Zara's Business Model

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September 7, 2011 was an epic day for American fast-fashion fans. The Spanish retailer, Zara, owned by parent company Inditex, finally launched its ecommerce site. What on earth took them so long?

When I saw the first announcement of their ecommerce launch I ran home and dug through my undergrad course work and quickly produced a case study I’d read in 2003. “Zara: IT for Fast Fashion” a Harvard Business School case study that examined Zara’s IT infrastructure and how it supported their unique business model.

Two important caveats from this case study stuck out in my mind.

Zara’s business model closely linked customer demand to manufacturing and distribution. Inventory depended largely on the location of the store and what particular customers were buying. They understood that their consumer had a penchant for trend driven pieces, and that marketing and advertising efforts lengthened the lead-time. Thus their marketing budget was usually .3% of revenue, and Zara was able to get high fashion looks in stores while they were still hot. Zara didn’t need to convince their consumers to buy with advertising and marketing efforts, rather they changed 75% of their inventory every three to four weeks, so consumers knew to constantly frequent the store for up to date items. Secondly, Zara had decided not to retail clothes online because of the high rate of returns (retail mail order rates were 50-60% whereas in store was roughly 5%), and because their distribution centers were not configured for small pick and pack orders. If you think about it, Zara’s business model is actually perfect for online retail. Their vertically integrated manufacturing operations allowed for the perpetual introduction of new pieces with short lead times. For the fickle online consumer that wants newness all the time, its heaven! In fact, the top right hand corner of their site pays homage to this brand ethos with a “new this week” link standing out from the pack.

So what...
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