Thursday, December 10, 2009

Business model example: Zara - A devastating business model

Zara, owned by Inditex, has been described by Daniel Piette, fashion director LVMH, as "possibly the most innovative and devastating retailer in the world" and is a vertically integrated retailer controlling the design, manufacturing and distribution of clothing itself. This is very different from most clothing retailers that outsource much of their manufacturing to developing countries. Zara has managed to substantially shorten the time to develop a new product and get it to stores, and in doing so it can react quickly to changing market trends. From design to finished goods can be made in four to five weeks, and modification of existing items can be made in as little as two weeks. It produces about 11,000 distinct items annually compared with 2,000 to 4,000 items for its key competitors, constantly updating its range of clothes. Zara shop managers report back every day to designers on what has and has not sold, information that is used to decide which product lines and colors to keep or alter, and whether new lines should be created. Reducing the time to get the clothes into the shelves and the batches of clothing in small quantities also keeps the costs down by keeping stocks low, and if a design doesn't sell well within a week, it is withdrawn from shops, and further orders are canceled. Where most retailers have different "seasons" Zara keeps no design on the shop floor for more than four weeks, encouraging customers to make repeat visits. Popular items appear and disappear within a week creating an image of scarcity. Some customers know exactly when new deliveries arrive at their local shop and turn up before opening time to pick up the latest fashion. Zara uses no advertising or promotion, and 50% of the products are manufactured in Spain, 26% in the rest of Europe, and 24% in Asian and African countries and the rest of the world.

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  1. Isn't this similar to the H&M model? Don't they also rely on short product cycles?

  2. Thanks for your comment Richard!

    You are right in that H&M also rely on short product cycles for some of its clothes but they tackle this in a different way. H&M uses outsourcing, foremost in Asia, while Zara is fully vertically integrated, with more than half of its factories in Europe. Another major difference is that H&M keeps a large inventory of basic items (produced and shipped from Asia) whereas Zara order new ones based on sales.

    It is fascinating that two companies in the same competitive market have similar challenges, uses different models, yet both companies are very successful.