Zara’s Strategy - 7 Ways it Stays on Top
Have you ever walked past a Zara store on a balmy Saturday afternoon and wondered what the commotion is for? There are usually throngs of women hovering over the latest arrivals and long lines of people waiting to try on jeans, dresses and jackets. The apparel industry usually eats retailers for lunch. With low barriers to entry almost anyone can start selling t-shirts online. Gap started out just five years before Zara in 1969 but it has struggled to stay relevant amongst a new generation of shoppers that is only interested in wearing the latest thing. But throughout its nearly 50 year history Zara has more than held its own.
Inditex, which is Zara’s parent company, is the largest clothing company in the world and Zara represents about 70% of Inditex’s sales. In 2021 Inditex generated 27.7 billion euros in sales. If you are curious about how Zara has been able to stay on top for so long then consider these seven elements of its strategy.
1. Manufacturing designs close to home. Spanish retailer Zara has bucked a trend set by other apparel brands by manufacturing close to home. Instead of sending production to Asia, Zara manufactures more than 50% of its merchandise in Spain as well as in a few nearby countries, Portugal, Morocco and Turkey. This makes it easier for Zara to quickly send merchandise to its stores. “When it comes to apparel, there’s no secret sauce,” said Felipe Caro, a business professor at UCLA Anderson School of Management “To shorten lead times, there’s no other way than doing local production.” Local production gives Zara a leg up on other clothing retailers that source production overseas.
2. Having an integrated digital and offline business model. In many parts of the world you would be hard pressed to be in a city centre and not come across a Zara store. But Zara like many retailers is doubling down on its digital business. In 2020 during the height of the COVID-19 pandemic when consumers were forced to shift a large share of their spending online, Zara’s digital sales were up 77% representing a third of all sales. Then in 2021 Zara’s digital sales were up 14% on top of breakthrough sales the year before. To keep this success going Inditex announced it is investing 2.7 billion euros to further integrate its online and offline operations. 1 billion euros will be allocated to enhancing online operations while 1.7 billion euros will be allocated to its store network to make it more integrated with its online business.
Along with that move Inditex had a plan to close up to 1,200 stores by the end of 2022 and open 450 new stores. Most of the stores that were to be closed were from other Inditex brands including Pull&Bear, Oysho and Stradivarius. 2020 marked the first time Inditex ended a year with fewer stores than when it started the year. But stores will continue to play an important role in Inditex’s strategy. "Stores will play a stronger role in the development of online sales due to their digitalization and capacity to reach customers from the best locations worldwide," Inditex has said. Overall "the overriding goal between now [2020] and 2022 is to speed up full implementation of our integrated store concept, driven by the notion of being able to offer our customers uninterrupted service no matter where they find themselves, on any device and at any time of the day," says Pablo Isla Inditex’s former CEO and Chairman.
Inditex has also invested in radio frequency identification technology (RFID) to track the location of its merchandise. With this technology Zara is able to determine if that black puffer jacket you want is available in store or online or in both channels. This has helped to turn Zara’s stores into mini distribution centres allowing Zara to fulfil an order from a store or a warehouse seamlessly. This approach also helps to alleviate last mile shipping costs since stores are closer to customers than distribution centres. Inditex has also said that: “the integrated stock management system, underpinned by the full deployment of radio frequency identification technology (RFID) providing real-time data on inventory, is enabling the company to operate with even tighter inventory levels, while improving the customer shopping experience.” “When the stores were closed, we were able to offer to the online customers the clothes in the stores,” said Isla. “Five years ago this would have been impossible.”
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3. Investing little in advertising. Zara spends very little on advertising, instead relying on stores to create awareness for its brand. Likely the first time you heard about Zara was when you were out on a shopping trip and came across one of their stores packed with merchandise and people. Over the past twenty years Inditex has grown from around 750 stores to over 7,000. Zara’s stores, often located in the best shopping districts and malls around the world, have proved to be an effective way to get the word out. Although Zara is doubling down on eCommerce stores are still critical. As many direct to consumer brands have found digital marketing costs can spiral without a store network to lure customers in on their daily shopping trips.
4. Manufacturing in small batches. Zara manufactures merchandise in small batches which allows it to react faster to changing trends. Zara is able to bring new styles to market in as little as five weeks and within as little as two weeks a style can be redesigned and arrive in stores just in time for customers to snap it off the shelves. Another benefit of this strategy is that it helps Zara to hold less inventory. Instead of making a big bet on a single style, let’s say a floral dress, manufacturing it in large quantities only to find the demand is not there, Zara can avoid this by producing smaller quantities. This approach allows Zara to see what the demand is like before making a larger investment. This method helps Zara to write off less inventory boosting profit margins in the process.
5. Staying on top of key trends. Despite being in business for nearly 50 years Zara, unlike the likes of Gap, has consistently stayed on top of what consumers want to wear. In the beginning Zara was known for having its version of runway designs in its stores within only a few weeks after a show aired. But now Zara draws on a wider set of sources to influence its design process. Zara’s designers often look at what influencers are wearing to see which styles are taking off. "You can find everything on your phone now – you can see everything that is being worn in New York, Shanghai, Tokyo at one time — that was something that didn't happen 15 years ago," said a Zara designer. Zara’s designers also incorporate feedback from store managers, analyze what customers are searching for on Zara’s website and pay attention to customer requests. All of this data is then used to visualize the next hot thing.
Zara’s business model also allows it to bring more merchandise to market with Zara releasing as many as 20 new collections per year. That is in contrast to other apparel brands that are bound by a seasonal calendar where new collections may only be released four times a year. But Zara is facing competition from new entrants that are known as ultra fast fashion retailers. These companies include Shein, Boohoo, Fashion Nova and ASOS. They have taken Zara’s model and have made it even faster.
Shein has risen quickly becoming the most downloaded shopping app in the United States in 2021. Shein places orders in even smaller quantities than Zara sometimes only ordering 100 pieces of a single style, while Zara may order 300 -500 units per style. These small production runs makes it even easier for Shein to quickly identify and respond to new trends. If those small order quantities quickly sell out Shein knows it has a hit on its hands and can quickly ramp up production. But if a style is slow moving then Shein avoids having too much inventory that it will need to get rid of later. “Compared to its fast fashion competitors, Shein is able to take more bets, but at a lower risk,” said Mathew Brennan, a Beijing-based analyst of Chinese technology. “Shein doesn’t work with very large factories but [with] small to mid-sized workshops that pick-up orders daily.” “It’s very much like an Uber system, where new orders are coming into factory owners’ phones and they receive the order. It’s very scrappy, but efficient.”
6. Making fashion affordable. Unlike at a luxury brand, buying a new outfit at Zara will not break your budget. You can get a dress at Zara for less than $20.00 and a winter jacket for less than $60.00. Most consumers are struggling financially, often living paycheck to paycheck. Like Walmart, having an offering that targets price conscious consumers is a winning proposition in retail right now. Most of the retailers that are thriving from Amazon to Dollar General sell on the low end of the pricing spectrum. But Zara should be wary of the growth of ultra fast fashion retailers. Their goods are so cheap they make Zara’s clothing look expensive. At Shein you can get a dress for less than $5.00 and a winter jacket for less than $30.00.
7. Focusing on novelty. Consumers crave novelty especially in the age of Instagram where it can be in bad taste for someone to wear the same outfit more than once. To meet this need Zara produces 20 collections each year. It is estimated that in February of this year, Zara’s website had over 9,000 skus. That’s a lot of winter jackets. Zara also moves product quickly with two thirds of Zara’s merchandise being less than three months old.