Innovation Management - Zara

Zara: A Spanish clothing chain's recipe of centralisation and integration

Key points:

„X Zara is the world's fastest-growing retailer

„X At the heart of the company's success is a vertically integrated business model that spans design, just-in-time production, marketing and sales, giving it more flexibility than its rivals to respond to changeable fashion trends

„X Unlike other international clothing chains, Zara makes more than half of its clothes in-house, rather than relying on a network of slow-moving and disparate suppliers

„X Zara can make a new line from start to finish in three weeks, against an industry average of nine months

A mixture of vertical integration and street smarts has transformed a small Spanish clothing chain into a global success, reports The Economist

Most fashion retailers discreetly tuck their price tags inside their garments. Not Zara. Its sales tickets are big and colourful, emblazoned with the flags of a dozen countries, each accompanied by a local-currency price that is the same for that item around the world, from Madrid to Riyadh to Tokyo.

In an industry traditionally geared to local tastes, this United Nations approach exemplifies the centralisation and integration that have turned Zara into the world's fastest-growing retailer. Over the past five years, the number of its stores has risen from 180, mainly in Spain, to 450 in 30 countries. Revenues have grown by an average of 27% a year since 1998.

Founded in 1963 as a maker of ladies' lingerie in the Galician town of La Coruna, Zara today is the centrepiece of Inditex, a holding company for five fashion chains that is planning an initial public offering on the Madrid bourse on May 23rd. The flotation is expected to value Inditex at as much as euro9.3bn ($8.2bn) and cement the standing of its reclusive 65-year-old chairman and majority shareholder, Amancio Ortega Gaona, as Spain's richest man. Mr Ortega started the business with just Pta5,000 ($83).

At the heart of Zara's success is a vertically integrated business model spanning design, just-in-time production, marketing and sales. This gives the group more flexibility than its rivals have to respond to fickle fashion trends. Unlike other international clothing chains, such as Hennes & Mauritz (H&M) and Gap, Zara makes more than half of its clothes in- house, rather than relying on a network of disparate and often slow-moving suppliers. H&M, for instance, buys clothes from more than 900 firms. "Vertical integration has gone out of fashion in the consumer economy," says Richard Hyman of Verdict, a retail consultancy in London. "Zara is a spectacular exception to the rule."

Starting with basic fabric dyeing, almost all Zara's clothes take shape in a design-and-manufacturing centre in La Coruna, with most of the sewing done by seamstresses from 400 local co-operatives. Designers talk daily to store managers, to discover which items are most in demand. Supported by real-time sales data, they then feed repeat orders and fresh designs into the manufacturing plant. This, in turn, ships the desired items directly to the stores twice a week, eliminating the need for warehouses and keeping inventories low (see chart).

The result is that Zara can make a new line from start to finish in three weeks, against an industry average of nine months. It produces 10,000 new designs each year; none stays in the stores for over a month. Jose Maria Castellano Rios, the firm's chief executive, who rather prosaically compares the shelf life of a new frock to that of a tub of yoghurt, says constant refreshment of the store offering creates a sense of excitement that attracts new shoppers and ensures that old ones return.

Moreover, Zara's business model makes it highly price-competitive, allowing it to offer mid-market chic at downmarket prices. And it protects against slip-ups, too. Whereas most retailers have committed 60% of their production at the start of a season, the figure at Zara is 15%, so it is easier to dump a range that turns out to be unpopular--and Mr Castellano admits that Zara, like everybody else, makes mistakes.

It tries to minimise them, however, by pushing its designers on to aeroplanes to search out new trends. Constant travel, catwalk shows and even music videos help to bring new ideas--a look seen on MTV can be in the stores within a month.

This is underlined by Zara's expansion plans. At a bad time for many international retailers--Marks and Spencer is retrenching overseas, while both Gap and H&M have issued profit warnings--Inditex plans to open 150-200 new shops