To what extent should other retailers follow Zara s model ? '

By Molly W. - Year 13

In recent years, Zara has adopted a vertical integration approach to manufacturing and production, bringing in house operations that would normally be outsourced to a third party. Other fashion retailers have stuck with a horizontal approach to this aspect of the business. Vertical integration has given Zara a unique selling point within the fashion retail industry, and created a solid and impressive business structure. However, this approach is not a viable option for many other firms.

Zara has successfully implemented the vertical integration technique in order to gain control of their manufacturing process, streamlining production in the process. Through their own high-end technology, and a capital-intensive system, they are able to maintain power over their business, as they are not relying on outside parties, like production factories in Asia. As they are in control of their manufacturing process, they are flexible enough to adapt to market trends. They control their raw materials, production runs, stock flows and are able to produce clothes that are unique, on-trend and often with small production runs. Zara buys raw materials locally, reducing transport and stock costs, and allowing a very quick turnover of products. If a product doesn’t work, they can simply end production and move on to a new design, as the outlay on raw materials is significantly reduced.

Other fashion companies have to predict market trends and place orders for manufacturing months in advance. However, designers for Zara can make up to three or four designs a week: for example, an outfit seen on the first night of Madonna’s concert run in Madrid was ready for sale by the time of the last performance. This is achievable because fifty percent of Zara’s production is manufactured in their home country of Spain, in a region where labour is relatively cheap, so they can cut on costs where other retailers cannot. The cheaper and more generic items, such as T-shirts, are outsourced because they can be made at low cost and are more standard items. By producing 76% of their clothes in Europe, Zara can control the supply chain, distribution to market and adjust to the requirements of individual stores (within a quick 48hour turn around period).

However, whilst Zara has perfected this vertical integration model, it is not something all clothing companies can do. The horizontal integration model is far more common with UK retailers, such as the Arcadia Group and Gap UK. They manufacture in places like Asia, where lighter legislation enables a lower cost of production. They also have more brands within the clothing market. Having different and distinctive brands under one umbrella allows a variety of consumers to be targeted, but reduces the flexibility to switch product ranges and adapt to trends efficiently and effectively. Companies operating in this way don’t have the same control as Zara; they can have lower costs, reducing the purchase price of their products. They also benefit from economies of scale, allowing them to bulk-buy resources at a lower unit cost. An obvious example of this sort of retailer is Primark, where the customer knows the quality is less, but the prices are so much cheaper than Zara that purchasing decisions are taken more easily.

Zara’s success is due to owning factories, targeting a smaller market share and creating quality clothing at higher retail prices. Bigger retail companies would not have the finance in place to build their own factories and control vast product ranges and raw materials whilst maintaining low-cost production, which would not suit their target market. Companies such as Arcadia can spread across the whole marketplace, whereas other brands are more targeted: for example, Topshop leans more towards teenagers, Burton towards men and Dorothy Perkins towards women. They have built market share through many brands, whereas Zara have one, more targeted brand, with efficient supply and customer-targeted market trend control. There is no doubt Zara’s model is unique so, while their supply chain is hugely advantageous, it would be difficult for other retailers to simply adopt.