Zara Continuing to Dominate Fast Fashion
Spanish fashion retailer Zara has become a global phenomenon and household name. The chain has over 2,000 stores across the world and an astonishing $14.5 billion in worldwide sales. In fact, during the early part of this century, the company’s profits grew by more than 20% annually. But how has Zara achieved this amazing success?
Zara concentrates on a “fast fashion” model, which essentially means that the focus is on taking the latest trends from the international catwalk and recreating them in a product that is affordable and accessible to ordinary people. Fashions and what the consumer wants are constantly changing variables, so the key to Zara’s business model is to make the turnaround as quick as possible. The company manages to complete this entire process within 10 to 15 days, using its network of automated factories in Spain along with over 300 finishing shops in locations such as Turkey and North Africa. The automated Spanish factories are continuously creating unfinished so-called “greige goods” (which are essentially unfinished fabrics). Once Zara sees a new trend from the catwalk, these greige goods are quickly shipped to the finishing shops and turned into marketable products. In this way, the company manages to get high-fashion pieces into the shops in time to meet the demand from fashion-conscious customers.
Reducing Markdowns and Increasing Profits
According to Dr. Warren Hausman of Stanford, firms like Zara can increase their profit margins by almost 30% by working on reducing markdowns. Zara is around four times more profitable than most retailers, largely due to quick turnover, high profit margins and taking as few risks as possible with their stock. Zara’s trademark is up-to-the-minute high fashion, and because they know exactly what their customers want and give it to them when they want it, their markdowns are far lower than rivals. Most retailers end up marking down pieces by between 50% and 70% at the end of the season; in Zara’s case, this reduction tends to be around just 15%.
Other retailers can learn a lot from Zara’s business model and its pioneering marketing strategies. The main point that other chains can take on board is the fast fashion model; by giving followers of fashion what they want as quickly as it is possible to translate it from the catwalk, profits are sure to increase. By meeting the consumers’ needs as closely as possible, markdowns will decrease and profit margins will expand.
Zara’s margins could potentially grow even bigger in future if they opt to complete the whole manufacturing process in Asia rather than producing their greige goods in Spain, as the cost per item of goods produced solely in Asia would be far lower. Markdowns are already low, but profits could be even higher if the margin was higher to begin with.