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Zara Franchise Model

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Business Studies

Zara belongs to Inditex, one of the largest and most successful clothing manufacturers in the world. The company was founded in 1975 in Arteixo, Spain by Amancio Ortega and Rosalia Mera. Despite a controversial business model that revolves around fast fashion - the production of low-priced but stylish clothes to meet the latest trends - Zara is acclaimed for its highly responsive supply chain and franchise model. These will be the focus of our case study.

About Zara

Zara is one of the world's most popular fashion brands. It is the third-largest business in the garment industry, with headquarters in Spain. The company has more than 2200 stores and franchises in 88 countries.

Zara's first store opened in Spain in 1975. By 2015, Zara was ranked the 30th most valuable fashion brand in the world.

Beauty, clarity, functionality, and sustainability are Zara's guiding principles.

Zara offers a variety of clothing items and accessories for men and women. However, its target market is women between the ages of 24 and 35. Most Zara stores are found in city centres because of the high concentration of women in this age range. Some of its bestselling items include shirts, jackets, trousers, and accessories. The Zara clothing line generates a huge portion of the company's revenue.

The Inditex group, which controls the Zara brand, also owns other well-known clothing companies, like Bershka and Stradivarius, among others.

Zara's business model

Zara is often described as a supply chain icon since its success mainly comes from the highly efficient supply chain that continuously boosts sales, profits, the number of stores opened and its customer base. In this section, we will discuss Zara's business model and focus on inventory and supply chain management.

A lean supply chain

A lean supply chain is a supply chain that supplies goods or services to the customer in the most efficient and flexible manner possible.

Zara's supply chain is undoubtedly one of the leanest and most agile supply chains in the world. However, its model is often criticised due to its focus on the mass production of quick, cheap, and disposable garments.

Typically, Zara's agents will be looking for new trends in fashion at events. They then send design sketches to the company's fashion designers, who create new items quickly. The company's fashion designers can create new items and modify existing ones in 4 to 6 weeks.

Zara has an impressive inventory turnover rate, at 12 times per year. To avoid stock-out, stores have to place orders twice per week. The shorter inventory cycle also allows the company to make a more accurate forecasts about the order quantity compared to competitors who only replenish their inventory a few times per year.

Inventory turnover is the number of times a company has to replenish its inventory over a period of time.

This process helps Zara keep track of its orders, which saves time and helps them get better fashion forecasts.

Another advantage of the short lead time is inventory cost reduction. At 10% of its inventory, Zara has the lowest level of unsold inventory in the industry. This means fewer expenses for holding inventory or discarding unsold items at the end of the season.

Zara's core supply chain is its massive distribution centre, The Cube.

The Cube is a highly automated building ranging over 467,000 square meters. Tunnels run under the buildings, which are equipped with high-speed monorails (about 200 kilometres or 124 miles of rails). These rails help move the fabrics from the factories to The Cube. The Cube is located near 11 Zara-owned clothing factories.

The raw materials used to make clothes pass through the cube on their way to the factories. The finished products are then transported to the company's stores worldwide.

Zara’s success is largely due to effective sourcing. This allows them to quickly identify and implement their own solutions to the latest trends.

Vertical integration

Vertical integration refers to the acquisition of a business within the same industry but at a different stage of the supply chain.

Zara has a high level of vertical integration. It controls all production processes, from clothing design to manufacturing, warehousing, logistics and transportation.

The company adopts nearshoring, a method of outsourcing operations to a nearby country or region - for production. Then, from a central distribution centre, small-batch deliveries are distributed to Zara stores.

With full control over the supply chain, Zara can ensure products arrive on time. The system also allows the brand to plan and manage tasks, increasing employee efficiency and business profitability. The highly vertical-integrated model fits well with Zara's reputation as a trend adopter - replicating a fashion trend and launching a new design in the store every few weeks.

Zara franchising strategy

Zara entered the international market with three types of ventures: franchises, joint ventures, and subsidiaries.

The most common entry form is a subsidiary - a foreign entity that is 100% owned by the parent company. This strategy is adopted for most European and South American markets, where the perceived risks are low. Risks, in this case, refer to significant loss of cost and time, complicated legal requirements, as well as regulations regarding human resources, payrolls and taxes.

The second entry form is joint ventures where two or more companies agree to join resources to run a successful business. This strategy is chosen by Zara for large and competitive markets.

In India, Zara joined forces with the Indian conglomerate Tata group to form Trent Retail India Private Ltd. The company manages 21 Zara stores in 11 cities.

Finally, through franchising.

A franchise is a type of license that allows a party to have access to a company's proprietary knowledge, processes, and trademarks. Usually, the franchisee pays the franchisor, the initial start-up and licensing fees.

To revise the differences between a franchisor and a franchisee, check out our explanation on Franchising.

It took Zara 13 years to establish its international and franchise presence. They started with a cautious expansion period, which allowed them to test their business model and gain valuable experience before entering new markets.

The first phase of Zara's international expansion was carried out from 1988 to 1996. It opened stores in nearby (ie. European) markets such as France, Portugal, Cyprus, and Malta. During the period, Zara also managed to add one to two new stores each year. Towards 1998, Zara was located in ten foreign markets.

However, the company's aggressive expansion strategy was eventually successful. Nowadays, Zara is the 41st most valuable brand in the world.

Zara's franchise expansion

After launching its first store in 1975, the franchise expanded its operations to Portugal and other nearby countries in the next couple of years. It also opened stores in Belgium, Spain, Finland, and Greece in 1993.

In 2002, Zara opened its first store in Singapore, and in 2003, it entered the Malaysian market. Nearly a decade later, Zara expanded to eCommerce with online stores for customers in the US, Canada, Russia, and Mexico.

Zara's franchise fees vary from country to country, but the average franchise fee is around £25,000. However, there are also additional fees including:

  • Equipment, furniture and fixtures: £40,000

  • Royalty fee: 5-10%

  • Advertising fee: 3% of total revenue

That's a total initial investment of at least £65,000. Also, an agreement has to be made with Zara before opening a franchise store.

The Zara franchise allows franchisees to have complete access to its corporate administration, HR, and coordination. A Zara franchise also gives its owners the opportunity to return up to 10% of their stock purchases. The advertising expense of the franchise is typically around 0.3% of your aggregate revenue.

The cost of the franchise is the first thing that should be considered when starting a Zara franchise. The other factors that should be considered include the country where the franchise is located and the predicted profitability of the business in that market.

Zara's Franchise Model - Key takeaways

  • Zara is one of the world's most popular brands.

  • It is the third large largest player in the clothing industry with headquarters in Spain.

  • Zara is often described as a supply chain icon with a highly efficient supply chain and level of vertical integration.

  • Zara expands to foreign markets through subsidiaries, franchising, and joint ventures.
  • It took Zara 13 years to establish its international and franchise presence due to cautious planning and continuous testing of its model.
  • Nowadays, Zara has a presence in 88 countries around the world with 2200 stores.
  • Zara gives its franchisees complete access to its corporate administration, HR, and coordination as well as providing them with an opportunity to repurchase stock.

Sources:

1. Zara, Business of Fashion, 2022.

2. Zara, Interbrand, 2016.

3. ZARA United States | New Collection Online, Zara, 2019.

4. M. Hugos, Zara Clothing Company Supply Chain, SCM Globe, 2020.

5. Hitesh Bhasin, Business Model of Zara – How does Zara make money, Marketing91, 2021.

6. Nitant Narang, Fashion Disrupted: The Definitive Guide To Zara’s Global Supply Chain, Procurify Blog, 2016.

7. How Vertical Integration Helps Fashion Leaders Grow, Retailisation, n.d.

8. Nina Leidifer, Internationalization Strategy of Fashion Retailer ZARA, Grin, 2017.

9. Robert Stockdill, Zara joint venture records loss in India, Inside Retail, 2021.

10. The World's Most Valuable Brands, Forbes, 2022.

11. Zara Franchise: Startup Cost, Profit & Opportunities, StartupBack, 2019.

Zara Franchise Model

Zara achieves its competitive advantage by offering customers trendy clothes at low prices. The brand's designers create thousands of unique products each year. 

Zara is able to continuously improve its product offerings by acquiring new designs. On average Zara changes its clothes designs every two weeks, while its competitors do it every three months. 

The Zara Business Model is built on the vertical integration of design, manufacture, shipment, distribution, and logistics. Through this strategy, the company can control its entire supply chain.

Yes, Zara offers the rights to individuals who want to own a franchise. 

Final Zara Franchise Model Quiz

Question

Why is Zara described as a supply chain icon? 

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Answer

Because it has a highly efficient supply chain that continuously boosts sales, profits, and the customer base. 

Show question

Question

What is a lean supply chain? 

Show answer

Answer

A lean supply chain is a supply chain that supplies goods or services to the customer in the most efficient and flexible manner with the least waste produced. 

Show question

Question

What is inventory turnover? 

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Answer

Inventory turnover is the number of a company has to replenish its inventory over a period of time. 

Show question

Question

What are the strengths of Zara's business model? 

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Answer

  • A lean supply chain
  • High level of vertical integration 

Show question

Question

What is vertical integration? 

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Answer

Vertical integration refers to the acquisition of a business within the same industry but at a different stage of the supply chain. 

Show question

Question

Does Zara have a high or low level of vertical integration? 

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Answer

High - Zara controls all its production processes from clothing design to manufacturing, warehousing, logistics and transportation. 

Show question

Question

How does it benefit Zara to be vertically integrated? 

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Answer

Vertical integration provides Zara with a lot of control over the supply chain. This ensures the end products arrive at stores on time with the least damage. 

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Question

How does Zara enter a new market? 

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Answer

Setting up a subsidiary

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Question

Which kind of market does Zara choose to set up a subsidiary in? 

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Answer

Markets with low risks related to costs, legality, regulations, taxes, human resource, etc. 

E.g. Most European markets and South America. 

Show question

Question

What is a franchise? 

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Answer

A franchise is a type of license that allows a party to have access to a company's proprietary knowledge, processes, and trademarks. 

Show question

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What is a franchise fee? 

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Answer

The fee that franchisees pay the franchisors to sell products under their brand name. 

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Question

What does Zara's franchise fee include? 

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Answer

  • Equipment, furniture, fixtures
  • Royalty fee
  • Advertising fee

Show question

Question

What are the benefits of becoming a Zara franchisee? 

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Answer

Complete access to Zara's corporate administration, HR, and coordination.

Show question

Question

What factors should be considered before becoming a Zara franchisee? 

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Answer

Costs

Show question

Question

Who are Zara's main target group? 

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Answer

women between 24 and 35

Show question

Question

Which business sector does Zara operate in? 

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Answer

Fashion retailing - the company sells clothing items and accessories for men and women. 

Show question

Question

What is the most common market entry form by Zara? 

Show answer

Answer

Setting up a subsidiary

Show question

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