Zara Business Model and Growth Strategy

There is no doubt that the retail market is extremely competitive. Many retailers are struggling to get people into their stores. At the same time, the Zara business model is allowing them to rapidly expand while many others are rapidly contracting and hoping to survive. Many fashion retailers look to predict trends up to 1 year in advance. They source orders and then stock large volumes of inventory.

This gamble can create a massive payday for the retail industry. It can also create massive markdowns on unsold inventory when there’s a fashion miss on the season’s order.

The Zara business model completely eliminates this risk. Instead of purchasing large amounts of inventory, they run on very low numbers. Instead of stocking up for a season’s worth of fashion, Zara changes what they put on display an average of twice per week. This provides two unique results that other retailers just can’t achieve: frequent customer visits and an immediate atmosphere of scarcity.

Why Is the Zara Business Model Seeing Better Results?

Every business model should be composed of three specific elements in some way so that it can be successful.

Promotion.
It’s difficult to sell something to someone if there aren’t being any leads generated. A company could have a life-changing product, but no one will purchase it if they don’t know it exists.

Engagement.
People need to feel like a business cares about them in order for them to connect with that business. Without a relationship, the leads which do get generated will usually feel like they are being targeted for their money alone.

3. Value.
Products or services must solve problems in order for leads to be generated. Without problems being solved, there will be no reason to invest.

Zara changed the way the fashion industry does business because they were able to prove that the average retailer wasn’t connecting with the average lead that was being generated. Major fashion designers are now having 6-7 collections every year instead of 1-2 collections because the Zara business model works.

Here’s why it works: if a fashion sells out immediately, the low inventory numbers will be quickly replaced by a new fashion that will be in the store within a few days. If the fashion design doesn’t sell very well, the effect on the bottom line of Zara is negligible. Even if Zara strikes out 3 or 4 times in a row, it won’t matter because they will still have a new opportunity in a few days to make it up.

4 misses for Zara with two new fashions per week mean a loss of two weeks’ revenue. For the traditional fashion retailer, four misses could mean the destruction of an entire retail season.

Zara Lets People Be Fashion Forward On a Budget

High fashion for more than a century was generally reserved for those who had enough cash. The average stay-at-home mother couldn’t go to a fashion conscious store because it wouldn’t fit into the budget. Since their parent company’s IPO in 2001, what the Zara business model has done well is to combine both worlds, the rich and the cost conscious, together into an atmosphere that promotes scarcity.

The stay-at-home mom is going to be shopping next to the 18 year old girl who skipped out of school and the middle-aged woman who never had kids and is look for a new outfit for an important meeting. Zara might find success in short lead times and minimized risk, but they have also done something truly unique: they’ve eliminated the customer segment.

How could Zara do this? By controlling their inventory chain. Instead of outsourcing a majority of the fashion forward clothing that they sell, around 50% of it is locally produced in Spain right around the parent company’s headquarters. When you got purchase something at Zara, you’re almost always purchasing something that was made by Zara. This makes it unique and because it is also affordable, it attracts all sub-segments of their demographic.

Because fashions are produced internally and in low numbers, risk is naturally minimized. If a fashion doesn’t sell as expected, its production can be stopped immediately and something new can be designed. This prevents long-term markdowns, improves revenues, and creates a better overall margin. It is estimated that Zara produces 12,000 styles annually.

Doing more while producing less. That’s the unconventional method of the Zara business model, but it really isn’t that strange. They promote scarcity, provide a good value proposition, and they react instead of attempt to predict. When combined, Zara has created a system that will continue to transform the fashion industry.