How did Zara Faced its First Loss[Zara Case Study]

Inditex is one of the world's largest fashion retailers with eight brands (Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterqüe) Zara has a total of 2270 stores worldwide in 96 countries.

Zara has reported its first loss since going public 2 decades ago due to coronavirus pandemic, Two months later lockdown has forced Zara to shut down almost 90% stores in every country which has caused a drop in his first-quarter sales.

Zara is already looking into it that how it can surpass its rivals and gain maximum market share in the post lockdown world.  At Inditex, e-commerce rose 50% in the first quarter, The company got 14% of the total revenue from online sources last year. Inditex has plans to invest 3 billion dollars to boost the e-commerce operations of chains like Zara and Bershka to get an edge over rivals as the pandemic has stalled down the operations.

Zara Business Model

Zara is one of the most popular, recognized brands of fast-fashion in the world. one of the reason for the success of Zara is its business model and its supply chain management.

Integral products of Zara business model

  • Men’s and women’s clothing
  • Children’s clothing (Zara Kids)
  • Beauty and Lifestyle Products
  • Accessories

1) Vertical Integration

  • Vertical integration is one of the factors that makes the Zara business model stand out against rivals.
  • Zara ensures speed and responsiveness in deploying new designs for its customers whenever they demand one.
  • This technique encourages Zara to fluidly communicate with different stages of the company this also ensures Zara to create an efficient supply and distribution chain.

2) Logistical trade-offs

  • Zara manufactures maximum of its products in Europe.
  • Based on statistical information Zara generates most of its sales from Europe, approximately 66% of total sales.
  • Manufacturing in Europe is profitable for Zara because it circumnavigates the cost of vertical integration.

3) Control over design and manufacturing

  • Zara ensures that only high-quality clothing is manufactured and high-quality machinery and only skilled workers are used.
  • Zara houses 300 designers who produce 40 000 new designs every year.

4) The rapid product replacement cycle

  • Since Zara manufactures all of its products in Europe it stays ahead of others by rapidly and continuously changing designs according to the changing trends.
  • This cycle encourages customers to purchase clothes periodically as the clothes which are in-trend today may be replaced by some other trend in the future.

5) Lack of advertisement

Advertisements are not one of Zara's strategy to promote their products

  • The only advertisement they rely on is catalogs and logos on their retail bags. this technique helps Zara to stand out from others and maintaining the authenticity, luxury, and uniqueness of the brand.
  • One area that Zara saves a lot is, The lack of advertisements surprisingly this strategy works in a favor of Zara and they can deliver the customer's a price range of products that are much lower than that of luxury brands.

Zara operations management

Zara is known for its vertically integrated supply chain, Zara controls majority of processes such as processes of designing, manufacturing, and distribution of completed products. fashion industry is highly competitive Zara vertical integration, smaller supply chain, and minimum inventory stock allows Zara to stay ahead of others and avoid excessive risk. the product life cycle in fast fashion industry is really short so the product needs to be unique to compete with other brands and build a strong image.

Supply chain management of Zara

Zara's supply chain management has helped Zara become one of the most profitable and recognized brands in the fashion industry.

Zara supply chain management
Zara supply chain management

1) Zara design process

Zara design process keeps it ahead of other trends and fast fashion brands. Zara pays great importance to its design process because that is the user selling point of their brand.

Zara case study
Zara design process

Zara's designers are the core of its business model, In each locality where a store is located, the designers, market specialists, and buyers are located in nearby offices that hold small workshops for experimenting on new designs. Zara houses 300 designers who produce 40 000 new designs every year in which only 10 000 reach the production this allows  the company to bring new items to the store every week.

2) Zara Manufacturing Process

In this fast fashion industry, the trends shift rapidly which makes it harder for the brands to manufacture the products, ship the products to the warehouse, and then to the retail stores. The average production to shelf cycle of new designs in Zara arrives in the store around 15 days compared to competitors that receive new styles of clothing once or twice in a season.

Since the company is vertically integrated it is able to produce its own fabric and it purchases dye from its own subsidiaries. Zara is faster than its direct competitors like GAP which offers more unique products than Zara.

3) Zara Distribution Process

Zara has invested a huge amount in its automated warehouse which is considered as a great investment for the brand, which are close to the production centers and are responsible for packing, storing, and assembling individual orders for their retail network.

The automated warehouses are the reason that Zara can deliver new designs to their stores every two weeks to the fast-changing trends of customers that are mostly young and urban individuals.

4) Zara Retail Process

One thing that makes Zara retails stores different from other fashion stores is that the design stays in the store only for two weeks this encourages the customer to visit store with an expectation that they'll find new designs every twice a week Also, product designs are not repeated and are produced in relatively produced in small quantities.

Zara case study
Zara retail process

Problems faced by Zara

Inditex has been hit hard during the pandemic, with sales down 44% to €3.3bn between 1 February and 30 April, the first quarter of its financial year. The company has reported a net loss of €409m during the first quarter. The net income in the first quarter of 2020  was -€409 million versus net income of €734 million in the first quarter of 2019.

Zara supply chain managemnet
Interim three months of Zara 2020

Due to the restrictions imposed on the operations of stores in most of the market in which we have a presence , the sales decreased rapidly. Quarter of the stores were closed down due to the restrictions. Due to the adaptability of the business model inventory decreased by 10%. The closing inventory is considered to be of high quality.

Zara supply chain management
Zara store sales Q1 2020

The company has decided to close up 1200 stores worldwide, mainly smaller stores in which the closure is expected to be focused on Asia and Europe. The total store count will fall from 7,412 to between 6,700 and 6,900 after the reorganization, which will also include the opening of 450 new shops.

Steps to be implemented by Zara to overcome the current loss

Over the next few years, Inditex will be very active in developing its unique, fully integrated store and online model. Inditex has planned to invest €1billion over 3 years on digital investments and a further €1.7bn in stores to allow them to integrate better with websites for faster deliveries and real-time tracking of products. Zara expects to open the new online studios (64,000 m2 ) at headquarters by the end of 2020.

Expected outcome of the implementation

  • Online sales are expected to reach more than 25% of total sales by 2022.
  • The RFID product traceability system, full inventory integration, and global online development will be completed in all concepts by 2020 as planned.
  • Gross store openings will be around 150 stores per year in the 2020-2022 period. During this period a very significant number of high-quality store enlargements will be carried out.
  • Unique Store and Online platform to provide the strongest customer experience.
  • Capital expenditure €900m annually

Zara's supply chain management has helped Zara become one of the most profitable and recognized brands in the fashion industry. Zara has a design and distribution process that keeps it ahead of other fashion brands.

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About Arbaaz sayed

Content editor at startuptalky