How did Zara escape the price war?

At a time when fast fashion brands are generally facing challenges, Zara has been able to achieve growth despite closing stores and raising prices, thanks to its unique business model and brand strategy.

When price matches quality and creativity, someone will naturally pay for it.

Today, when "fast fashion" has almost become a thing of the past, Zara is the first brand to return to growth after the epidemic. This is based on the closure of a large number of stores and price increases for two consecutive years. This is incredible - according to data from Bank of America cited by Reuters, Zara raised prices by 5% and 2% in 2022 and 2023, respectively.

In 2023, Zara's global stores decreased by 74, and the number of stores in mainland China has shrunk from 183 at its peak to 83.

Zara contributes 70% of Inditex's annual revenue. In the semi-annual report released in September, Inditex CEO Oscar Garcia Maceiras said when talking about price increases, "We have never raised prices in regions with low inflation rates," indirectly acknowledging the fact that the company has raised prices.

In today's consumer environment, it is risky to raise prices against the trend.

Over the past year, the profits of H&M and Uniqlo, both fast fashion brands, have been dragged down to varying degrees after price increases. Uniqlo, which was once known for its quality, is particularly affected by the huge number of "white-label" products in China.

In contrast, Zara has not lost its consumers after the price increase, at least for the time being. What did it do right?

1. A European company

"Living here, you must have one or two friends who work for Zara," Juan, who has run a high-end restaurant in La Coruna for 30 years, told 36Kr. "If not, then you must know one or two suppliers who work for Zara."

As the most populous city in Galicia, an autonomous province in northern Spain, La Coruna has been dominated by fishing and animal husbandry for most of its history. Many artists and writers have come out of it, but it is obviously not as star-studded as the Catalonia region.

The most famous writer born here, Emilia Pardo Bazin, wrote Los pazos de Ulloa, a work about the plight of people in rural Galicia, but she also spent most of her time in the capital, Madrid.

In 1975, an underwear businessman named Amancio Ortega opened the first store here to digest the orders that were temporarily cancelled by customers. Ortega named the store Zara.

Today, the store still stands on Arteixo Avenue, only a five-minute walk from the Bazin sculpture. The pure white marble door has turned yellow, and the furnishings are not special. Residents who pass by in a hurry don't seem to care, just thinking it's an ordinary clothing store. In this small city with a population of less than 250,000, you can see an Inditex brand store almost every 100 meters.

The world's first Zara, photo by the author

Juan told us that most of Inditex's employees choose to live in this city because it is only a 15-minute drive from the company's headquarters in the Arteixo industrial zone. There are about 5,000 to 6,000 of these wealthy foreign residents, who have pushed up housing prices in the city center and brought cultural and commercial vitality.

In 2023, Galicia contributed 7.9% of Spain's exports, one-fifth of which were textiles, which were manufactured by Zara's parent company Inditex.

Talking about "localization" in a company that has successfully promoted the fast fashion model globally seems a bit counterintuitive, but Inditex is indeed a Europe-centric company.

Fashion companies almost never have their own factories. They choose to sign long-term contracts with factories in Asian countries, largely to save costs. But Zara is an absolute outlier: According to data from Harvard Business Weekly, Inditex's self-built production factories have a capacity of about 50%, most of which are located in Europe.

The key cutting and designing steps are completed by more than a dozen factories located at the headquarters, and only the sewing step is outsourced to suppliers, which ensures Zara's speed in responding to demand.

According to many public reports, Zara can design, produce and deliver a new garment within two weeks and display it in stores around the world. This speed is unheard of in the fashion industry, where designers usually spend several months planning the next season's clothing.

At Zara's headquarters in Arteixo, there are nearly twenty factories of various sizes.

More than 3 million pieces of clothing are shipped here every week. These huge quantities of ready-made clothes have been labeled before leaving the factory. At the 178 gates on the first floor of the logistics center, trucks are already waiting in a row to deliver these newly-made clothes to major cities or airports in Europe. Within 48 hours, customers can find these new clothes in the store.

Because Zara can offer large quantities of the latest designs quickly and in limited quantities, its profit can be 85% of the retail price, compared with the industry average of 60% to 70%.

Therefore, Zara's net profit margin on sales is higher than that of its competitors, which also means that when cost pressure comes, Zara has much more room to flexibly adjust prices than its competitors.

RBC analyst Richard Chamberlain revealed in a report that after comparing and analyzing the prices of 40 Zara clothing items, it was found that the prices of the same product in the United States and Mexico were at least 60% higher than in Spain, and the prices in the Gulf countries were 71% to 91% higher than in Spain.

The report concluded that "Inditex's pricing varies by market and is more flexible than H&M's."

Flexible pricing comes from flexible production: Zara's items with strong seasonal attributes are usually produced in Morocco in North Africa, products with complex cuts usually come from Europe, knitted products and accessories come from China, and most mature products (such as jeans and T-shirts) are mostly produced in Bangladesh.

Such distribution is certainly related to the focus of the textile industry in different countries, but it also reflects Inditex's management of product shelf life and cost expectations - the farther the factory is from the market, the longer the sales window of the products it produces should be in order to spread the higher transportation costs.

An article by SCM GLOBE that studies the supply chain of the fashion industry points out that 76% of Inditex's products are produced in Europe, and only 24% are produced in Asia and Africa, a considerable portion of which comes from North African countries such as Egypt and Morocco.

This is consistent with Zara's store layout. Most of Zara's stores are concentrated in Europe, with Spain, France and Italy ranking the top three in terms of store numbers.

Although the "produce in Europe, sell in Europe" model does not seem to achieve the so-called maximization of benefits, it can capture consumers more flexibly after the consumption environment changes. Spain has welcomed an influx of tourists this year. In the first four months of 2024, international tourists' consumption in Spain increased by 22.6% over the previous year.

Zara and its fellow brands have also become popular check-in destinations for tourists. Many netizens have recommended visiting Zara, which can be found everywhere in Barcelona, ​​in Google reviews, with the reason being that "the products sold here are more unique and not available anywhere else."

Zara's Europe-centric production model has another meaning today when SHEIN is rising.

2. More fashionable

Europe has always been home to the world's top creative talents. In the past, they dreamed of working in high-end fashion houses, turning what they had learned into clothes on graceful models, and showing them to customers on the catwalk under the spotlight. After all, what could be more fulfilling than letting these tasteful and wealthy guests spend a lot of money?

All this began to change after high-end fashion houses were corporatized. After becoming multinational companies, luxury brands began to place overly stringent requirements on creative talents: design talent is only a basic requirement, you need to know how to communicate and coordinate, and it would be best if you have some market acumen and sales talent.

The worst part is that creative directors often become scapegoats for poor brand performance. Once a brand is controversial, consumers will call on the brand to change its creative director. In such a high-pressure working environment, the careers of creative directors in the high-end fashion industry are shorter than one another.

Last May, the news that Ludovic de Saint Sernin was “laid off” after only one season for Belgian designer brand Ann Demeulemeester caused an uproar in the fashion industry. This was the third time a young creative director had left within three months of that year. Their shortest tenure was five months and the longest was no more than two years.

At present, Zara is constantly wooing these "frustrated" talents, and the latest partner is former YSL creative director Stefano Pilati. This is exactly the plan of Marta Ortega Pérez, the current chairman of the group and the youngest daughter of the founder.

She said in the 2022 annual report, "We don't want to be fast, we don't want to be big, we want to be flexible and relevant to the present."

In her vision, Zara is no longer fast fashion, but a legitimate designer brand. Like most second-generation people in the fashion industry, this young successor, who has just been in office for two years, hopes to stand on the shoulders of her father, the founder, and blaze a new trail.

Zara and Stefano Pilati's collaboration seriesPhoto by the author

It’s an open secret that Zara used to be famous for copying catwalk styles, and it’s rumored that Zara spends a lot of money on copyright infringement lawsuits against luxury brands every year. Now things are getting interesting, because Zara hopes to establish long-term cooperation (rather than a one-time collaboration) with those it once “copied”, similar to the long-standing reputation of Uniqlo’s U series.

Zara has photographed these collaborations into high-quality photos, with legendary photographers such as Steven Meisel taking the photos, and has included these works in the SRPLS series. According to the brand, this is a series of "luxury designs for daily wear, with innovative implications".

Unlike the one-time collaboration pioneered by H&M, this long-term collaboration places certain demands on the designer’s ability to sell products, but this is also where the cleverness lies.

The well-developed business strategies of large fashion companies have reduced the negative impact of a poorly received collaboration to a certain extent: remember Kanye West's controversial tenure as a designer for Gap? Or, how many consumers of Adidas T-toe shoes today still miss the tens of millions of Yeezy shoes that were unsold in warehouses at the time?

In addition, the huge distribution power of large companies can make the works of designers that were once only admired by themselves known to more people.

Clare Waight Keller, the former Givenchy creative director who just took up the position of design director of Uniqlo, revealed to the fashion media Business of Fashion that it is an unprecedented experience to let the public wear her works, "because in the luxury market, this has always been a challenge. Your works are so expensive, so you are exposed to a smaller market segment."

If the cooperation is done properly, this is a win-win business: fast fashion brands have independent creative designs, designers find a broader space for development, and corporate operations can also avoid the risk of failure caused by over-reliance on the personal creativity of a certain designer.

Most importantly, fast fashion brands like SHEIN have been repeatedly criticized for quality and environmental issues, and their road to globalization has been bumpy; at the same time, luxury brands have lost young consumers due to successive price increases.

Today, the "affordable design" represented by Zara provides a possibility for consumers who are still looking for a piece of clothing with decent quality and fashionable design. In other words, when quality, creativity and price match, someone will naturally pay for it.

Over the past two decades, Zara has been successful for three reasons: faster, more fashionable, and more affordable. Today, this formula still holds true, but Zara has found a new reference.

Author | He Zhexin Editor | Qiao Qian This article is written by the operation author [Future Consumption], WeChat public account: [36氪Future Consumption], original/authorized to be published in the operation party, and reproduction is prohibited without permission.

The title image is from Unsplash, based on the CC0 protocol.