Zara Company’s Business Model and Competition

Zara: Fast Fashion Case Study

Founded in 1975 by Rosalia Mera and Amancio Ortega, Zara is the main brand the Spanish corporation Inditex Group, one of the largest retailers of clothing in the world. Described as “possibly the most innovative and devastating retailer” (Fraiman, Singh, Arrington, and Paris 270), the company has a unique marketing strategy that focuses on providing the customer with innovative designs and pleasant retail experiences that are different to those offered by the competitors. The main success factor that contributes to the company’s development and growth is the short lead time for products, which means that Zara is supplying clients with more fashionable clothing more regularly. This report will focus on examining the company’s business model and its competitive advantage. Attention will be given to the sourcing strategy, as well as its risks and possible advice on how the current strategy can be improved.

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Zara’s Business Model and Its Advantage Against Competitors

The unique business model of the company includes a variety of factors. It encompasses a chain of operations such as the planning and design cycle, production, sourcing and scheduling, distribution, retailing, the introduction of pricing and growth strategies, and lastly, marketing. The planning and design cycle starts a year in advance of the season’s start. Designers begin working a year earlier to define key themes and color palettes for putting together the core collection of seasonal clothing. On average, the team of Zara designers produces about eleven thousand styles yearly, which is about five times more in comparison with competitors (Fraiman et al. 272). Therefore, Zara offers customers more options for styles that update regularly. Apart from in-house manufacturing, Zara cooperates with outsourced producers (60% from Europe and 30% from Asia).

The decision to combine outsourcing with in-house manufacturing was based on a variety of factors such as expertise, relative cost, and, most importantly, sensitivity to time. As to the in-season production of apparel, Zara produces approximately sixty percent of products before the season starts, leaving the rest for in-season production. The distribution of apparel is conducted weekly, with 2.5 million pieces of clothing moving through the main distribution center. The final inventory allocation is conducted centrally, putting a great focus on the “freshness of the assortment” (Fraiman et al. 275). When it comes to sales at the end of a season, Zara experiences fifteen-twenty percent markdown, which is much lower compared with thirty to forty percent, experienced by competitors.

Zara’s growth strategy helped the company develop and expand its base in Spain. The strategy is associated with stocking little clothing and updating current collections very regularly (Lutz par. 13). Such a concept sets the company apart from its competitors that update their collections seasonally, leaving a lot of time for customers to choose to clothe. Zara restocks and updates the selection two times a week, presenting a great challenge for competitors in terms of keeping up with such a rapid speed. According to Suzy Hansen’s article in the New York Times, such a fast-paced production, distribution, and retail strategy work effectively in two directions (par. 5). The first part of success is that potential customers are encouraged to return to stores to check the new additions to the collection. Second, if a customer wants to buy a specific product, he or she feels inclined to buy it since there is no guarantee that the product will not sell out because of the low stock in stores.

Thus, Zara’s competitive advantage is associated with less time to buy a product, which slightly pressures the customer to buy before it sells out. However, it is important to mention that store managers can ask for the extra stock of a product if there is an increased demand for a specific item. This strategy can truly be described by the notion of ‘fast fashion.’ Another aspect of Zara’s competitive advantage is predicting trends that will be popular in the future season. Because the planning starts a year ahead of the season, similar to the way global fashion weeks take place, designers can analyze what high fashion offers to the market and provide high street customers with more affordable options. Despite that some criticize Zara for stealing and copying designs from others, the fact that customers can buy fashionable items for an affordable price greatly adds to the company’s advantage.

Lastly, it is important to mention the strong online presence of the brand. Online marketing is crucial in the modern environment; this means that brands must be ready to compete for both in stores and online. Because Zara employs the same online retail strategy as in stores, sales are on the rise. Also, the company developed special smartphone and tablet applications, which make shopping for apparel even easier. Such a strategy shows that the company’s management clearly understands the importance of online marketing and sales that greatly contribute to the increase in revenue and the development of the company, expanding its presence worldwide.

Zara’s Sourcing Strategy: Benefits, Importance, the Necessity of Change, and Challenges

According to the case study conducted by Fraiman et al., from all of the outsourced production, Zara uses 30% of Asia-based producers and 60% of Europe-based manufacturers (272). The majority of products are manufactured in small batches because of the time-sensitivity of the production process. Both external and internal production flows through the company’s distribution center (Ghemawat and Nueno 9). It is important to mention that the most high-quality and fashionable clothing, produced in smaller batches, is manufactured internally or by suppliers that are close to the distribution center so that reordering is easier if the products sell well.

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Because more simple and basic clothing is price-sensitive rather than time-sensitive, it is usually outsourced to Asian factories because the European production for Zara tends to be fifteen to twenty percent more expensive. Internal manufacturing takes place in twenty company-owned factories, eighteen of which are located near the company’s headquarters, which is very convenient when it comes to examining the quality of the most expensive products. Initiated in 1980, vertical integration into manufacturing is a crucial component of Zara’s sourcing strategy. Since 1990, Zara invests significantly in developing an effective just-in-time system in internal manufacturing plants, and, in cooperation with Toyota, achieved success in teaching employees about how to operate innovative equipment and work in multifunctional teams (Ghemawat and Nueno 11).

Some of the clothing that is manufactured in-house and is not outsources is sometimes sent to Galicia-based and northern Portuguese workshops in the ‘cut’ condition so the garments can be later sewn together. These workshops are small and consist of up to thirty employees, each specializing in a specific product type. As the company’s subcontractors, these employees tend to have long-term work relationships with Zara that provide them with technology, financial support, logistics, and rearranges rates for finished garments and are responsible for other activities.

Zara benefits from its sourcing strategy because it goes hand-in-hand with its competitive advantage – small stocks and regular updates. Therefore, it is advised for the company to optimize the in-house production for in-season and high-quality items. Thus, the clothing for the upcoming season should be outsourced. However, the company’s centralized supply chain should be updated to acquire more factories nearby the headquarters with lower costs for labor. The company’s management should search for new suitable locations for establishing new manufacturing facilities to decrease spending. On the other hand, it is still important to maintain Zara’s current network of distribution and design, centered in Galicia. For achieving success in finding the perfect balance, the company should look into utilizing lower-cost labor markets situated not too far away (prospective labor markets can include countries like Portugal, Hungary, Tunisia, and Morocco).

It is expected that the labor costs in new locations will be from twenty to fifty percent lower than the ones in Spanish production plants. For Zara’s management to make a sound decision about the location of new factories and workshops, an assessment of hourly cost savings in comparison with other estimated costs relevant to each location is crucial. Such costs may include taxes, property and shipment costs, and others. Because the company is planning to grow and extend its worldwide presence in global markets, Zara will require more capacity than it has at the present moment. Furthermore, expansion to new markets such as America and Asia calls for the assimilation to the specific characteristics of these markets.

The strongest competitive advantage of the company is regularly providing customers with fast fashion, making sure that the stock is low enough to motivate and encourage consumers’ buying behavior. Therefore, it is advised for Zara to maintain its core strategy and apply it with regards to lower-cost labor markets to reduce spending. Such a long-term recommendation means that the company will need to develop a lower-cost center for design and production, establish a completely new network of factories owned by Zara, and create a fresh chain of distribution to expand the presence to Southeast Asian and Chinese markets.

With the changes to the current sourcing strategy come great challenges. One of the first challenges is the unique environment of the markets, to which the company aims to expand its presence. Adapting to specific characteristics of markets can disrupt the current sourcing and distribution strategy, which currently successfully contributes to the company’s competitive advantage. The second challenge is associated with finding low-cost labor markets not too far from the company’s headquarters. Because of the low costs of labor, the prospective regions may be occupied by other companies that save money on the workforce. Thus, Zara may be faced with an issue of competing with other clothing brands for cooperating with factories that offer lower-cost services compared to those in Spain.

Conclusion

The analysis of Zara’s case showed that the company’s success is currently relying on the strong system of operations, a coherent sourcing and supplying strategy, and a great influence on customers’ buying decisions. The advanced level logistics and the ability to offer fashionable clothing at reasonable prices is the advantage that is hard for competitors to overcome. Therefore, it is advised to maintain current strategies and expand the brand’s presence to other markets, finding new locations for lower-cost production factories.

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Works Cited

Fraiman, Nicolas, Medini Singh, Linda Arrington, and C. Paris. “Case: Zara.” Designing and Managing the Supply Chain. Ed. David Simchi-Levi, Philip Kaminsky, and Edith Simchi-Levi. New York, NY: McGraw-Hill, 2002. 267-279. Print.

Ghemawat, Pankaj, and Jose Luis Nueno. ZARA: Fast Fashion. 2003. Web.

Hansen, Suzen. How Zara Grew Into the World’s Largest Fashion Retailer. 2012. Web.

Lutz, Ashley. This Clothing Company Whose CEO is Richer than Warren Buffett is Blowing the Competition out of the Water. 2015. Web.

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StudyCorgi. (2020, November 18). Zara Company's Business Model and Competition. Retrieved from https://studycorgi.com/zara-companys-business-model-and-competition/

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