Zara Fast Fashion Case

The global apparel chain was a typical buyer-driven chain in which upstream structure was fragmented, locally owned, dispersed, and often tiered production whereas downstream structure was relatively concentrated intermediaries. The industry was coordinated and dominated by downstream intermediaries like retailers and branded marketers. A short summary of the apparel industry characteristics was as follows:

Production: Very fragmented apparel production. Developing countries had an unusually large share, about one half in total exports due to cheaper labor and inputs. Proximity was important since it reduced shipping costs and lags. Despite China’s existence as an export powerhouse, regionalization was the dominant motif of changes in apparel trade in the 1990s.

Retailing: The increasing concentration of apparel retailing in major markets was thought to be one of the key drivers of increased trade. In order to improve speed and flexibility, large apparel retailers played the leading role in promoting quick response (QR). Retailing activities remained quite local with respect to other industries.

Customers: Per capita spending on apparel tended to grow less proportionately with increases in per capita income, so that its share of expenditures typically decreased as income increased. Significant local variation in customers’ attributes and preferences was an issue not only between regions but also within regions.

ZARA’S BUSINESS MODEL

We mainly analyzed Zara to recommend on Inditex’s strategy since it was the flagship of Inditex and the generator of a huge percentage of financial results by itself. Zara used needs-based positioning, targeting a specific segment of customers and providing a tailored set of activities that can serve those needs best, in developing its business model. Its selling ideas was giving middle class customers an exclusivity feeling in its stores with fashionable products, service, store design, and store locations.

Marketing Mix

Zara’s well-designed marketing mix was in consistency with its “medium quality fashion clothing at affordable price” positioning and its selling idea

Target Customer: It targeted fashion-conscious customers who were at the same time price-sensitive and have frequent shopping behavior.

Product: Zara offered designer-style garments and accessories with broad, rapidly changing product lines; relatively high fashion content; and reasonable but not excessive physical quality.

Place: It invested heavily on store locations. They were typically located in highly visible locations, often including the premier shopping streets and upscale shopping centers.

Price: The prices of products were affordable.

Promotion: Zara spent only 0.3% of its revenue on media advertising, compared with 3%-4% for most specialty retailers. It relied on centralization of store window displays and interior presentations in using the stores to promote its market image. Its new items were first displayed in stores. The rapid turnover reflected the freshness of its offerings, the creation of sense of scarcity and an attractive ambience around them, and the positive word-of-mouth that resulted.

Competitive Advantages

Competitive advantages of Zara were mainly the key attributes of its unique business model and the perfect fit of all activities in this business model. The competitive advantages are as follows:

Strong real estate network: As mentioned in marketing mix, Zara located its stores at premium districts. The stores functioned as both the company’s face to the world and as informations sources. The promotion and advertising were executed through window displays and interior presentations. However, finding available real estate in these locations was a matter of relations and brand name in addition to financial power which made it difficult to replicate for many competitors.

Quick Response(QR): Despite the global trend was transferring apparel manufacturing facilities to countries with lower lapor and input costs such as China, proximity was the key element in Zara’s manufacturing policy. Manufacturing remained mainly in Europe and its neighborhood. 40% of finished garments were manufactured internally. Just-in-time system was installed by the cooperation with Toyota. In addition to this, Zara had its own centralized distribution system. Its focus on internal manufacturing and outsourcing to nearby manufacturers led to significantly shorter lead times than its competitors in the industry. Zara also applied concurrent manufacturing for short lead times and reduced failures in understanding trends.

Human Resources: Zara was a flat organization and the stores were the heart of it. In-store personnel, store managers and section managers, played a crucial role in reflecting the demand from customers to manufacturing. They decided which merchandise to order and which to discontinue and also transmitted customer data and reflected their opinions to Zara’s design teams.

IT Infrastructure: Zara was always leading the sector by its commitment to IT. The suppliers, manufacturers, warehouses, stores, and the top management were all connected with each other with the IT infrastructure. This was the core reason of success in Zara’s complex business system. As an example, Zara’s IT requirements were so unusual that they mandated internal development instead of using logistical packages available on the market.

Sustainability of Competitive Advantages: One might question why the competitors do not imitate these activities and not eliminate its competitive advantage. The activities mentioned above were crucial, but what was not imitable was not each but every one of them. It was the strong fit and reinforcement among the activities that locks out competitors. For example, World Co. of Japan wanted to imitate QR but was unsuccessful. The strength in human resources was very difficult to imitate because it was very costly. Only high costs were not enough to get premium locations but brand name and relations are very important which made imitating the model even more difficult. There was also the experience curve, operating methods, own IT structure and philosophy that made this business model very hard to duplicate. To sum up, a competitor who wanted to compete with Zara in its own method had to change its entire business model according to Zara’s which is almost impossible since others’ systems were completely different.

Activity Map for Zara: Zara was aware of the trade-offs it had to face. For example, Zara chose QR as its main strategy and gave away being cost leader since it chose to produce most of its products in Europe where labor was expensive. It chose to use lower quality raw material to reduce costs by which it admitted to sell “products to be worn ten times”. By making these and many other trade-offs, it designed its business model with highly fitted and reinforcing activities (See Exhibit 1 in Appendix).

Financials Linked with Zara’s Business Model

In order to see what comparisons indicate Inditex’s relative operating economics, and how specifically the distinctive features of Zara’s business model affect its operating economics, the financial data given were examined. The impacts of the business model and the trade-offs can be seen in the financials with comparison to its main competitors: H&M, Gap, and Benetton (See Exhibit 2 in Appendix). According to ratio comparisons, the closest competitor of Zara was H&M. Zara’s RoS ratio, which evaluates a company’s operational efficiency, was higher than its competitors. Moreover, Zara had the highest operating and net margin among its competitors. These ratios confirm the fit between business model and the operations.

EXPANSION PLANS

Advantages When Entering New Markets

Since it promoted its products via its stores and it had its own centralized distribution center, Zara had no advertising and logistics cost when it decided to enter a new market whereas others had to invest heavily on advertising and organize a distribution system. Secondly, there was more cross-border homogeneity in fashion which supported heavily Zara since its target market is consumers receptive to fashion. Thirdly, there was increasing concentration of apparel retailing. Lastly, experience curve was another facilitator for Zara when entering a new market.

Disadvantages When Entering New Markets

It would be difficult for Zara to enter a market far away from Europe since it would cause longer lead times and less quicker response. If Zara does not replicate the business model in new market, it can face diseconomies of scale. However, replicating the Europe model in other geographies can be very difficult due to culture, language, and infrastructure differences. Finding space in premium locations is getting tougher in many markets. Other reasons for possible failures can be the difficulty in finding capable staff, price undercutting by low cost suppliers, failing to upgrade technologies, and less fashion savvy customers in new geographies.

ANALYSIS OF GEOGRAPHICAL EXPANSION ALTERNATIVES

Zara had expansion opportunities in Europe, Middle East, North America, and Asia. Zara should decide the business model it will use for these markets and modes for entry/expansion. We analyzed each market and defined the opportunities and challenges in expanding in these markets.

Expansion in Europe:

Advantages: (a) Existing well-working business model; (b) Fashion conscious, frequent visitor type of buyer; (c) Not fully exploited (Italy, Greece, Scandinavian countries -counter attack to H&M) ; (d) Low retail chain concept, room for growth; (e) High sales per capita.

Disadvantages: (a) Risk of saturation; (b) Spain not reputable for fashion in Europe.

Expansion in Middle East:

Advantages: (a) Ability to use existing business model due to proximity; (b) Increasing consumer wealth; (c) Desire for European fashion products; (d) Existence of prospective EU members.

Disadvantages: (a) Not very stabilized financial markets; (b) Cultural differences in some countries.

Expansion in North America:

Advantages: (a) High GNP and sales per capita; (b) Sustained and big market.

Disadvantages: (a) Not fashion savvy & infrequent visitor consumers; (b) Different standards of clothes; (c) Too much internal variation geographically; (d) Earlier examples of failure: Benetton, H&M; (e) Saturated retail market; (f) Need to replicate business model because of distance and differences.

Expansion in Asia:

Advantages: (a) Huge market; (b) Increasing wealth; (c) Desire for European fashion products.

Disadvantages: (a) Need to replicate business model because of distance and differences; (b) Culture and language difference; (c) Hard to find qualified personnel; (d) Less fashion conscious consumers; (e) Tough competition due to low cost producers; (f) High imitation of fashion products; (g) Different standards of clothes.

RECOMMENDATIONS

After doing all analyses mentioned above, we arrived at the conclusions below:

Expand Aggressively in Europe and Middle East in Short Term: Zara should aggressively expand in Europe and M. East in the next five years. There are significant untapped markets to exploit such as Greece, Italy, and Scandinavian countries, Israel, Turkey, Lebanon, and Kuwait. Zara should especially enter Sweden market as a counter attack to H&M to defend its position in Spain. Zara has a very good assessment for entry modes. It should continue to use this strategy and decide entry mode per each country. It should continue to own flagship and critical stores while franchising or joint-venturing other whenever there are direct barriers to direct entry or financial risks.

We tried to calculate the effects of these expansions on the bottom-line. Due to the future growth expectations in money markets, Zara wants to attain certain financial targets: 20% growth in annual sales, 15% increase in selling area, keeping existing margins. We calculated the financial effects of opening 55-65 new stores in 2002. Our assumptions and calculations for the financial results of opening 60 new stores can be seen in Exhibit 3 in Appendix. We concluded that by only opening 60 stores in Europe and Middle East, Zara can roughly attain 19% increase in sales, 18% increase in sales area the first year while keeping a gross margin of 49% (which is very close to current 52%).

Stop Expansion in North America: Expansion in five years time in North America does not seem very beneficial since there are much more disadvantages in market than benefits. Zara should continue to analyze the POS data coming from existing stores to better understand the consumers and dynamics. Zara should use this insight to decide on the most appropriate business model for North America in case of a future expansion. According to the volume it expects from this market, Zara should analyze needs for distribution centers, transportation or production requirements. Inditex should also consider if other Inditex chains can be successful in North America. North America is not an ignorable market; therefore, although it does not expand, it should follow it carefully.

Expand in Asia in Long-term: Asia is the most popular emerging market for almost all industries. It may be very promising for Zara as well. Although this decision should be re-evaluated in five years of time, Inditex should go Asia first with Zara since it has an established brand name, the “European” image and most fashionable chain with largest target. Zara cannot reply to Asian demand with its current European business model when the volume increases because of many differences between Europe and Asia indicated in analysis part. Therefore, it should replicate its business model there totally, which means a huge investment and effort as well as higher risks. Human resources play the most important role in Zara’s success, and lack of trained personnel is one of the biggest threats in Asian market. Zara should invest a lot in training. It should leverage its Zara experience for other chains.

Assess and Eliminate Some Other Inditex Chains: When we look at the positioning map (See Exhibit 5 in the Zara case) and consider their target markets, we see that Inditex has many chains very similar to Zara. These undifferentiated chains depend heavily on Zara’s management and experience. This can become a huge burden on Zara when they expand nationally and internationally. Zara is still the growing stage and needs effort to stay as successful as it is now. Diversifying the managerial capabilities in too many new chains can destroy both Inditex’s and Zara’s success. Inditex should assess well whether these chain networks can really become profitable and eliminate some of them if needed. While leveraging Zara’s experience is crucial, Inditex should be careful not to steal too much effort from Zara for new chains.