How to Disrupt an Industry: Zara

This successful retailer now runs nearly 6,500 stores in 88 countries. As of 2019, Amancio Ortega was the 6th richest man in the world. But how did Zara go from one store in Spain to a globally recognized brand in just a few decades?

History and Expansion:

Amancio Ortega opened the first Zara store in 1975 in central A Coruña, Galicia, Spain. This first store featured low-priced lookalike products of popular, higher-end clothing fashions.

In 1985, Amancio Ortega set up a parent company for Zara before going for the global expansion, and in 1988, the company started its international expansion through Porto, Portugal and continued its global expansion in the following countries. United States (1989), France (1990), Mexico (1992), Greece, Belgium, and Sweden (1993), Brazil (2000), Japan and Singapore (2002), Russia and Malaysia (2003), China, Morocco, Estonia, Hungary, and Romania (2004), Philippines, Costa Rica, and Indonesia (2005), South Korea (2008), India (2010), Taiwan, South Africa and Australia (2011), Peru (2012).

In September 2010, Zara launched its online boutique. The website began in Spain, the UK, Portugal, Italy, Germany and France. In November that same year, Zara Online extended the service to five more countries: Austria, Ireland, the Netherlands, Belgium and Luxembourg. Online stores began operating in the United States in 2011, Russia and Canada in 2013, Mexico in 2014, South Korea in 2014, Romania in 2016, India in 2017, Brazil in 2019 and Peru in 2020. 

How did they disrupt?

Zara’s competitive advantage comes from their unique manufacturing and distribution processes.

When Zara opened their first location in 1975, the fashion industry operated on a bi-annual cycle. Meaning most brands in the fashion industry would conceptualize, manufacture, and ship their collections twice a year. Zara shortened that time to just a few weeks. Zara has a unique ability to stay current with rapidly changing fashion trends and incorporate it into its collections within weeks. From the beginning, Zara found opportunities in the fashion industry that few brands had effectively addressed. This was to keep pace with latest fashion trends, but offer clothing collections that are a combination of high quality and yet, are affordable. The brand keeps a close watch on how fashion is changing and evolving every day across the world. Based on latest styles and trends, it creates new designs and puts them into stores in a week or two. Most of Zara’s competitors would take close to six months to get new designs and collections into the market.

In the fashion world, a trend starts small, but develops fast. Zara employees are experts at  listening, watching, and being attentive to the smallest changes in the tastes of their customers. The quicker they can respond to changing trends in the marketplace, the more likely they are to succeed in supplying the right merchandise at the right. Additionally, Zara has set up sophisticated technology driven systems, which enable insights to travel quickly from the stores back to its headquarters, enabling decision makers to act fast and respond effectively to a developing trend.

Zara has a highly developed, vertically integrated supply chain enabling the export of garments 24/7/365.  After products are designed, they take around 1 to 2 weeks to reach the stores. All clothing items are filtered through the distribution center in Spain. Here, new items are inspected for defects, sorted, tagged, and loaded into trucks for distribution. This vertical integration allows Zara to retain control over areas like dyeing and processing. On demand fabrics manufacturing processes. This eliminates the need for warehouses and helps reduce the impact of demand fluctuations. Zara produces over 450 million items and launches around 12,000 new designs annually, with this volume it’s important to ensure that the rollouts of new collections sell through quickly to avoid large overstock quantities of collections that did not sell through.

While other fashion retailers prepare their collections 6 months in advance, Zara locks approximately 50% of it’s stock by the start of the season. This way if a new fashion trend appears they can immediately react and produce what customers are looking for. Additionally if Zara has an item that has little demand they can simply discontinue it and move on to the next design. Low levels of stock and a frequently updated offering reduce the company's risk and give them more flexibility to react to emerging trends. In addition to these supply chain efficiencies, Zara can also modify existing items in as little as two weeks. If a design does not sell well within a week, it is withdrawn from shops, further orders are canceled and a new design is pursued. 

This strategy also incentivizes customers to visit their stores frequently, knowing that every time they come in there will be new collections available. Additionally, this also imprints a sense of scarcity for the customers in store, not knowing if the clothes they like will still be on the shelves next time they come in. An average high-street store in Spain expects customers to visit thrice a year, but for Zara, the expectation is that customers should visit around 17 times in a year.

Another key factor in Zara’s strategy is that they produce most of their clothing in Spain and in Europe. This is where the highest concentration of their retail stores are. This enables shorter lead times and faster replenishment of stock. Although the production cost is higher in these countries, it’s offset by Zara’s policy of no advertisement spending. 

This combination of innovative manufacturing and distribution strategies made Zara a world renowned brand and disrupted the way an entire industry operates, even to this day. 

How are they doing now?

Being that Zara's primary focus has been physical retail locations, they have been hit hard by the COVID-19 crisis in 2020. In Q1 2020 sales fell 44% and the company reported a net loss of USD 482 million. They have since announced that they will be closing between 1,000 to 1,200 stores worldwide, shifting their primary focus to Asia and Europe.  While online sales have been encouraging – Zara’s online sales for Q1 2020 grew 50% – however this is not enough to counteract the lost revenue from retail locations. 

Amancio Ortega plans to spend $1.1 billion scaling up its digital strategy and online capabilities by 2022 and a further USD 2 billion in stores to improve integration between online and offline for faster deliveries and real-time tracking of products. Its goal is for online sales to constitute at least 25% of total sales. This is a challenging task considering that they spend $0 in advertisements. Zara will need to think of new and innovative ways to engage its customers and drive significant organic growth through online communities and social media platforms to drive consistent traffic to their website. Unfortunately, Zara was late to the game with ecommerce and needs to catch up fast with competitors. Trends indicate a scenario where spending on mobile commerce will overtake desktop based ecommerce by 2021. On an average, most brands currently get about 15-20% of their website traffic via mobile devices but this is rapidly increasing with some brands seeing the majority of their traffic coming from mobile devices.  With the deluge of investments planned in the mobile commerce space and Zara’s competitors already having an advantage on the mobile front, Zara needs to quickly make mobile shopping a seamless and enjoyable experience for their customers. 

Zara built its name on offering trendy fashionable clothing at an affordable price but going forward this cannot be the only differentiator. Competitors are cutting prices and refining their business models to cut the competitive advantage that Zara has. Swedish fast fashion retailer H&M is quickly capturing market share on Zara’s home turf. Additionally, it now faces increasing competition from brands like Mango, which cut prices and started focusing on fashion segments in which Zara maintained large portions of market share. Other competitors like Gap and Topshop are also fighting for market share in the affordable fashion retail industry. There also now have online fashion “outlets” that bring in multiple brands under one website. 

Zara has long been a leader in the fashion industry by relying on it’s innovative manufacturing and distribution operations. As the world evolves and people's buying habits change, we are seeing that low prices are not enough to keep Zara at the top of the totem pole. To maintain industry dominance they will need to quickly adapt to the changing environment and continue to provide value to their customers in different ways they have over the last 40 years.