Zara's Big Idea: What the World's Top Fashion Retailer Tells Us About Innovation

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Zara didn't have to invent a brand new product to become the world's biggest fashion retailer. It just had to invent a new process. And process innovation is dominating the global economy.

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Reuters

There are three steps to being a successful fashion company. Step one: Make clothes that people want to wear. Step two: Sell enough clothes for more than you made them. Step three: Do it again, and again, and again.

Easy enough to list. But each step is fraught with its own difficulties. First, style is fickle and fleeting. For example, the naked abs and lightly perfumed stores that once sold millions Abercrombie & Fitch shirts are now gauche reminders of last decade's trends (the stock is down 60% from its 2008 high). Second, distinguishing yourself is expensive. Savvy designers and memorable advertising cost a lot of money. Both are essential if you want to stand out in a crowded global marketplace for clothes, where you're dong battle with department stores, legacy brands, online upstarts, and boutiques.

Zara, the world's largest fashion retailer, has an innovative solution to both the style problem and the marketing problem, as Suzy Hansen explained in the New York Times magazine this weekend. Rather than hire world-class designers, Zara, which is based in Spain, politely copies them. Then it relies on a global network of shopper-feedback to tweak their designs. Corporate HQ absorbs thousands of comments and sends tweaks to their manufacturers in Europe and Northern Africa, who literally sew the feedback into their next line of clothes. The clothes are shipped back, and the stock changes so quickly that shoppers are motivated with a "now-or-never" choice each time they try on a blouse that won't be in-store in a few weeks. It's the user-generated approach to fast fashion.

That's the design challenge. How about advertising? Basically, Zara doesn't do it. There is no ad budget. Instead, the company spends ungodly amounts of money buying storefronts next to luxury brands to own the label of affordable luxury:

"The high street is really divided according to brand value," says [Masoud Golsorkhi, the editor of Tank, a London magazine about culture and fashion], who is also a consultant for fashion brands. "Prada wants to be next to Gucci, Gucci wants to be next to Prada. The retail strategy for luxury brands is to try to keep as far away from the likes of Zara. Zara's strategy is to get as close to them as possible."...

Zara stores cozy up to the most famous brands in the world to sing their luxury ambitions even as they profit off a brilliant, cheap, short supply chain that delivers similar fashion at a much lower price.

Supply chains sounds boring. But they're the secret to Zara's success. Rather than ship skirts and dresses from Chinese plants where they arrive in-store after the style has peaked, Inditex (the parent company) makes the bulk of its clothes in Spain and Morocco. A hemline suggestion goes from a customer's lips to a sales rack at record speed. The company, now the largest fashion retailer on earth, has grown overall sales by about 50% in five years to $17.5 billion. Its employees have gone from 80,000 to 110,000 in that time, despite being headquartered in a depressed Spanish economy, and selling predominantly to a very sick European continent.

ELEMENTS OF STYLE

The Zara Model is successful, global, and enviable. But one wonders: Is it really innovation?

Two weeks ago, Clayton Christensen, the man who coined the "Innovator's Dilemma", described three forms of innovation. First, "empowering" innovations create jobs by selling elite products to the masses. Much of the manufacturing revolution that put cars and toasters in every household falls under this category. Second, "sustaining" innovations replace old products with new models (i.e.: Ford phases out the Taurus and builds better cars each year) and have a basically neutral effect on overall employment. Third, "efficiency" innovations reduce the cost of products and services and can eliminate more jobs than they create.

Which kind of innovator is Zara? It's creating jobs by bringing elite fashion to the masses, which sounds empowering. It's competing with other global fast-fashion corporations, like H&M, for a sliver of your apparel budget, which sounds sustaining. And it's cannily reducing the cost of making high-fashion clothes, which is purely efficient.

But Zara's most important contribution isn't a new product. It's a new process: fast fashion, directed by customers, and enabled by a short manufacturing leash. Process innovation is the story of modern retail -- especially here in the U.S. Amazon showed us you can shop with a mouse, deleting thousands of storefronts in the process. Groupon and LivingSocial moved the coupon business to our inbox, arguably helping merchants clean out their slowest inventory. And then there's Walmart, the largest employer in the United States, which used supply chain management to push down prices, forcing local businesses to follow, and increasing productivity throughout the retail business.

The outcome of process innovation in the retail sector has been clear in America: Lower prices, less waste, and fewer workers. Retail employment grew alongside population for most of the 20th century. In the 1990s, it stopped. Here's a graph of total retail employment in the United States compared to professional business services and the health/education super-sector. This isn't the end of retail. But it is something like the end of retail employment growth.

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Zara and other process innovators are welcome for cash-strapped customers and they're a good story for Spain and other countries in its global family that have seen 40,000 jobs created as a result of Inditex' genius. The question isn't whether Zara's strategy is innovative. It is. The question is what is their innovation costing us?

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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