Why Might Zara Fail?

One of the main reasons why Zara has become a prominent global apparel company is because of Zara’s founder Amancio Ortega Gaonathe’s idea of implementing vertical integration, a method of combining both distribution and manufacturing, to reduce costs and improve efficiency. Because fashion trends are consistently changing, Zara needed to implement a process that designs, manufactures, and delivers clothing products quickly and effectively. This idea of implementing vertical integration into its fundamental processes has created a competitive advantage for Zara. Although Zara continues to be one of the leading clothing apparel companies in the industry, there are various factors that could contribute to its downfall.

One of the reasons why Zara has increased its revenue since its foundation is because it has successfully globalized its company without having to change its fundamental values. Zara’s philosophy and the appropriate amount of employees to support each of its store locations have allowed Zara to implement its own identity and brand into different regions and markets. However, if Zara were to ever change its growth strategies in contrast to its beliefs upon which the company was founded, Zara would essentially fail. For example, if Zara were to operate from the top down rather than the bottom up, change its organizational structure, change its fashion image, or chooses not to pay attention to changes in the market, then failure would occur.

While Zara has been successful in applying its brand and philosophy across a variety of countries, it has also had issues entering into other markets, such as the Japanese and Chinese markets, because of their traditional methods of business and defined culture. In order for Zara to be successful in these markets it can’t go about “colonizing” the country into adapting Zara’s philosophy. Zara must adapt to the market that exists in that country and eventually ease into introducing its company’s philosophy. Similarly, Zara is having trouble entering the U.S. market because, according to the case, the U.S. is subject to retailing overcapacity, is less fashion-forward than Europe, and demands larger sizes on average.

Another key issue is the problem of location and real estate space. It is very difficult to establish stores in the best sites of the biggest capital cities because the markets are very tight. Because three or four companies in the markets compete for square inches of real estate in the major capitals, new companies have a hard time entering the market. Another threat of failure that lingers Zara is their inability todevelop a strong supply chain in the Americas. Zara’s current strategy in Europe has given them success and ability to grow.

Outside Europe however, Zara lacks the essence of strong internal production and distribution facility, producing in small batches, and delivering in short-lead times in international markets. In addition, changes in foreign currency market can also be a possible threat. Production costs may increase if the Euro becomes stronger against the Dollar, leading to higher costs of apparels to the final consumer.

A last potential threat to Zara’s booming business is its direct competition. H&M, The Gap, and Benetton are all looking at international markets to enhance their growth opportunities. In contrast to Zara’s idea of keeping its brand consistent across countries, H&M’s strategy is to enter one international market at a time and produce clothes based on the specific country’s tastes. Because H&M has similar prices and styles to Zara, H&M and similar international apparel industries pose as a threat to Zara’s future success.