Zara: History and Background

ZARA: History and BackgroundInditex is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children through its chains around the world. Zara is the largest and most internationalized of the six retailers that Inditex owns: (Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho). By the end of 2001, Zara operated 507 stores around the world, including Spain.

Of Inditex's total employees, over 80% of them are part of the retail sales force and 8.5% are in manufacturing, design, logistics, and distribution. The remaining 11.5% are part of the corporate headquarters of Inditex, which is located in the region of Spain called Galicia.

The role of the corporate center at Inditex's headquarters is that of a "strategic controller" only, and is involved in setting the corporate strategy, approving the business strategies of the individual chains, and controlling their overall performance rather than as an "operator" functionally involved in running the chains. This gives Zara autonomy to operate independently and be responsible for its own strategy, product design, sourcing & manufacturing, distribution, image, personnel and financial results.

With this freedom, Zara was able to make major investments in manufacturing, logistics, and IT, including establishment of a just-in-time manufacturing system and a 130,000 square meter warehouse close to its corporate headquarters. Zara manufactured its most fashion-sensitive products internally and its designers continuously tracked customer preferences and placed orders with internal and external suppliers based on this information. Due to its unique needs, Zara chose to internally develop its business systems. Zara is now able to originate a design and have finished goods in stores within weeks for entirely new designs and take even less time for modifications of existing products.

Key International Competitors of Inditex

Gap, H&M and Benetton are considered Inditex's three closest comparable international competitors. As in the product positioning map, Inditex's flagship brand, Zara, is relatively perceived as more fashionable than all the other three and prices less than Benetton and Gap but higher than H&M. In these four competitors, Benetton and Gap place at relatively less fashionable and higher price, while Zara and H&M is more fashionable and price lower.

In Appendix 1 which analyzed the operating and financial performance of the 4 companies in the year of 2001, we can see that H&M is the closest competitor in many dimensions, such as ROE, Gross and Net Profit Margin, etc. Also, H&M's focused approach to international market is more similar to Inditex's expansion style than the other two closest competitors.

Business Model of Zara

As the largest and most internationalized brand of Inditex's chain, Zara is the principle driver of the group's growth and play the lead role of Inditex's sales and profit. Zara's unique business model brings special interest of business studies and is often sited as "Dell in the fashion industry".

The core concept of Zara's business model is they sell "medium quality fashion clothing at affordable prices", and vertical integration and quick-response is key to Zara's business model. Through the entire process of Zara's business system: designing, sourcing and manufacturing, distribution and retailing, they presented four fundamental success factors: short cycle time, small batches per product, extensive variety of product every season and heavy investment in information and communication technology. These four elements are involved in every aspect of the business.

Zara's designers track consumer preferences on a year-round basis and place orders with both internal and external designers. Each year several hundred thousand SKU's are produced based on 11,000 distinct items varying in color, fabric and size. Zara is able to accomplish this huge variance due to ordering small batches and internal production of the most stylish, and therefore most time-sensitive items. More predictable styles are outsourced to manufacturers in Asia. The throughput time from beginning of the design phase to the arrival of the finished goods in the stores is 4 to 5 weeks for new items and 2 weeks for modifications to existing items. The sourcing and manufacturing process are also key to the business model. Zara has purchases offices in the fashionable cities of Barcelona and Hong Kong which allow for the purchases to also serve as trend-spotters. Zara uses an Inditex subsidiary, Comditel, for its purchasing of fabric. Approximately half the fabric is purchased in grey to allow for flexibility in manufacturing a variety of colors and patterns. This is a key component of the business cycle as the fabric is finished in just one week. The particular distinction of Zara's manufacturing is that they manufactured its most fashion-sensitive products internally and produce in small batches for the most time-sensitive ones.

For distribution, all merchandise is shipped through either the central facility in Arteixo, Spain, or through satellite sites located in Argentina, Brazil and Mexico. Merchandise in the main facility has a capacity of only 45,000 folded garments per hour. This facility admittedly has its limitations unless more capacity can be created elsewhere. Also, the vertical integration of manufacturing and distribution greatly helped to reduce the Bullwhip effect.On the retailing end, the business model allows for Zara to have a much more fashion forward line because it can commit to its product line much later in the season. In fact, the design process does not seem to stop and the designers are constantly evaluating consumer preferences. Zara's in-store staff is also young, and very fashion-conscious who serve as key "trend-spotters". In addition, Zara provides very limited volumes of new items in the most fashionable of Zara's stores and then uses the results of those sales to decide whether the items should also be sold in other locations. The limited volume and short available time successfully created a sense of 'scarcity' in consumer's perception.

Current Issues

Zara is facing several issues. Zara has a consistent business system that gives the company its competitive advantage. One of these advantages is the economies of scale that Zara is able to utilize and the company has been successful in scaling up its