Fast Fashion: The Zara Case
Zara is one of the most successful fashion retailers in the world. How is its business model different from that of traditional fashion retailers? To make this question more concrete, think of the business model of a traditional retailer like Macy’s and compare it to Zara’s.
With 11,000 each year and 200 designers on staff, Zara is one of the leaders in the higher-end commercialized fashion industry. Their business model was somewhat disruptive at the time of their conception. Unlike the traditional fashion retailers, like Macy's, their production sourcing and scheduling processes are highly split and flexible. With its gradual commitment of 15-25%, then 50-60%, and the rest left to reactive capacity Zara is more nimble compared to, let's say, Macy's with their estimated 80% committed inventory.
In addition to sourcing and scheduling, Zara's manufacturing and procurement are also modular. For example, the fabric sourcing and garment assembly are mostly located within one local region of Southern Europe(around 60% of total outsourced production). The factories and subcontractors have constant deliveries allowing the work to scale as the new work comes in. With this in-house approach, the company boasts its ability to finish style production within 10 days!
By contrast, retailers like Macy's, have monolithic commitments for each season. The inventory is immense and is difficult to flow from one location to another. Adding the fact that multiple brands with their own supply and procurement contracts. These factors make it extremely costly to make changes to the in-season production.
What are the advantages of the “fast fashion” business model?
This winning model allows Zara to respond to ever-changing market demand with rapid speed. This is not only a competitive advantage (an average customer visits Zara for "fresh content" 17 times a year vs 3 to 4 times for other retailers) but also a great strategy to increase profit.
One of the biggest changes in the fashion industry is the markdown. In recent years, only about 60-70% of all garments are sold at their full price. But Zara manages to sell about 80-85% of their products without a discount. That number we can directly attribute to the company's agility to supply inventory based on demand at the right time and location.
Another externality of this rapid inventory flow is customer loyalty and a high customer retention rate.
What are the costs or tradeoffs of the “fast fashion” model?
The main reason why few other retailers are actively trying to reproduce the 50-year-old Zara business model is probably that it is more costly to implement every step of the traditional process.
In the traditional approach, the company selects the new season items >> makes a bet >> places the order >> uses resources to sell as much as they can >> asks for customer feedback.
Zara resequences this process: ask for customer feedback >> select >> make a more certain bet >> place smaller order >> sell >> ask for feedback again >> use some resources to sell >> use other resources to react to the feedback and so on in a constantly scalable loop.
If a giant like Macy's decided to adopt this fast fashion model their upfront costs will be significant. Everything from reestablishing the manufacturing system to retraining employees will require a large investment and possibly one or even a couple of unprofitable seasons.
So, while Macy's acknowledges the need to make some necessary targetted changes (e.g. introduction of the "hold and flow" approach to the inventory management), they probably have a hard time justifying the increased cost associated with:
a. acquiring more local manufacturers
b. arranging more frequent deliveries across stores
c. maintaining idle capacity
d. delaying decisions for as long as possible
e. retraining the workforce about the new value chain process
What’s the bottom line?
The main takeaway in this brief analysis is that there is no one single solution to a risk-driven business model. Managing uncertainly in matching demand and supply might have more favorable conditions within one business and less favorable within another. So it’s not fair to say that Macy’s and everyone else should blindly copy a fast fashion model that works well for Zara.
Whatever the approach it has to balance the level of risk with the costs of implementing the mitigation technique.
But one idea is clear: managers should be vigilant about risks associated with their current business model and employ strategies like splitting, fast fashion, or resequencing to mitigate them.