Zara: Fast Fashion Case Analysis

In 1975, a Spanish entrepreneur first opened Zara as a retail store in La Coruña, Spain. He then created the corporate group, Inditex. Inditex had become one of the world’s largest specialty retailers; it had six different chains, through which Inditex designed, manufactured, and sold apparel, footwear, and accessories for women, men, and kids around the world. Stability distinguished Inditex from other apparel retails. Although Inditex had become a public company with increasing stock price and high margins, Inditex always aimed to become a very sustainable company rather than most profitable one in the world. Zara was the largest and most internationalized chain for Inditex. Its headquarter was located in Arteixo, Spain. Zara was well known for its success in creating “fast-fashion” by selling fashion items at affordable prices and responding the market trend very quickly. Its business system and international expansion had become Inditex’s proudest decision. Inditex became increasingly international after 2001.

It announced that Zara’s strategy in international expansion was the main reason for the group’s sales growing globally. Zara was no doubt the cash cow and key business for Inditex. However, Zara itself faced some difficulties when expanding internationally. The differences in cultures and regulations made the expansion much riskier. After its failure in Italy in 1998, and competitors’ failures in U.S. market, Zara and Inditex had to be more concerned and careful about entering into a foreign new market. Moreover, top management in Inditex started to think about further plans for the group. Managing six different chains, they planned to develop other chains (or new chains) into a star business as successful as Zara. This report will focus on solving Zara’s international expansion issue, as Zara was so far the largest business for Inditex, and its issue was relatively urgent. After Zara establishing a sustainable and more successful long-term international business, Inditex’s other chains could learn from its experiences. Inditex would be more capable and confident in managing and developing other chains into another large and international model like Zara.

ISSUE STATEMENT
Inditex had to allow Zara to expand and develop primarily, in order to grow into a stable and large organization rather than only focusing on home business (focusing in Spain). But International expansion was very expensive, and not that easy as different countries had different regulations, cultures, market demand and preferences. Large apparel firms like Zara, H&M and Benetton had met difficulties attempting to enter foreign markets. Meanwhile, Zara had almost covered the whole market in Spain; in order to grow, it demanded larger market outside the home country. Thus, the issue statement discussed in this report is the future geographic focus for Zara: Which foreign market should Zara focus in its international expansion, and what are the strategies to enter the market?

SITUATION ANALYSIS
Zara’s Business System
Zara was the largest and most internationalized of Inditex’s chains, which are six independently operated chains and was responsible for their own strategy (Zara, 8). In 2001, Zara generated 85% of Inditex’s earnings and 76% of total sales. It generally targeted medium and high-income level and fashion sensitive consumers; while the income level of target market may be different in different countries. It was the leader in the fast fashion industry. The business system distinguished Zara from other retailers, and enabled it to have a quick response to the market and fashion trend.

Zara’s success came from its highly vertical integration strategy. It owned different levels of supply chain, from design, sourcing and manufacturing, distribution and retail. This strategy allowed Zara to better control the performance and quality of product, be highly efficient in delivering consumers’ preferred product to the market. Zara’s goal was to create a sense of scarcity, and to offer consumers fashionable product with reasonable quality and affordable price. The vertical integration strategy contributed to this goal by shortening the cycle time from design to retail to four weeks (over 6 months for the traditional industry), reducing the working capital intensity, and reducing the inventory pressure.

Design Zara had three product lines: women, men and children. All of them had their own creative designers, sourcing and product development specialists. Several dozens items were designed each day, but only 1/3 of them would actually go into production (Zara, 10). Zara designed almost all products in-house. The designers cooperated well with store managers, and used an advanced technology system to track the data to analyze the market trend.

Sourcing & Manufacturing Zara had purchasing offices in Barcelona and Hong Kong to help it source fabric, other inputs, and finished products from external suppliers. It bought undyed fabric in order to adjust with the most recent updating in fashion trend. Zara outsourced the production of basic item (price sensitive but time insensitive), and produced the fashionable item (40% of products) in-house for better control and quality. Large amount of outsourced goods were from Europe, so that Zara saved time in transportation process. Only 20% of finished garments were manufactured in Asia, while H&M outsourced nearly all of the products to Asia.

Distribution Majority of Zara’s sewn garments were produced in small workshops and sent to Zara’s centralized distribution. It was located in Arteixo. Zara only allowed most of the products to stay there for a few hours. Third-party delivery services shipped the items twice a week to stores over the world, mostly by truck. Only 25% was shipped by air because it was expensive.

Retailing The price of Zara’s products was relatively low, and Zara located its stores in prime areas of different cities. Zara saved costs by investing little money in advertising and by efficient, vertically integrated supply chain. Zara maintained a competitive price in every market. Although prices in different countries varied due to transportation cost, tax and exchange rate, the advertisement promotion strategy was generally maintained in every country. Store managers played a significant role. Zara offered them large power to manage the store like their own business, and also offered high compensation and bonus as incentives. They provided critical data and feedback to designers and contributed to the design process; they were responsible for the selecting and training in-store personnel; they also made decisions on ordering and store operations.

International Expansion After 2001, Zara had 282 stores in 32 foreign countries, it had most foreign stores in Europe and only 5 in Asia (Japan). Zara owned the stores in less risky and large market, but the costs would be higher. Zara used franchising to enter small, risky markets with cultural differences and regulation barriers. Zara used joint venture when the market was large and important but with barriers. SWOT Analysis of Zara’s Business

Strength The fast fashion concept, quick response and sense of scarcity were attractive to the consumers. The price was relatively low and competitive. The business cycle time was short from design to retail. Inventory was controlled low. The designers were creative. The strong centralized distribution system and vertical integration were distinctive feature of Zara’s business and made it hard for other brands to copy.

Weakness Promotion was weak compared to H&M, due to little advertising investment. Production or outsourced costs were relatively high, as H&M outsourced mostly to Asia while Zara focus more on Europe manufactures with higher costs. Since there was only one distribution center, there might be diseconomies of scale if Zara developed more stores. The only distribution center may not have enough capacity to handle too much stores around the world. It would also be risky to handle all items in one center. The goal of low inventory sometimes could not satisfy the demand. The joint venture agreement with foreign partners was sometimes complex in responsibilities, and there were risks that Zara had to buy out the partner’s interest. Also, under international expansion, store managers would be hired from different countries and may not understand Zara’s concept well. Thus they may not operate Zara’s business in an efficient and standardized way.

Opportunity The potential market was very large because apparel industry was needed in every country. The Internet was increasingly popular since 2000 and might be a new chance to promote brand or to reach customers.

Threats Competitions was all around the world. There was direct competition with local firms. And many of the large apparel retailers were considering entering into international expansion. The product design was easy to copy. There would be social, cultural, political, economic and regulation differences if entering into foreign new market. ALTERNATIVES ANALYSIS

1. Fully focus on European market
2. Expand aggressively into North American and Asian market
3. Expand globally, specifically, cover European market in a more aggressive way than other places in short run, then in long term open more stores in North America and Asia. Alternative 1: Fully Focus On European Market

Pros The European market was lucrative. Zara had most of its foreign stores in Europe so far, thus it would had more experiences. The home country and distribution center were both in Europe, which would save more time and made the business easier to control. There would be less cultural differences. The consumers’ preference into fashion was more similar within Europe than other countries oversea. The major potential market could be Greece, Sweden and Italy. Italy was the largest single apparel market in Europe, its consumers visited apparel stores more frequently and they were more fashion conscious (Zara, 19). Zara’s distribution center and current distribution system allowed it to operate well in Europe, as most of the shipping would be using truck (inexpensive), and most of Zara’s manufacturers were in Europe.

Cons Some of the markets like Italian market were difficult to enter alone due to the regulation barriers. Zara failed for the fist attempt entering Italy in 1998. The barrier required Zara to enter with joint venture agreement with a large local partner, which may also be Zara’s competitor. Europe was relatively small compared to Asia and America. Since Zara had opened its foreign stores in around 20 cities in Europe after 2002, the potential market that could be further explored in Europe was even smaller. Major competitors like H&M, Benetton were all European companies. Alternative 2: Expand Aggressively into North American and Asian market

Pros These two markets had larger population, and were relatively prosperous compared to South America or Africa; hence the sales could be high. They had less apparel cultural differences compared to the Middle East.

Cons Costs would be high especially in terms of marketing, research and transportation. Zara had very limit experiences in certain larger cities in these markets (e.g. had only entered Japan for Asian market) and did not know those markets and consumers well. The designs were the same for all stores, but consumers’ preferences would be different (e.g. North American people were less fashion forward; Asian consumers may dislike the European style). With only one centralized distribution center it would be time consuming and costly, if items were manufactured in Asia (items would be sent to Europe first and then sent back to Asia).

Size requirements were different (the U.S. consumers requires larger sizes while Asian consumers preferred smaller sizes), so there would be difficulties to standardize and control the product quality. U.S. market was fragmented, retailing overcapacity and full of local competitors. Outside Europe, Zara didn’t have strong in-house production and distribution facilities to ensure the low cost and timing. As Zara cared the time for items reaching the market, it had to increase the usage of air shipping which was much more expensive. Also, longer time for reaching the stores would make it ineffective to response to consumers’ need and taste. The Foreign exchange risks could be also a threat. Alternative 3: Expand Globally.

In the short run, Zara should aggressively enter the European market. Since the European market was closer, more familiar and less risky compared to other large markets, Zara should take full advantage of it. Meanwhile, Zara should keep a look on North American and Asian market and open a few flagship stores in their prime cities. In the long run, Zara should enter more aggressively into these two large markets by opening more stores.

Pros: It would combine the advantages of the first two alternatives. By opening a very few but critical flagship stores in North America and Asia in the short run, Zara could get more experiences from those markets and understand the consumers well. Flagship store was also a promotion strategy to attract more attention. The cost would be relatively low in the short run. Zara would be more experienced and financially capable to open more stores in those two new markets in the long run. Expanding globally would allow Zara to grow as large as it could in the long run, and develop into a real international business.

Cons: It would still be restricted by the only one centralized distribution center for entering Asia and North America, and still have the risks for entering them. The decision criteria would be revenue and profit, awareness, sustainability and consumer loyalty. According to the analysis above, alternative 3 would collect sales both from all three large markets, and thus should have more market share. It would be more sustainable due to the short term and long term focus. By successfully growing into a stable, large, profitable and global organization, Zara would have awareness and thus better brand image and consumer loyalty. Recommendation

Based on the analysis, the report recommends alternative 3. It would maximize the profit by reaching all the potential markets in the world in long term. Since there were risks and concerns for each market, the best way for Zara to grow would be expanding its market by following a short-term and long-term strategy. However, because of the limitation of each market, Zara still have to adjust its current business system when adopting alternative 3. Action Plan

Short Run
Although expanding the business globally required Zara to enter all three large markets (Europe, Asia and North America), in the short run, Zara should focus more on European market. In 2002 Zara planned to open 55-65 new stores. It is recommended to open 90 stores in the next year with around 75% in Europe. France, Germany, the UK, Italy, Portugal, Greece should be major European markets outside Spain, since they are larger, less risky, relatively stable and advanced. Zara also had more experiences and resources operating in them in the past. As they are important markets, Zara could own the stores (or consider joint venture if there was regulation concerns) for better control and profit maximization. Although countries like Cyprus and Israel were risky and small, Zara could still open more stores with Franchising. Also, Zara could open new stores in new countries like Russia (Moscow) to establish the foundation for future development in the countries.

Zara should take opportunities in other large demand areas while consolidating its presence in the European market at the same time. It could open around 10 stores in the U.S. and Asia (especially outside Japan) respectively. Specifically, it could choose New York, Los Angeles, Las Vegas, Singapore and Hong Kong since they are densely populated, prosperous and multi-cultural. There would be less cultural differences. It would be a great chance to present Zara to the local city but also the visitors around the world. It would be safer if Zara considered enter those markets initially with joint venture. Zara could consider open flagship stores rather than normal stores in new cities, in order to attract more consumers, promote and build a better brand image. After 1-2 years, when newly opened stores became stable and profitable, Zara could consider stepping into Internet. As mentioned in the opportunity part, this would be a chance for Zara to promote itself or to develop a new distribution and retail method. Zara should improve its website quality, use the website to deliver its style, company value and latest fashion design information.

Zara should have website for every major country that Zara had entered, with standardized style but unique store and product information. This would be a great chance for Zara to approach consumers. Moreover, Zara should prepare for the online shopping. For North America and Asia, Zara should have new distribution center and also manufacturers in South America and Asia, as these close places required lower costs. This strategy would save transportation costs and time, and solve the problems of over capacity and diseconomies of scale with centralized distribution center. Since different markets had different fashion taste, now Zara could efficiently and easily manage the distributions to each market.

Zara should also seek for and build good relationship with local deliver services like UPS and FedEx for a lower cost and better performance. Also, since the U.S. and Asian markets were both full of local competitions, Zara should not insist on minimizing advertising and promotion investment in those markets. As also mentioned, different markets had different tastes. For example, the North American people were less fashion sensitive and required larger sizes. Zara should update its IT system to have better track and record of the consumers’ behavior, in order to make better decision on design and distribution in the future. Long Run

After 3 years expansion, as the European market would be stable in the long run, Zara could start entering Asian and North American market more aggressively. It could open more stores in areas including Canada and China. They were two largest countries with similar tastes and culture with the U.S., Hong Kong and Japan market. Previous success in those markets would also positively affect the consumers’ choice and awareness in Canada and China. It could also consider opening flagship stores in Australia later. In terms of distribution, Zara should maintain the good relationship with delivery services. In terms of design, Zara should utilize the data from IT and track system to design fashion product specifically for markets with different cultures and tastes. For example, Asian consumers preferred more colorful patterns, while North American consumers value more simple and basic designs.

Moreover, Zara should have head officers in North America and Asia for efficient control and management. These offices would be responsible for internal training as well, since it would be hard for every store around the world to send their managers to headquarter for training. The store managers were the key elements for the Zara’s operation and design, it was important for Zara to maintain highly qualified managers in stores all around the world. Zara could launch internship program to attract more talented and capable people. This program could deliver the Zara’s concept well, and contribute to a better cooperate culture, which was important for the sustainability of a large international brand. Lastly, in the long run, Zara should consider buy back the joint venture stores which turn to be profitable, so that Zara could have better control. CONCLUSION

Zara should enter the global market but focus on different markets in a short term and long term phases. It should establish new offices, distribution center and manufacturers in North America and Asia to catch up with its expansion. After successfully growing into a sustainable and more profitable international business, Inditex could have better experiences and resources to consider further development of new chains. It is not suggested for Inditex to grow an existing apparel chain as it might confuse consumers and compete with Zara. It could launch a new brand with new product line under a name similar to Zara (e.g. Zara Home), as consumers would be more attracted to it.