While the rest of the industry struggles, this store has created the 'best business model in apparel' - and millennials are flocking to it
That's Zara - which is beloved by young, fashion-forward women.
It's almost like it built itself to operate successfully among today's millennial and teen shoppers that are frugal, value-minded, and demanding quick, speedy, on-trend fashion.The company does so well because it has a phenomenal operating supply chain and manages its inventory well, creating great value for customers and shareholders alike.
It helps set it apart from other fast-fashion retailers like H&M, Forever 21, and the frighteningly cheap Primark."If I had to condense the foundations for Zara's success, I would say it comes down to agility and flexibility," Neil Saunders, CEO of retail consulting firm Conlumino, said in an e-mail to Business Insider in December. "From these things flow a number of advantages: quickly picking up on new fashion trends, accurate forecasting of stock requirements which reduces markdowns, quick turn of stock which keeps customers coming back for new product, good responsiveness to external factors like the weather, and margin maximization."A report Suzy Hansen in The New York Times Magazine revealed how Zara doesn't stock a lot of clothes, and the company updates what's in stores regularly. That benefits the company in two ways: one, it doesn't have to resort to excess sales to rid itself of inventory, and two, it encourages consumers to shop with a sense of urgency - something that consumers don't have when it comes to shopping at a Banana Republic or J. Crew, when they have been conditioned to buy everything on sale.Advertisement
It's incredibly swift at adapting, too, since it operates on a fast-fashion basis. This make Zara immune to sudden changes, like unseasonable weather or a sharp detour in fashion trends.
"This is a significant point of difference to most other apparel retailers which usually commit in advance of each season and have no capability to change volume or introduce new styles mid-season," Saunders wrote. "Zara has always been this way, but in today's market where trends change rapidly and where the weather seems to fluctuate more, this has become a major source of competitive advantage."Zara also seems well suited for today's Instagram and Snapchat-obsessed era; today, consumers have a front seat to the runway and want the styles they see immediately, and at a sweet price point, too. Zara is able to do that thanks to its team that sources style rapidly; this helps hose who operate on that basis.Advertisement
"Unlike fast-fashion retailers, which have buying teams sourcing current trending fashion from third-party vendors, traditional specialty retailers have design teams creating product they believe is going to be trending 12 months out," Goldman Sachs researchers wrote.
Its spurred change in the fashion industry - which is a unique observation, considering how Zara sources trend from the runway."They broke up a century-old biannual cycle of fashion," an analyst told Hansen. "Now, pretty much half of the high-end fashion companies" - Prada and Louis Vuitton, for example - "make four to six collections instead of two each year. That's absolutely because of Zara."Advertisement
Zara also has an internal data center that helps it track but customers want and don't want, which is a huge boon to help it outlast others in the current retail environment.
This business model has proven to be so successful, that Zara's parent company, Inditex, has seen continual spikes in profits.Advertisement
"We believe that Inditex has the best business model in apparel and expect Inditex to deliver double-digit earnings growth per year over the next five years," Bernstein analysts told The Wall Street Journal.The ingenuity of Inditex stems from its founder, Amancio Ortega, who is currently the second-richest man in the world with a net worth of $69.2 billion, according to Wealth-X. That makes him even wealthier than Warren Buffett. Ortega's wealth has led him to lead a life characterized by an air of mystery. He's extraordinarily private - Reuters notes that he very infrequently gives interviews - and despite his massive wealth lives frugally, wearing the same simple outfit each day (blue blazer, white shirt, and gray pants) and eating lunch with employees in the Zara headquarters cafeteria. Advertisement
He's come a long way, though. According to Reuters, he grew up as the son of a man who worked in the railway industry, and at fourteen, he was a delivery boy. His biographer wrote that he sometimes couldn't afford food when he was growing up, and that he dropped out of school when he was a teenager.
His biographer also notes that Ortega didn't even start working on Zara until he was 40 years old. The idea has blossomed into the most successful clothing company in the world in the four decades since.
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