The apparel retailing industry is a highly competitive industry. One major challenge most companies face lies in being able to predict and respond swiftly to changing fashion trends. For the purpose of studying the industry model, Gap Inc. business model will be used.
Gap Inc. Business Model
Gap Inc. is a specialty retailing company which offers clothing, accessories and personal care products for men, women, children and babies under five brand names - Gap, Old Navy, Banana Republic, Piperlime and Athleta. Gap Inc. segments its market by income, with Banana Republic serving the high-end market, Old Navy catering to the lower end market by delivering cheaper apparel and Gap lying in between with apparel of moderate prices. Gap Inc. also segments its market by lifestyle, with Banana Republic serving mainly the working population by selling professional attires, Old Navy catering to the young and families while Athleta serves active women inclined towards sports. The range of diversified brands gives Gap Inc. its competitive advantage as it is able to reach out to more customers through the different value propositions that each brand offers.
Other than offering trendy designs, Gap Inc. also provides value to customers through its strong brand name established worldwide. Gap Inc. has expanded multiple brands internationally and currently owns 3,000 company-operated stores and 200 franchise stores over 40 countries. Other than opening stores, Gap Inc. also has an e-commerce platform Universality which enables consumers to shop online from all five brands conveniently. This service has allowed approximately 90 countries to shop from its website, enabling Gap Inc. to gain access to more customers worldwide. Gap Inc. also uses various platforms to advertise such as media, fashion magazines and catalogues.
To lower production costs, Gap Inc. purchases supplies from more than 1,000 independent vendors over 43 countries and majority of its production are outsourced to China. Outsourcing to low cost overseas vendors has allowed it to price products at lower prices relative to competitors like Zara.
Like most other apparel businesses, Gap Inc. takes a few months from designing to bringing a product to the racks in stores. This is mainly because overseas contract manufacturers require longer lead times. As the process takes a few months, this means that retailers need to be able to predict trends a few months in advance which can be risky. Misjudging the market or failing to keep up to trends timely will adversely affect sales and markdowns will be required to move the excess inventory. Gap Inc. once made a mistake in predicting the wrong trends and it impacted Gap Inc. for nearly a decade.
Zara Business Model
Zara is one of the companies under the Inditex Group, which is one of the world’s largest fashion retailers. Zara offers apparel, footwear and accessories for women, men and children. Its stores can be found in prime locations in more than 400 cities. Zara only operates stores and do not merchandise their products on the internet due to unfavourable sales return rates. Zara’s target market includes young customers who are price-conscious and highly sensitive to the latest fashion trends. Zara does not segment its target market by lifestyle or age thus it has a much broader market. Zara focuses on responding to the latest current fashion trends instead of creating new trends. As a trend chaser, this allows Zara to save costs on product development and design.
Zara offers value to customers by delivering fashionable clothes while they are popular, at a much cheaper price in comparison with designer brands. Zara also produce clothes with short life spans so customers had to buy clothes on the spot or it will be gone by the next visit. As Zara constantly introduced new styles, customers visited the store frequently to check out new styles. A typical Zara customer visits the store 17 times a year compared to the industry average of 3 times per year.
Zara generally avoids mass production although some stock will be replenished. Producing in limited quantities allows Zara to cultivate the exclusivity of its offerings and encouraged customers to buy right away at the original price. This practice also reduces markdowns. A study by consulting firm Bain & Co. estimated that the industry average markdown ratio is approximately 50%, while Zara’s markdown ratio is only approximately 15%.
Unlike most retailers who outsource production to low cost countries such as China, Zara is vertically integrated with majority of its productions carried out across specialized facilities in Spain and Portugal that quickly produced and delivered the required goods. This may be more costly but the proximity of these suppliers it gives a lot more flexibility and speed. Zara uses its own factories to dye and cut cloths and sewing is outsourced to local trusted workshops. To ensure quality control, finished garments are ironed and inspected by Zara before being sent to a distribution centre. This reduces lead times and enables Zara to adapt and respond quickly to the latest trends, reducing dependency on trends forecast.
Disruptive Innovation
A disruptive innovation is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network, displacing an earlier technology.
Zara’s business model could be disruptive to the apparel industry due to its ability to provide “fast fashion”. While its competitors hold goods in inventory for a long period of time, Zara does not have any finished goods inventory as its supply chain allowed products to be produced and delivered to stores quickly. With vertical integration, Zara has control over the whole supply chain from designing, purchasing, producing and distributing to retailing. Zara is able to produce and sell products while they are still in demand instead of relying on marketing to convince customers to buy clothes that has been manufactured. As a result, Zara did not have to spend much on advertising unlike its competitors.
With the aid of technology, Zara can quickly identify fashion trends and assess popularity of items in stores. Commercials can make appropriate manufacturing and replenishment decisions to maximize sales and minimize stock-outs, making it a very efficient order and fulfilment system. With PDAs, store managers worldwide could place orders twice a week, check out new designs and receive information from headquarters. Commercials would collate the orders after the order deadline and make decisions whether to manufacture more or stop placing factory orders. With efficient distribution facilities such as 200 kilometres of underground tracks, merchandise could be moved to its right destination without much human intervention. Stocks were delivered within three days by truck or air from distribution centres. Products did not stay long in a distribution centre as they were produced and delivered according to the orders.
Zara’s decentralized decision making process also enabled it to be more efficient. Zara has several small teams dedicated to a specific section and collection, unlike competitors who mainly had one small elite team in charge of designing. Commercials had great autonomy and could decide what clothes to design and produce, shortening the time taken from design to retail. As a result, Zara only required 3 weeks from designing to putting products on the shelves compared with a several-month industry average. Zara is also able to introduce more items into the market faster than its competitors. Zara introduced 11,000 new items annually compared with an industry average of 2,000 to 4,000.
Rather than concentrating on forecasting accurately, Zara developed its business model to react swiftly to changing trends. Instead of guessing trends, store product managers travelled to worldwide Zara stores and observed what people were wearing and what was selling well, enabling them to transfer garments selling in a less popular area to a popular selling area. This allowed Zara to stay close to its customers and meet their demands swiftly. Store managers worldwide also use PDAs to gather customer opinions about products. Such data is gathered on a daily basis and sent directly to headquarters so that commercials could design styles according to changing taste and preferences. A Point of Sales (POS) system is also present in all Zara stores which allow Zara to monitor what is selling and what is not, allowing for more popular items to appear in the store.
Risk Management
Lead times from design to distribution are typically long in the industry and customer tastes and preferences are extremely difficult to predict. Wrong predictions could result in stock-outs or excess inventory which has undesirable consequences. Excess inventory require subsequent discounts which reduces profit margins while stock-outs result in lost sales. Zara’s business model has helped it to mitigate these risks.
With an efficient supply chain, Zara has shortened its lead times. It is able to follow the latest trends, efficiently producing and selling items while they are popular. It takes up to a year for designer labels to launch a catwalk collection but Zara can sell similar expensive-looking items at an affordable price within weeks of their debut. Zara does not have to predict future trends as they do not create new trends. By focusing on reacting to the latest trends such as what a celebrity is wearing, it reduces the likelihood of wrong predictions.
As Zara only produced and delivered according to the orders they received from store managers, they have very little finished goods inventory in its supply chain. This reduces risk of excess inventory becoming obsolete or risk of stock-outs. This is important as the apparel industry is easily influenced by economic conditions. Consumers are more willing to spend on fashionable apparel when the economy is doing well and they are less willing to spend during a recession. Most apparel retailers had excess inventory from recessions and were forced to discount their apparels because consumers were reluctant to spend on such discretionary items. Such effects of economic conditions have minimal impact on Zara as they only produce according to the demand for their products.
As Zara produces a limited quantity of each style, it also lowers the risk of having excess products that cannot be sold. Lower quantities reduce the likelihood of excess stocks at the end of a season. An image of scarcity also attracts many shoppers to purchase immediately before it is gone. As a result, Zara only discounts 18% of its stock in sales, which is half the industry average. Limited production also allows Zara to reduce risk of making mistakes with collections. Compared with failure rates of product lines in the industry of 10%, failure rates of Zara’s product lines are just 1%.
In conclusion, the retailing success of Zara can be attributed to its excellent supply chain management. The efficiency and speed gave Zara the ability to sell products when they are still in demand, giving people what they desire without incurring much advertising costs. The trust and autonomy given to employees also play a major role for operations to be more efficient.

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