Zara is by all means a household name in the world of fashion. The company attracts polarized views within the fashion industry, with some calling the Zara business model revolutionary and others seeing it as exploitative and unauthentic. Despite this, the company is certainly successful, with the company being branded with a value of nearly $13 billion in 2022.
Let’s take a look at the Zara business model, the history of the company, and most importantly, how it makes money.
Contents
A brief history of Zara
Year, name change, type of company, business model, number of stores, employees, valuation, number of products sold, famous for little advertising, criticisms, effects on the industry
The company known as Zara was started in 1975 by Amancio Ortega and Rosalía Mera. It was initially named Zorba, but the name was quickly changed since it shared the same name with a local bar. The first store was opened in Galicia, an autonomous community located in the northern part of Spain. They specialized in the sale of cheap imitations of popular, high-end fashion trends.
The company opened several more stores throughout Spain in the 1980s, but did not achieve truly massive growth after Amancio Ortega developed the concept of “fast fashion”. He then changed the design, manufacturing, and distribution procedure to reflect this new business model and achieved a significant reduction in the production process, and responded to changes in a high-end fashion more quickly.
These changes were mostly centered on the core tenets of the fast fashion philosophy. These included:
Rapid trend replication through the use of primary information technology;
Significant increases in productivity through the practice of groups of designers working on products instead of individual designers;
They use cheap materials for their products;
Competitive pricing by taking advantage of low-quality materials and cheap labor, usually outsourced offshore to certain countries because of their more cost-effective (cheaper) wage structure.
Who Owns Zara
Zara is owned by Industria de Diseño Textil, S.A. (Inditex), a Spanish multinational clothing company that has its headquarters in Arteixo, Galicia, in Spain. Inditex is the largest fast-fashion group in the world, with a market capitalization of $73.7 billion in 2020. Zara makes up its largest subsidiary with 2,007 stores in 96 countries, which contribute about 70% of the total sales volume of the Inditex Group.
Zara’s Mission Statement
Zara’s mission statement is simply to “give customers what they want, and get it to them faster than anyone else.”
This perfectly represents the key value propositions of; being able to provide cheap, near-replicas of high-end fashion trends and deliver them quickly, with a 15-day lead time between the initiation and completion of the entire production process of a single item.
How Zara makes money
Let’s take a look at how Zara makes money.
Revenue from Retail Sales
Zara is said to sell over 450 million products a year, and a significant portion of these sales come from its retail stores. The company has thousands of retail outlets in nearly 100 countries. These physical locations provide male, female, and children’s clothing and accessories, as well as a range of other products such as beauty products, shoes, and perfumes.
Revenue from Online Sales
Online sales also make a significant contribution to the total sales volume of Zara. E-commerce sales for the year 2022 were said to have contributed $8.6 billion to the total sales revenues. This represents a continuation of a steady uptrend in its online sales revenue with $6.1 billion generated in 2021, $4.8 billion in 2020, and $2.9 billion in 2019. The company has plans to further increase its online presence and still projects significant room for growth.
Trend-focused, but budget-conscious fashionistas: The Zara business model involves providing pocket-friendly, but trendy clothing and accessories to men, women, and children. Amongst adults, their primary customer segment is younger adults between 18-40 who are fashion-conscious, tech-savvy, and environmentally conscious.
Zara has a transactional relationship with its customers since the company does not build long-term, personalized services for its customers but simply supports transactional services;
Self-service is also one of the Zara customer relationships, since shoppers are allowed to choose through the available retail catalog and purchase items without the need for significant assistance;
Customer service it’s one of the most important sectors of the business structure and helps customers with any complaints they may have;
The Zara social media platforms and brand identity offers loyal customers a sense of community when they purchase Zara products.
Operating expenses, such as facility maintenance, employee wages, legal fees, IT costs, etc.;
Marketing and advertising costs;
Research and Development.
Zara’s Competitors
Here are some of the top competitors to the Zara business model.
Shein: It’s a Chinese fast fashion retailer which focuses on the sale of affordable apparel sourced from the wholesale market and enjoys a significant online presence. It is valued at $220 billion, making it the most valuable fashion retailer in the world in 2022;
H&M: It’s a Swedish multinational clothing company that was founded in 2008 and is second to only Intidex in terms of size. The company currently has over 4,800 stores open worldwide;
Gucci: This is a high-fashion luxury brand that offers a wide range of high-end clothing and accessories such as bags, shoes, home decorations, and so on. According to data from 2019, it generated $9.6 billion in sales from its 487 stores;
Forever 21: It’s a multinational fast fashion retailer which Sells clothing to men, women, and children as well as other accessories such as bags, shoes, cosmetics, perfumes, and so on. It is headquartered in Los Angeles, California, and operates 540 locations worldwide;
Uniqlo: This is a Japanese clothing company that specializes in the design, manufacture, and distribution of casual wear. It was founded in 1973 and has over 30,000 employees.
The brand takes advantage of the cost-effective wage structure of some of the countries to which it off-shores its manufacturing process such as Bangladesh, Armenia, Spain, Morocco, Turkey, and Portugal;
Zara can source lower quality materials than standard would be expected in high-fashion clothing, allowing them to save significant costs;
The company spends significantly less than its main competitors on marketing and advertising. This has two beneficial effects. First of all, it gives the company the impression of being a high-fashion brand by creating an artificial sense of exclusivity and scarcity;
The Zara retail outlets are one of its strongest assets and are located in prime locations all over the world;
The fast fashion business model which the company operates allows them to quickly copy high-fashion trends and create near replicas that can quickly be sold at cheaper prices while the fashion style is still popular;
The ability of the company to leverage its significant understanding of fashion trends on social media to quickly detect and copy these trends, allowing them to produce over 11,000 distinct items a year;
The company can sell 85% of its clothing and accessories at full price, which is much better than the industry standard of 60%;
Zara produces most of its clothes seasonally, with only 15% to 25% of its clothing articles being produced in advance. This allows the company to respond to rapid changes in trends during particular seasons and avoid having leftover unsold inventory, which also helps create artificial scarcity and drive up clothing prices.
Zara’s Weaknesses
The company invests very little in marketing, a strategy which may backfire eventually since its competitors invest at least 10x as much as Zara in terms of advertising;
The centralized distribution system (known as the Cube) puts the production process at risk of significant disruption and even catastrophic failure due to having a single vital weak point.
Zara’s Opportunities
The brand should improve its online presence and carve out a strip of the fashion e-commerce sector;
Zara should strive to attain more global relevance to survive increased competition from both local and global competitors.
Zara’s Threats
Since a significant portion of Zara’s sales are made in Europe, this leaves it open to increased competition from the growing popularity of some of its competitors on the continent;
The inability of Zara to gain a significant share of the market outside of Europe and China has left it open to an increasing pool of global competitors;
Zara has been accused of committing various labor violations such as exploitative labor, unsafe working conditions, and even child labor;
The fast fashion business model which involves copying recent high-fashion trends from other designers has been seen as inauthentic and a blatant infringement of trademark rights. This has embroiled the company in various lawsuits over alleged trademark violations, as well as copycat fashion scandals;
Rapid increases in the cost of raw materials, as well as labor costs, could prove detrimental to Zara’s business model and render it unsustainable;
Its relatively poor online presence in terms of e-commerce sales could mean that the company may fail to attain a significant online retail market share.
Conclusion
Fast fashion was one of the most significant revolutions in the fashion industry in the last century. Zara has been at the very forefront of this movement for almost five decades and has shown strong growth as well as the potential for further development. Though the company enjoys a large market share in Europe, it still has room to compete for a wider global customer base, as well as utilize the ever-expanding opportunities offered by E-commerce.
The Business model of Zara consists of vertical integration and logistics trade-offs. These two strategies play a significant role in the success and global recognition that Zara receives. Vertical integrations help the company to control all of its verticals like design, manufacture, shipment, distribution, etc.
The Business model of Zara consists of vertical integration and logistics trade-offs. These two strategies play a significant role in the success and global recognition that Zara receives. Vertical integrations help the company to control all of its verticals like design, manufacture, shipment, distribution, etc.
Because Zara manufactures only a limited supply of items, it doesn't have to deal with excess inventory or constant markdowns. Each store has a limited inventory of items in each style that are replenished based on demand. New styles based on latest trends arrive constantly.
Its core values are found in four simple terms: beauty, clarity, functionality and sustainability. The secret to Zara's success has largely being driven by its ability to keep up with rapidly changing fashion trends and showcase it in its collections with very little delay.
Yes, the business model is scalable. Zara needs information about the latest fashion trends in order to design new styles of clothing. The company also needs information about its customers in order to produce clothing that meets their needs.
Zara's strategy is to offer a higher number of available products than its competitors. While most clothing retailers manufacture and offer to the public for sale 2,000 to 4,000 different articles of clothing, Zara's production has been markedly higher, at over 10,000 pieces produced per year.
The Zara target market includes women and men, mainly younger adults in the age range of 18 to 40. This places the Zara segmentation strategy as largely focusing on Millennials and Gen Z, who are both fashion conscious and tech savvy.
Value Proposition – Zara's key value proposition lies in its ability to design, produce, and deliver the latest fashion trends to customers before its competitors. The company achieves this through agile supply chain management, fast production cycles, and a strict inventory control system.
The Zara brand story. Zara was founded by Amancio Ortega and Rosalía Mera in 1975 as a family business in downtown Galicia in the northern part of Spain. Its first store featured low-priced lookalike products of popular, higher-end clothing and fashion.
The origin of Zara's brand identity was delivered on the Inditex website. Zara had its origins in the name of Spanish founder Amancio Ortega . The founder of Zara started a clothing company in 1963 and opened his first clothing store, Zara, in 1975.
In brief, Zara's statement is "to give customers what they want, and get it to them faster than anyone else." An effective mission statement is something clear and concise, and Zara's mission statement definitely gets a check-in both these criteria.
Additionally, ZARA uses near-shore production for both fabrics and finishing, cutting out time in transportation to and from factories. The implications of this efficiency are real. Compared to a traditional player, ZARA will spend more to produce a similar garment AND sell it more cheaply (at regular price).
Fashion giant Zara is under fire after Head Designer women's department, Vanessa Perilman, attacked Palestinian model Qaher Harhash on Instagram. Caught spewing anti-Palestinian rhetoric, Vanessa allegedly sent controversial messages to Qaher in response to pro-Palestine posts by the model from occupied east Jerusalem.
What are some of Zara's weaknesses? Fast-Fashion: Interestingly, the trend that helped propel Zara to the top is the cause of its most pressing weakness. With the focus on sustainability increasing among customers and policymakers Zara's weakness is balancing sustainability with fast-fashion.
The analysis focuses on measuring the company's position based on forces like threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and competitive rivalry.
Gap Inc. is the largest specialty apparel company in the US that owns several billion-dollar lifestyle brands, including Old Navy, Gap, Banana Republic, and Athleta. Like Zara, Gap offers clothing, accessories, and personal care products. Gap has over 150,000 employees with $13.8 billion in revenue.
However, the brand has recently faced three main challenges: e-commerce, competition and sustainability. To sustain its global expansion, the brand made a step toward digital expansion even before the pandemic hit, and it paid off. So far in 2020, Zara reports a 74% jump in online sales alone.
Zara has cultivated unique advantages with its 4Es approach to marketing by focusing on experience, exchange, evangelism and every place strategies for the customer, rather than the old product, price, promotion and place concept focused on the brand.
Zara owner Inditex and Swedish fashion retailer H&M reported a contrasting set of results. Inditex, which also owns Pull & Bear and Bershka, reported a nearly 20% increase in profits to £7.6bn in 2022 compared to the year earlier.
The Zara's business model is unique, comprising each and every stage of the fashion retail business: design, manufacture, distribution and sale of fashion in own-operated stores. The key to this model is the ability to adapt the offer to customer desires in the shortest time possible.
Zara's generic strategy is cost leadership. The brand holds a competitive advantage in the market by offering products similar to high-end fashion and designer brands' styles at modest prices. However, how Zara differentiates itself in the industry is beyond that extent.
Zara is the Spanish clothing retailer Inditex Group's flagship brand. Of the numerous fashion companies that belong to Inditex, Zara has the highest store numbers on a global scale. As of January 2023, Spain, France and Italy were the European countries with the highest number of Zara stores as shown in this statistic.
Zara‟s method of sourcing product is very different from the traditional methods used in the fashion industry because the company controls every part of the supply chain. Instead of using an outsider to design the clothes, the firm uses 300 in-house designers and relies heavily on store managers‟ input.
They have an innovative manufacturing process, which allows them to be quick in responding and sending clothes to their shops, and they also do some re-designing at that time. Only 15–25% of clothes are produced before the season and 50–60% at the start of the season.
The fast-fashion business model of H&M is largely responsible for its growth. Fast fashion depends on transferring a sizable quantity of goods from the designer table to the showroom floor in the shortest amount of time and at an affordable price.
H&M, or Hennes & Mauritz, is a renowned fast-fashion retailer that generates revenue primarily through the sale of clothing and accessories. Their business model focuses on offering a wide variety of trendy and fashionable products at affordable prices, attracting a large customer base.
Zara's strategy disregards most of the components for a successful supply chain. Unlike many clothing suppliers that actively use outsourcing, Zara manufactures a significant number of its products using its own resources. The brand itself is engaged in the processes of design, storage, distribution, and logistics.
Zara's customers value variety, design, and the ability to access the latest fashion trends. 2. Value Proposition – Zara's key value proposition lies in its ability to design, produce, and deliver the latest fashion trends to customers before its competitors.
It is said that he was an autocratic leader first where the concentration of power was focused on him. But once his business ascended, and his reputation became superior, his leadership style transformed to a democratic way of leadership.
The fast fashion business model is based on flexible design and responsiveness. Unlike more traditional clothing retailers and fashion houses, fast fashion companies are able to roll out a large number of styles per season and respond quickly to market demand for their products.
A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales.
Circular business model definition. A circular business model articulates the logic of how an organization creates, delivers, and captures value to its broader range of stakeholders while minimizing ecological and social costs.
Since H&M focuses on cost leadership/differentiation strategy, H&M has to keep the production costs low in order to achieve profitability. To lower production costs, companies usually have to place orders with large quantity of items in order to get the best prices.
Aimed at young, fashion-conscious urban consumers, their products are trendy and they're cheap, bordering on disposable. Fast fashion retailers make their profits by having a high merchandise turnover and by constantly resupplying the product pipeline with the latest trends.
We are a value-driven, customer-focused, creative and responsible fashion company. For us, fashion, fun and action are essential. We are defined by “the H&M way”: our culture, values and guidelines which reflect the heart and soul of H&M.
Today, Zara is one of the largest international retail chains, spanning over 90 countries and 3,000 stores. It's influenced even the most iconic and long-lived fashion brands in its operational execution.
The results show that: ZARA has lower product prices, unique and numerous designs, high production efficiency, and low production costs; its disadvantages are mainly manifested in low product quality, excessive scale expansion, and bad reputation of plagiarism; the opportunities are mainly the rapid development of AI, ...
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