Business Case Study: ZARA's Billion $ Business Strategy

ZARA - Decoding ZARA’s Billion Dollar Captivating Business Strategy to Fascinate More people

Dec 06, 2021

The fashion industry, one of the most demanding industries nowadays, is a multibillion-dollar enterprise that devotes itself to the business of making and selling clothes. In today’s article, we are going to discuss about one of the greatest brands in the fashion industry, i.e., none other than ZARA.

It is so hard to believe that a venture that was started by a school dropout, has now become so huge that it employees more than 1 lakh people and has more than 2000 stores spread across 80 countries. And, the most interesting thing about Zara is that it has not incurred a loss in the last 19 years until the pandemic.

About ZARA

Now, talking about Zara, this is a story that dates back to the late 1950 in Spain when 14 years old, Amancio Ortega, dropped out of school and found a job in a local shirt megastore in order to support his family. And, for the next 10 years, he worked at multiple jobs in the garment business, from being an assistant to a tailor to delivering clothes directly to the customers.

During these 10 years of experience, Amancio Ortega made 3 very important observations that went on to change the fashion industry forever. Even today, Zara operates on the basis of the same lessons.

Mr. Amancio Ortega, CEO and co-founder of Zara

Core Philosophies

What are these observations? What was so special about those lessons that turned this ordinary boy into one of the richest people on the planet?

The first thing, Ortega understood is that all human beings depending on whichever age group they belong to, they put in extra money and they put in extra effort onto something called the instruments of status.

To understand it in a Mr. Amancio way, the 90’s kids could go an extra mile just to buy a Shaka Laka Boom Boom pencil, to get a MRF bat, or even to get a Ben10 watch. Whoever had these instruments of status was considered to be a cool kid.

As we are growing up, smartphones are becoming instruments of status, and if somebody has an iPhone, they are considered to be slightly rich. So, at every age, we have our own instruments of status. Just like that, Mr. Amancio understood that the most important instrument of status among women between the age of 20 to 34, were nothing but the clothes they wore.

Secondly, he also understood that along with these instrument of status, humans also has critical parameters that define the value of those status instruments.

For example, nobody cared how well actually the Shaka Laka Boom Boom pencil wrote, but in fact, most of those pencils did not even write properly. Similarly, nobody cared about the quality of wood that MRF bats were made of, in fact, most of these bats were duplicate bats just with the sticker of MRF, we only bought it just because Sachin had it.

If we see, the parameter to judge the status instrument was never the quality or utility of the product, it was just a sticker or a stupid doll. And, just like that, women have 2 primary parameters in clothing, that define their status in the social circle.

Those parameters are Variety and Design.

The combination of these parameters is what makes them great status instruments, for example, if you wear a Manish Malhotra dress, it kind of loses its value after wearing it at 2 weddings. And obviously, variety is useless, if all the clothes are badly designed. And the most interesting point to be noted here is that just like nobody cared if MRF bats were original or not. Very few women cared about the quality of clothes as much as they cared about variety and design. So, hardly a few people wanted to dress that would last for 10 years, because they anyways wouldn’t wear it frequently.

Third and most importantly, he also found out that women were extremely fascinated by fashion icons. But at the same time, the existing clothing stores never caught to these needs of customers in order to get the latest style of clothing, they only had a new stock every 2 to 3 months. On the contrary, the designer clothing that actually caught up with these strengths was quite desirable and very expensive. So clearly, there was an unfulfilled demand in the market.

Therefore, by using these 3 insights, Amancio Ortega build an agile supply chain that looked something like this.

Instead of buying high-quality clothes in less quantity, he would buy medium quality material in high quantity and then bargain with the seller to get it at a discount. Then he would do research to find out what types of design are trending in society and what types of design are doing well at the most premium outlets.

On top of that, he would even travel the city and would also keep an eye on pop culture. And as soon as, he would spot a lucrative design, he would immediately get the designers to design something similar, pass it on to the tailors, gets on to the display, within the shortest time possible. This speed was so high, that while normal shops had a new stock every 2 months, Zara had a new design every 2 weeks. This is what is known as the fast-fashion supply chain.

Not only that, he even marketed a Zara store to be selling medium quality fashion clothing at affordable prices and obsessively focused on design and variety of clothes.

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This strategy gave Amancio Ortega 3 magnificent superpowers over the rest of the competition,

The customers were extremely on cloud nine to find trending designs and a huge variety of clothes. The best part was that these clothes were available at ultra-low prices because the material itself was bought at a very cheap rate. On top of that, the number of visitors skyrocketed to the store because with new designs coming every 2 weeks, it sparked the curiosity of customers to such an extent that Zara stores had 3 to 4 times more visitors than the rest of the stores. This again resulted in an increment in their sales.
Because of more footfall and their fast-moving products, Zara is also called the superpower of something called Discounting.
Zara achieved the golden equation of Just-In-Time Production and Just-In-Case consumption. These are 2 types of operation in supply chain management, in fact, this mode of operation is not just applicable to just supply chain but to many of the aspects of life also.

This concept comes from the automobile industry. So, if a car company operated in Just In Case method, they will focus on keeping their inventory stocked up all the time. So, if they wanted to manufacture cars, they would by default have 300 red, 300 black and 300 yellow cars. So, regardless of what the customer wants, they will be able to deliver the products immediately. But, the major disadvantage of this strategy is that it leads to exorbitant storage costs and the inventory gets wasted if all stock does not sell. Whereas, in the second mode of operation, i.e., just in time, it is only about what is needed. So, after placing the order of a black car, the production line will start manufacturing the car, then it will be painted black. This way, there is very less storage cost because product moves quickly from the inventory and the supply chain, in general, becomes very efficient.

Now, this is the best part about Zara, Zara manufactures all the clothes in just in time approach. Wherein, they push out new designs every 15 days. So, they save a ton of money by not keeping in inventory. But the customer buys a product with just in case mindset and end up spending more than needed.

That means, if a girl sees a great Zara dress, she knows that in 15 days, it will be out of stock. Therefore, she will have the natural tendency to buy the dress even if she doesn’t need it, because she will buy it with a mindset that, just in case, I have a friend’s birthday, I will need this dress or just in case, I need to go to that trip, I would need that dress. Hence, she will end up buying more clothes than needed eventually saving Zara inventory costs but will end uploading her own inventory costs. Even if supposedly, flopped designs come in, it still gets bought by someone because they think they might need it at that moment only because of the fear of missing out.

On top of that, while the rest of the clothes are made to last for a year, Zara clothes are designed to last nearly 10- 15 washes only. Therefore, people bought 3-4 times more clothes at Zara and also shopped with 3-4 times more frequency as compared to the rest of the stores. These principles along with the supply chain evolution turned Zara into a super-profitable company and accelerated its growth.

Even today, while normal brands have 2000-3000 designs per year, Zara and even H&M end up releasing 12000 designs in a single year. This is a reason why today Zara is a 13 billion-Dollar company with more than 2000 stores across 88 countries. On the outside, Zara seems to be the perfect capitalistic miracle. Customers get a ton of variety, companies make billions of dollars, people get jobs and government makes billion of dollars in taxes.

People as much as H&M and Zara are capitalistic fairy-tale, it is equally important for us to realize that it also leads to an environmental Nightmare. And if we don’t strike the balance, the nightmare is going to be worse than the fairy- tale.

Fashion industry is the 2nd most industry to pollute the environment

What do we exactly do about it?

Take some simple steps,

Take a step back and analyze your instrument of status and always make sure that you are not so exploited by brands that you end up spending more than needed and that eventually end up broke. Zara is definitely important but not that much important that you end up swiping a credit card more than needed and then struggle with your debt.
Access the ordinary things in your life and find out how the brands exploiting you to purposefully increase consumption, it starts from a disposable razor all the way up to your apparel and makes a conscious choice to support brands that decrease your consumption.

Business Lessons to Learn:

If you want to sell a high-margin product, try to find out what exactly are the status of instruments in your customer’s life. Most importantly, find out, what are the parameters that make those instruments of status important. In this case, the instrument of status was nothing but just the clothes, and the parameters were design and variety.
There is always a thin line between what your customers want and what you think your customers want. In this case, while on the outside it looks like quality is the most important metric for any product, it’s quite counter-intuitive that in the context of fashion, quality is actually secondary as compared to design and variety.
Lastly, once a great man said, while everybody in this world learns how to see, very few learn how to observe. And that is what makes the difference between ordinary and extraordinary. In this case, the extraordinary observation of Amancio Ortega gave rise to not just a fashion company but a fashion revolution that changed the way the world dressed.
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