and polyester sold will be organic, sustainable or recycled by 2025. While Zara stores do not use plastic bags, by 2020, Inditex plans to eliminate the use of plastic bags across all its brands. The company also runs a scheme, Join Life which helps consumers identify clothes made with more environmentally friendly materials like organic cotton and recycled polyester.

Additionally, Inditex takes wide-ranging measures to reduce its consumption of water, energy and other resources, protect biodiversity, combat climate change, and avoid waste. For example, It has been expanding its waste reduction programme through which customers can drop off their used clothing, footwear and accessories at collection points, it has also outlined a Global Water Management Strategy, specifically committing to zero discharge of hazardous chemicals.

Commitment to people: Inditex ensures its suppliers have fundamental rights at work and by initiating continuous improvement programs for them, it also ensures that its employees have a shared vision of value built on sustainability through professional development, equality and diversity and volunteering. Almost USD 52 million is spent annually on the social and community programmes initiatives by Inditex. For example, its ‘for&from’ programme is aimed to enable the social integration of people with physical and mental disabilities, by providing over 167 stable employment opportunities.

The word “impossible” does not exist: Zara’s culture

Zara employs lots of young talent who quickly climb through the ranks of the company and has a very entrepreneurial culture. Zara promotes approximately 90% 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 fast implementation (the mantra of fashion) and risk-taking (as long as learning happens). 

Full liberty and control is given by the top management to its store managers over their store’s operations and performance with clearly set cost, profit and growth targets with a fixed and variable compensation scheme. The total compensation amounts up to twice of the variable component – making store level employees heavily incentive-driven.

A store develops a comprehensive training program for that individual with the HR department, which is followed up by periodic supplemental training, once an employee is selected for promotion – reflecting Zara’s commitment to talent development. With only a few managerial layers, the organisational structure is also flat.

The most important source of information for Zara are its customers, but like any other fashion brand, Zara also employs customer insights experts, trend analysts and retains some of the best talents in the fashion world. There are over 200 professionals in the creative team of Zara and they all embody and enact the corporate philosophy that the word “impossible” does not exist in Zara.

For example, Zara gets around the challenge of long lead times in discussions and decision making 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 which provides a constant two-way communication so that sales and marketing teams can talk about new lines to customers and designers / merchandisers have a strong visibility of customers’ needs and preferences enacted at a store level. To ensure no time is wasted on approvals the production scheduling is also closely coordinated. The design team structure bring very flat focuses on careful interpretation of catwalk trends that are suitable for the mass market, that is the Zara customer. The Spain based design and product development teams, work closely to produce 1,000 new styles every month.

Another important reason why Zara’s employee strategy is so successful is the fact that it empowers its staff to make decisions based on data, obviously beside being customer centric. Zara has no chief designer and all its designers, based on daily data feeds indicating which styles are popular, are given unparalleled independence in approving products and campaigns. 

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.

In sum, the entire brand culture is extremely customer-centric, which has been and continues to be a significant contributor to Zara’s success.

The Zara brand communication strategy

Zara has used endorsement policy and almost a zero advertising throughout its entire existence, preferring to invest a percentage of its revenues in opening new stores instead. An average of 3.5 per cent of sales is spent on advertising by competitors, as compared to a meager 0.3 per cent of sales by Zara. Amancio has never spoken to the media nor has in any way advertised Zara. This depicts the customers appreciate and desire the brand, which is over and above product level benefits but strongly driven by the brand experience.

Zara uses its store location and store displays as key elements of its marketing strategy, instead of advertising. Zara ensures very high customer traffic for its stores, by choosing to be in the most prominent locations in a city. The most outstanding pieces in the collection are showcased on its window displays which is also a powerful communication tool designed by a specialized team. A lot of effort is put into while designing the window displays to be artistic and attention grabbing. According to Zara’s philosophy of fast fashion, the window displays are constantly changed. This strategy goes down to how the employees dress as well – all Zara employees are required to wear Zara clothes while working in the stores, but these “uniforms” vary across different Zara stores to reflect socio-economic differences in the regions they were located. This reflects Zara’s close attention on the customer, yet effectively communicates it’s focus on the mass market. 

Zara launched its online boutique in September 2010, to tap into the emerging e-commerce trend. The website was initially available in Spain, the UK, Portugal, Italy, Germany and France. Over the next 3 years, the online store became available in the United States, Russia, Canada, Mexico, Romania, and South Korea and now it’s all around the world. As of 2019, online sales grew to constitute 30% of Zara’s total global sales.

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.

Conclusion: Take Zara’s cue and listen to your customers

Zara’s ability to understand, predict and deliver on its customers’ preferences for trendy fashion at affordable prices, depicts its keen eye on its customer. The brand’s ability to have its customers co-create designs and its effective supply chain is unique and provides it with a competitive advantage. As we know majority of the fashion trends often start unexpectedly, originate from uncommon places and grow out of nowhere. The pink scarf trend, which was mentioned above, could have started maybe because the Hollywood actress Scarlett Johansson had worn a pink scarf to a charity gala the evening before in Los Angeles, or golf star Michelle Wie had showcased a pink scarf at a celebrity tournament in Asia. But the very fact that Zara was able to quickly jump on to this trend and provide hundreds of customers with the pink scarves they desperately wanted to buy made it different from its competitors.

In today’s world, which is swamped with Big Data, and yet collected at an even more rapid pace than before, brands still need to be extremely careful and observant. Big Data does not provide answers to all business challenges, and it may be too hyped to be considered, just like the Holy Grail.

The respect for the fact that no one is a better, authentic trendsetter than the customer himself or herself is one of the secrets behind Zara’s global success is and this philosophy needs to be continually reflected in all its business strategies going forward.

So, why not consult your customers for a start? Zara always does.