Zara is a high-fashion, low-cost retailer with a unique business model.
Newest fashion at affordable clothes: Cutting-edge newest fashion at affordable prices. Identify styles that are “hot”, and quickly launch latest trend into stores. Zara established a strong customer loyalty - ones who want be the first one wearing a new coat or shirt.
High rate of launch and wider choice of styles: Zara creates ~12,000 styles per year (much higher than retail average of 3,000). High rate of launch of styles creates opportunity to find a winning style. Zara’s speed to market far exceeds its competitors and hence its differential advantage that enables Zara to respond quickly to shifts in consumer demands.
Scarcity: Zara limits manufactured quantity of each style creating artificial scarcity and therefore lower risk of unsold stock. Scarcity also increases desirability that creates a rush to buy within shoppers. Limited quantities keeps the sale/disposable stock under check when the season ends.
Prime locations: Zara connect with their target market by locating stores in prime town centers and spends little on advertising (0.3% of revenue).
Pricing clothes differently depending on the location. The cost of clothing from Zara is cheaper in Europe and more expensive in Asia and North America because the North American and Asian countries are able to afford the latest clothing designs compared to Europe.
Zara is vertically integrated with the majority of garment production carried out in owned or closely controlled facilities within Spain. This provides a lot more flexibility and speed albeit at higher costs. Zara controls almost the whole garment supply chain from design to retail. While other retailers outsource production to cost effective Asian countries, Zara focuses on lean and agile production where stores place orders twice/week and the supply of finished goods is matched to the store demand. Production is directly connected to the demand that means very little inventory in Zara’s supply chain that helps keeping lower working capital requirements. Deliveries arrive within one to two days after ordering. Most deliveries are done by truck from the Spanish factories. Overall, Zara can shift from identifying a trend to launching ready clothes for sale within 30 days (most retailers average 4-12 months). As a positive consequence, Zara’s customer visits the store 17 (approx.) times a year compared to the retails industry average of 3 times per year.
How is Zara managing the uncertainty in market demand? (1 paragraph)
Managing demand uncertainty: Zara practices short style (limited quantity) campaigns that are likely to run out of stock creating artificial scarcity. Most of Zara’s…