How does Zara escape the price war?

Written by He Zhexin

Edited by Qiao Qian

Today, "fast fashion" is almost a thing that belongs to the past. Zara is the first brand to return to growth after the pandemic, even though it has closed a large number of stores and raised prices for two consecutive years. This is rather astonishing - According to data from Bank of America cited by Reuters, Zara increased its prices by 5% in 2022 and 2% in 2023. In 2023, Zara globally reduced its net store count by 74, and the number of stores in the Chinese mainland has decreased from a peak of 183 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 a low inflation rate," indirectly acknowledging the company's price hike.

In today's consumer environment, raising prices against the trend is risky. In the past year, both H&M and Uniqlo, which are also in the fast fashion industry, have seen their profits affected to varying degrees after raising prices. Especially Uniqlo, which was once known for its quality, is facing the impact of a large 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 exactly has it done right?

A European Local Company

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

As the most populous city in the autonomous province of Galicia in northern Spain, La Coruna has mainly relied on fishing and animal husbandry for most of its history. Many artists and writers have emerged from here, but it is obviously not as glamorous as the Catalonia region. The most famous writer born here, Emilia Pardo Bazán, became famous for her work Los pazos de Ulloa, which focuses on the living difficulties of people in rural Galicia, but she also spent most of her time in the capital Madrid.

In 1975, an underwear merchant named Amancio Ortega opened the first store here to digest orders that were cancelled by customers at the last minute. Ortega named this store Zara.

Today, this store still stands on Arteixo Avenue, just a five-minute walk from the Bazán sculpture. The pure white marble storefront has turned somewhat yellowish, and the furnishings are not particularly outstanding. Residents who pass by in a hurry seem not to care, considering it just 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, photographed by the author

Juan told us that most Inditex 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 five or six thousand of these well-paid outsiders, 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 total exports, and one-fifth of them were textiles, which were produced by Zara's parent company, Inditex.

It seems counterintuitive to talk about "localization" in a company that has successfully promoted the fast fashion model globally, but Inditex is indeed a Europe-centered company.

Nearly all fashion companies do not 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 exception: According to data from the Harvard Business Review, Inditex's self-built production factories have a production capacity of approximately 50%, and most of these factories are located in Europe. The key cutting and design processes are completed by more than a dozen factories located at the headquarters, and only the sewing process is outsourced to suppliers, which ensures Zara's speed in responding to demand.

In many public reports, Zara can complete the design, production, and delivery of a new piece of clothing within two weeks and display it in stores around the world. Such speed is unheard of in the fashion industry, where designers usually take several months to plan the next season's clothing.

In Zara's headquarters in Arteixo, there are nearly twenty large and small factories. More than 3 million pieces of clothing are shipped from here every week. These large quantities of ready-to-wear clothes are labeled before leaving the factory. At the 178 gates on the first floor of the logistics center, trucks are neatly lined up, ready to send these newly produced clothes to major European cities or airports. Within 48 hours, customers can find these new outfits in the stores.

Zara can quickly and limitedly provide a large number of the latest designs, so its profit can be 85% of the retail price, while the industry average is 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 a much larger space for flexible price adjustment than its rivals.

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 price of the same product in the United States and Mexico is at least 60% higher than that in Spain, and the price in the Gulf countries is 71% to 91% higher than that in Spain. The conclusion of this report shows that "Inditex's pricing varies by market, and its elasticity is better than that of H&M".

Elastic pricing comes from an elastic production end: Zara's seasonal items are usually produced in Morocco in North Africa, complexly cut products are usually from Europe, knitwear and accessories are from China, and most mature-style products (such as jeans and T-shirts) are mostly produced in Bangladesh. Such an allocation is certainly related to the focus of the textile industry in different countries, and it also reflects Inditex's management of the product shelf life cycle and cost expectations - the farther the factory is from the market, the longer the sales window of the products it produces should be to spread the higher transportation costs.

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

This is also consistent with Zara's store layout. Zara stores are mostly concentrated in Europe, and the top three countries with the largest number of long-term stores are Spain, France, and Italy. The "produced in Europe, sold in Europe" model may not seem to achieve the so-called maximum benefit, but it can more flexibly capture consumers after changes in the consumption environment - Spain has welcomed a flood of tourists this year. In the first four months of 2024, the consumption of international tourists in Spain increased by 22.6% compared to the previous year. Zara and its sister brands have also become a must-visit place for tourists. Many netizens recommend visiting the ubiquitous Zara in Barcelona under Google reviews, with the reason that "the products sold here are more unique and not available elsewhere".

Zara's Europe-centered production model has another significance in the era of the rise of SHEIN.

More Fashionable

Europe has always concentrated the world's top creative talents. In the past, they dreamed of going to high-fashion houses, turning what they had learned and thought into clothes on graceful models, and showing them to the customers on the catwalk illuminated by spotlights. After all, what could be more fulfilling than having these tasteful and wealthy guests spend generously?

All this began to change after high-fashion houses became corporatized. After becoming multinational enterprises, luxury brands began to impose overly strict requirements on creative talents: Design ability is only a basic requirement. You need to know how to communicate and coordinate, and it would be best if you also had some market acumen and sales talent. The most fatal thing is that creative directors often have to become the "scapegoats" for the brand's poor performance. Once the brand has a controversy, consumers will call for the brand to replace the creative director. In such a high-pressure working environment, the career of the creative director in the high-fashion industry is getting shorter and shorter.

In May last year, the news that Ludovic de Saint Sernin was "laid off" after only doing one season for the Belgian designer brand Ann Demeulemeester shocked the fashion industry. This was already the third resignation of a young creative director within three months of that year. Their tenure was as short as five months and as long as two years at most.

Now, Zara is constantly recruiting these "frustrated" talents. The latest collaboration partner is the former YSL creative director Stefano Pilati. This is the plan of the current group chairman, the youngest daughter of the founder, Marta Ortega Pérez. She said in the 2022 annual report, "We don't want to be fast, nor do we 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 fashion industry heirs, this young successor who has just been in office for two years hopes to stand on the shoulders of her founder father and find a new path.

Zara's collaboration series with Stefano Pilati, photographed by the author

Zara was once known for copying catwalk looks, which is an open secret. It is rumored that Zara spends a lot on infringement lawsuits with luxury brands every year. Now things have become interesting because Zara hopes to establish long-term collaborations (rather than one-time co-brands) with these objects that it once "copied". This model is similar to Uniqlo's evergreen and popular U series. Zara turns these collaborative works into texture blockbusters, and the photographers are all legendary photographers like Steven Meisel. Zara collects these works in the SRPLS series. According to the brand, this is a series of "luxury designs for everyday wear that are also innovative in meaning".

Unlike the one-time co-branding pioneered by H&M, such long-term collaborations place certain requirements on the selling ability of designers, but the ingenuity also lies in this - the complete business strategies of large fashion companies can to a certain extent reduce the negative impact caused by the poor response of a certain collaborative work: Remember the controversial tenure when Kanye West designed clothing for Gap? Or, how many consumers of Adidas T-head shoes still remember the situation where tens of millions of Yeezy shoes were unsalable in the warehouse at that time?

In addition, the huge distribution capabilities of large companies can make the works of designers that could only be appreciated by themselves known to more people. Clare Waight Keller, the former Givenchy creative director who just took up the position of Uniqlo's design director, revealed to the fashion media Business of Fashion that it is an unprecedented experience to have the public wear her works, "Because in the luxury market, this has always been a challenge. Your works are so expensive that you are reaching a smaller market segment."

If the collaboration is successful, this is a win-win business: Fast fashion brands have their own creative designs, designers have found a broader space for development, and the corporate operation can also avoid the risk of failure due to excessive reliance on the personal creativity of a certain designer.

The most important thing is that some extremely fast fashion companies have been repeatedly criticized for quality and environmental protection issues, and their globalization path has been stumbling; at the same time, luxury brands have lost young consumers due to successive price increases. Now, the "affordable design" represented by Zara provides a possibility for those consumers who are still looking for a piece of clothing with acceptable quality and fashionable design. In other words, when quality, creativity, and price match, there will naturally be people willing to pay.

In the past two decades, Zara's success can be attributed to three points: Faster, more fashionable, and more affordable. This formula still holds today, but Zara has found a new reference.