Reference no: EM133015230

Zara: The challenges of staying on top in global fashion

Zara is a fashion brand that has excelled in winning over consumers to shop at its retail premises around the globe. But retailing is changing rapidly, moving towards online shopping and leaving the bricks-and-mortar shops behind. At least, that has been the experience of many retailers battling against the 'Amazon effect'. Zara has been a success story so far, but its growth in the past has been driven largely by opening more stores. That is now changing, as it grapples with the challenges of online innovations and issues of sustainability. Zara is the creation of Inditex, the fashion empire based in Spain. Since its formation in Galicia in northern Spain in 1975, Zara's founder Amancio Ortega, has revolutionized the business of retail fashion, from design through to production and distribution to its shops. In the process, Zara has shaped consumer expectations about fashion retailing in the world's shopping centres. Where once fashion retailers would off er a new range each autumn and spring, Zara continually renews the offering, at intervals as short as two weeks. When a line is successful, follow-up orders can also be delivered at very short notice, supplanting lines that are not. This constant renewal and responsiveness is at the heart of Zara's business model. While Zara shares this approach with 'fast fashion' retailers, it emphasizes sustainability, in contrast to the approach of retailers who sell clothing very cheaply and encourage a throwaway attitude among consumers.

The expertise that has gone into developing Zara's production and distribution is now being directed towards applying new digital technology to its logistics operations. Its strategy has shifted towards slowing the pace of new store openings, focusing on the larger, high-profile stores and investing more in its online sales. There are now over 2,000 Zara stores worldwide, and if the other Inditex brands, such as Massimo Dutti and Bershka, are taken into account, the company as a whole has over 7,000 stores in 96 markets. It is aiming to sell online in all of its markets.

Far from being part of a declining retail scene in so many town and city centres, Zara has taken pride in its elegant stores, many located in some of the most prestigious shopping streets. The aspirational shopping experience has long been a focus of the company's management, and such an approach was never more important than it is now. The enjoyable experience is, after all, the one area in which the online retailer cannot compete. Neither, of course, can the functional low-cost store that sells on price alone. Primark, for example, is a low-cost retailer with no online presence. Zara, by contrast, seeks to attract the consumer at an aesthetic level, with attractively displayed stock in a pleasant environment. The opening of its new flagship store in Milan in 2018 was indicative of this approach, inviting the shopper to take part in the celebration. Digital innovations in the shops themselves add a new dimension to the experience. One of these is augmented reality (AR), which are interactive experiences that add a whole new dimension for the customer. Zara store managers see firsthand what lines are popular and which are not. They are given considerable scope to take decisions on orders, and they are in frequent contact with the company's headquarters in Spain, where the commercial managers and designers can respond immediately. The responsiveness of the manufacturing process owes much of its efficiency to the fact that Inditex relies heavily on factories in relatively close proximity to its HQ. Over 50% of its products are made in Spain, Portugal, Morocco and Turkey. Morocco and Turkey off er relatively low-cost labour. Labour in these countries is not as cheap as in Asia, but the lower transport costs and speed of fulfilling orders make these closer manufacturing locations advantageous. On the other hand, much manufacturing for the Zara brand does take place in Asia, where much of the world's garment manufacturing is now concentrated. These are low-wage economies where poor working conditions, and safety doubts have come to taint any company involved in fast fashion. Inditex has been involved in Bangladesh, where the collapse of the Rana Plaza factory, in which over a thousand people died, brought to the world's attention the dangerous conditions suffered by garment workers. Inditex has been part of the Accord on fi re and building safety, along with other western companies (see the case study in Chapter 12).

The Inditex approach to global fashion retailing has been highly profitable. Surging sales in emerging markets are now helping to ensure future growth, as its online platform is launching in countries such as India and Turkey. Inditex saw a rise of 41% in online sales in 2017, and online sales now account for 10% of the total (BBC, 2018). Profits were up 7% and revenues reached over €25 billion for the year. Inditex has taken pride in its investment in technology and logistics, and also its sustainability initiatives. It announced in 2019 that all Zara clothes would be made from sustainable fabrics by 2025, with other Inditex brands to follow. Since 2015, it has operated schemes to collect used stock for recycling. Consumers are increasingly concerned over issues of ethics in the entire supply chain, including production, human rights issues and recycling of used clothing. Zara has been among the leaders in its approaches to sustainability.

• What are the aspects of the Inditex business model that have proved crucial to its success?
• In what ways has digitalization affected Zara's business?