The Zara Playbook - Stitched for Speed

Zara's Three Business Pillars

Dear Reader,

An average store on a Spanish high street expects customers to visit it three times a year, while Zara expects them to walk in seventeen times a year!

And that too, when Zara barely ever advertises. I initially thought I had never seen Zara ads in India, but I found out that they do not advertise much in general. Their social media handles are also merely platforms for updates and not for engagement with audiences.

Zara is one of the most successful fashion brands in the world, if not the most successful.

In today's Side Notes, we try to break down what really ticks for Zara.

By the way, you can listen to Zara’s story here.

Zara’s beginning was a serendipity. Back in the 1970s, Amancio Ortega and his then-wife Rosalia Mera would make gowns and lingerie for other European brands. A wholesaler suddenly cancelled a huge order, and the couple was left with a lot of inventory. They ended up opening a shop near their factory in northwestern Spain to sell their products in 1975. They wanted to name the shop Zorba, but that name was already taken, so they named it Zara.

Zara soon became popular for its ability to mimic popular fashion brands and quickly roll out those designs at cheap prices. Today, Zara has nearly 6000 stores in over 90 countries. H&M, often considered Zara’s closest competitor, has 4000 stores.

In terms of the size of their operations, Zara’s 39 billion euros worth of revenues in 2024 were nearly double that of H&M’s 21 billion euros and nearly 9X the size of Bestseller.

So, what makes Zara stand out from its competitors?

Over the past 50 years, Zara has refined its business model to achieve remarkable success. Three key strategies distinguish the company from its competitors: its vertically integrated value chain, its distinctive sales approach, and its deliberately suboptimal distribution strategy. In today's newsletter, we'll examine each of these strategic elements that drive Zara's competitive advantage.

Controlling Every Step - Zara's Vertical Integration Strategy

Zara controls nearly every step of its value chain, from fabric and dye sourcing through production, distribution, and retail operations. While Benetton is frequently cited as a prime example of vertical integration, it doesn't penetrate as deeply into its value chain as Zara does.

For most businesses, vertical integration doesn't make economic sense. Take mobile phone manufacturers, for example—they don't produce their own camera sensors or chips. Instead, they source these components from specialized suppliers. This approach works because chip manufacturers focus exclusively on their expertise, achieving economies of scale that benefit everyone. The phone maker gets better components at lower costs than if they tried to manufacture everything in-house, while the chip maker can serve multiple customers and optimize their production.

Many businesses outsource production to achieve cost efficiencies. But Zara has kept more than 50% of its production in-house. It produces the more fashionable and riskier designs at its own factories in Spain, Portugal, and Turkey. It outsources standardized items such as basic shirts and t-shirts with more predictable demand to vendors, mostly located in Asia. It keeps its European manufacturing costs low by engaging with the informal economy of mothers and grandmothers.

Having such a thought-out and well-controlled value chain has its benefits:

• Better quality control at every step of production and distribution

• Control over when it can introduce a new collection in a store or withdraw collections that are not working.

• Zara takes all of two to three weeks from designing a new item to bringing it to any store in the world. For most others, this lead time lasts about a few months.

These benefits seem to be translating into better performance for Zara. In terms of operating margins, as of 2024, Zara stood at 19%, H&M at 7%, and Bestseller at 15%. Historically, as well, Zara’s margins have had an edge over its peers.

Zara has mastered not just vertical integration but also sales and marketing, albeit without advertising.

Scarcity Creates Desire - The Psychology Behind Zara's Sales Strategy

Though Zara is vertically integrated, it does not really chase economies of scale. It produces items in small batches. Customers always find new products in Zara’s stores, but in limited supply. Empty shelves are meant to indicate that their goods are in high demand, which is why they keep running out of stock. This whole system adds an aspirational value to Zara as a brand. Being out of stock on one item helps sell another.

This “fast fashion” model thrives on a continuous flow of information across every link in its supply chain - from customers to store managers, from store managers to market specialists and designers, from designers to production staff, and so on.

Zara’s approach closely mirrors Toyota’s Just in Time inventory model. We discussed Just In Time in an earlier Side Notes episode. Zara has adapted it to suit the fashion industry. It produces in limited quantities, so it does not usually have to deal with unsold stocks. Instead, it faces stock-outs, which help create urgency among buyers to buy what is available.

Strategic Inefficiency - Why Zara Chooses Speed Over Cost

Zara deliberately operates below full capacity and often ships half-empty trucks or containers. Idle capacity gives Zara the flexibility to ramp up quickly during peak demand. It is also happy to bear the cost of a full truckload while filling only half of it. Reaching customers on time and introducing fashion trends before peers is critical for Zara.

Allow me to explain how a half truckload helps Zara be on time. Let's say there are two Zara stores in Madrid. One store has placed an order, but that order will only fill half the truck. Zara can wait for the other store to also place the order, and send shipments for both together. That means the first store will have to wait for the second store to place an order. It could face delays. But Zara won't wait for the second store. It will simply send the shipment with just half a truckload.

It also means that if the store places a larger order during peak season, Zara won't reject or delay it because of shipping space limitations.

Such an approach means that Zara cannot always offer the lowest prices, but they are competitive enough. And in return, Zara gains agility that most rivals can only scramble to match. I compared the prices of an average men’s shirt in Zara and H&M in India and the UK. Zara’s average price is higher than that of H&M.

Today, Zara is a conglomerate that houses multiple fashion brands. It reported over 38 billion euros in annual revenues in 2024, which is one of the highest among fashion giants.

Zara has risen to the top of the fashion industry by pursuing speed and control. While so much speed and control come at a cost, it seems to have worked in Zara’s favour. Don’t you think?

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This newsletter has been put together by Vineet Rajani. If you have any feedback for us or something you’d like us to cover in the upcoming newsletters, do let us know. Mail us at varsity@zerodha.com.

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