Marketing and Zara Essay

1. Background According to BusinessWeek, â€Å"Zara was a fashion imitator. It focused its attention on understanding the fashion items that its customers wanted and then delivering them, rather than on promoting predicted season’s trends via fashion shows and similar channels of influence, which the fashion industry traditionally used.† 5 Zara, the fashion retail chain, is a subsidiary of Inditex Group owned and managed by Spanish tycoon Amancio Ortega. Inditex includes several major brands, namely, Zara, Massimo Dutti, Pull and Bear, Oysho, Bershka, and Stradivarius. The group headquarters is located in La Coruna, Spain. It was here where the first Zara store was launched in 1975. Presently, there are about 1,500 Zara stores around the world. Zara employs around 80,000 people. The group recorded revenues of â‚ ¬ 9,434.7 million (approximately $13,068.8 million) during FY2008, an increase of 15.1% over 2007. The operating profit increased by 20.1% to â‚ ¬ 2,148.8 million in FY2008. The net profit, during FY2008, increased by 24.5% to over FY2007 toâ‚ ¬ 1,257.8 million (approximately $1,742.2 million).7 Zara’s claim to fame surfaces from the fact that it needs, on an average, two (2) weeks to develop and market a new fashion product compared to the industry average of six (6) month cycle. In addition to this, Zara is committed to showcasing around 10,000 new designs annually, in a fast and scarce manner, which gives it a constant new look and brings back customers to the stores. Owing to its unique supply chain management, use of information technologies and innovative management strategies, which is a must to survive the highly competitive fashion industry it has managed to come out on top year after year. The major competitors include H&M, GAP and Benetton. Some of the efficient strategies adopted by Zara are broadly the policies of zero inventories, Just in Time systems, contract manufacturing for small orders, decentralizing warehouses to deliver p roducts and above all close monitoring of the fashion trends. Above all, they had few unique strategies, mainly, zero advertising, where in Zara chose to open new stores rather than advertise and, the concept of shunning outsourcing to low cost development centers as it would result in dilution of the high quality fashion that Zara represents. Initial success for Zara is mainly attributed to featuring low priced lookalike products of more popular, high end fashion brand. Following  this success, they adopted new design and distribution method. Since the fashion industry product has long lead times, to the tune of six months, Zara aimed to reduce this and also minimize the uncertainties associated with fashion retail. Zara developed the concept of â€Å"Instant Fashion† that allowed them to respond more quickly to consumer tastes and emerging trends. The strategy helped them to bring in new products to the shelves quickly, in small quantity and produce more if demand occurred. This enabled them to minimize inventory, gauge demand and re move uncertainties. Later on, they brought in information technologies to further revolutionize the distribution processes. These helped Zara to developed fashion lines based on market trends and also, produce its own designs through a team of 200 in house designers. The introduction of information technologies helped them increase the efficiency of state of the art production system and warehousing mechanisms. The stores and warehouses were linked electronically, which facilitated the exchange of real time information thereby allowing them to minimize risk and capital outlays by reducing inventories. This leaner and responsive system helped rotate the stock quickly and also, improved sales as the customers would return to stores every two weeks to check out new designs and purchase as the design would not be available after the time frame. International expansion of Zara started with Portugal in 1988, and since then they have opened more than 1,000 stores globally. This has been done through company owned showrooms, joint ventures and franchisee models. Zara’s Products Currently, Zara caters to men’s clothing and women’s clothing. Each of these sections has 5 subsections, which include lower garment, upper garment, shoes, cosmetics and complementary products. The 50-60% of the demand is produced at the beginning of the season and the remaining is manufactured in season. This sometimes results in either stock outs or markdowns but compared to the competition the number of times the service failure happens is quite low for markdowns. Hence, if the design does not suit the customers’ tastes then it is taken off the shelves and further orders are cancelled. This leads to new designs and above all, no designs stay on the  store floor for more than four weeks, which encourages consumers to make purchases. When compared to the competitors, average number of times a customer visits Zara is 18 times a year compared to 3-4 times for the competition. 2. Mission, Vision, Values and Goals Zara’s Mission Statement is as follows,  Ã¢â‚¬Å"ZARA walks at the pace of society, dressing ideas, trends and tastes that society itself has matured.† Zara through its unique business models and stores has proved business can be successful with little or no advertising. This business is possible only through superior customer service helped by continued ability to restock and respond to customer needs within days. This gives Zara the competitive edge. Hence, keeping in mind the mission, they always innovate their products to enhance shopping experience and provide new designs at affordable costs made from quality materials which follow latest trends. 3. Zara’s Strategy for Growth and Positioning Zara believes in Zero advertising. It would rather spend on store expansion than to advertise. However, the minimally advertise in fashion magazines. The rationale behind this is the quick turnaround of store display, which is around 4 weeks, which renders advertising an unnecessary cost. Also, Zara concentrates on efficient design to market cycle and focus on showcasing large number of designs annually. The workforce in Zara is essential to its success right from the production to the store level as the feedback generated about fashion performance at store is percolated to the designer and production and supply chain helps to put the latest styles in 2 weeks time. We need to take a look at the factors that determine these strategies and also the shortcomings associated with these strategies 4. External Analysis The external environment characteristics can be stated as below 1. Demographic segment   Zara is targeting young consumers with disposable income. This will be primarily in developing countries and developed countries. This presents  them with a sizeable population. As shown by market research, the customers in these countries are willing to try new brands but at the same time are price and quality conscious. The ability to replicate the model and achieve the desired results can significantly enhance Zara’s brand in these market. 2. Economic segment Due to weak currencies, low labor costs and opportunity to be closer to customers, Zara need to think about strategies to take benefits from other location. Since the competition has already entered the newer market and is constantly trying to leverage the benefits associated with these markets. This has a big impact on the profits of the organization. 3. Legal segment Owing to increasing labor costs and stringent labor laws, the production processes in the present countries do not seem favorable as they will increase the production costs. In addition to that, concentration of designers in Spain/Europe can be handled as the labor laws permit that. In case, Zara does not want to decentralize these functions, there are no laws governing their decisions as fashion industry is not under regulations. 4. Technological Segment Zara presently uses IT efficiently in managing their supply chain which leads to lower operating costs. However, the use of IT can be extended to expand their procurement and manufacturing activities outside Spain. 5. Global Segment Owing to globalization and rapid advancement in technologies, several low cost production centers have come up. In order to reduce the costs even further and maintain quality, Zara can have offshore production facilities to low cost location in order to lower the costs. This will enable them to localize Zara and cater to local preference. The critical market for Zara in the coming future would be the Asian nations of India, China, Malaysia, Indonesia and Taiwan. The relaxation of trade norms would help reduce transaction costs, if, Zara plans to expand their activities outside Spain. The environmental characteristics changes very fast in fashion, especially  in terms of demographic and global segments. Zara being in core fashion industry with fast cycles have a unique strategy where in it caters only on the leading edge of the product cycle which enables it to deliver the promise of â€Å"Instant Fashion†. 5. SWOT Strategic Choice We will discuss each of the external and internal variables in details which will give us a better picture as to why Zara needs to act in a certain manner. Strengths * Strong product diversity As a group Inditex is a leading fashion distributor and has ore than 100 associate companies across the world. In addition to this, the stores are located in more than 400 cities across the world. In case of Zara, the international fashion retailing segment, this presents a new opportunity to foray into foreign markets. The group brands can be displayed as well when considering international expansion. This is what Inditex can look forward to offering the wide assortment of goods, replenished quickly to carve a niche for itself. * Strong revenue growth The group company of Zara, Inditex has registered a robust financial performance Y-o-Y. The revenues increased at a CAGR of 18% annually. The operating profit represents a CAGR of 21%. In the meantime, the profits also increase at CAGR of 25% annually. The strong performance of the group, Inditex and various brands leads to increased investor confidence about the company . * Strong distribution network The group, Inditex has a strong distribution network. The presence of an efficient supply chain management in Inditex assures that the goods are delivered within 24 hours of the receipt of the order in Europe and about 40 hours at its overseas outlets. The majority of the supply is handled through its centralized warehouses in each of the European, Asian and American markets. The company’s logistics department has more than 4,000 people  delivering 627 million garments in financial year 2008. * Zero advertising Zara follows the policy of zero advertising to decrease expenses. Hence, in newer markets, it can focus its capital on expansion. The strong brand name, store ambience and product quality will compensate for the lack of advertising. Weaknesses * Overdependence on the European market Zara has a significant market presence in Spain and other European countries. Around 50% of the stores are located in Spain and surrounding countries. However, the revenues contributed by Spain accounts to only 40% of the group revenues whereas 60% of the revenues comes from its international operations with 43% coming from European operations and the rest 17% from outside Europe. The group as a whole is highly dependent on the Spanish and European market to sustain its revenues, making it highly vulnerable to the economic, political and social changes taking place in these markets, especially in Spain. Also, the fashion tastes might reflect heavily the European perspective, even though during international expansion Zara needs to cater to the international customers. * Reliance on local designers Even though local designers are preferred for designing new range of garments for Zara, almost all the designers are from Spain. This leads to a situation where the design might be too localized. Considering the fact that Zara intends to have a global presence, localization of the core designing and manufacturing processes might not be a feasible option. With respect to catering to local tastes and fashion, the designers should be located more closely to the markets. Opportunities * * Expansion plans The group has invested more than â‚ ¬ 2.8 billion to open new stores internationally, in countries where it already has a presence and few new  markets as well. The rate of growth of stores has been as high as 640 stores per year. Zara fashion will be made available in Korea, Ukraine, Egypt and Montenegro. A well defined expansion plan is critical to the corporate objective of international expansion with sustained and robust revenue growth in the future. * Growing apparel retail market in Asia (China, India, Malaysia, Taiwan and Indonesia) The Asian apparel market is growing at a high rate. Owing to the growing population of affluent household, higher disposable incomes, consumers knowledge of international brands, it presents an opportunity for Zara to enter and expand its operations in Asian market. Accelerated development in these markets will help shift the burden of growth and diversification from mature and intensively competitive European and American markets to the building Asian markets. * Growing online sales Online retailing has been growing at a scorching pace in the last decade and considering UK market, more than  £14 billion has been spent on online shopping. Zara should try to open online retail shops to cater to the audience who need to shop for standardized version of Zara’s products. This also presents an opportunity to display the entire product lines from Zara and can be easily searched. It will enable strong growth in online and well as, offline retail sales. Threats * New avenues being utilized by competitors The competition is always on the lookout for cheaper manufacturing location such as China, India and Eastern Europe. The benefit of lower costs of procurement can be passed on to the customers through low prices. The main advantage of Zara’s vertical integration is the frequent replenishments of its stores and also, feedback from store staff to design. If this feedback works out as expected, then Zara will be able to sustain higher manufacturing costs than its competition in future. The competition is also working on reducing the lead times, which if successfully implemented could lead to erosion in market share and reduction in revenues. * Counterfeit goods The counterfeit goods in the new markets and existing ones adversely affect sales of branded accessories. Widespread counterfeiting reduces the brand value and exclusivity, especially in cases of high end fashion products, through customer dissatisfaction. * Rising Labor cost in European region Since Inditex focuses most of Zara’s designing and manufacturing activities in the European region, the increasing labor costs drive down the profits as it increases the operating expenses. This results in adverse impact on the group’s margin. 6. Internal Analysis We undertake the resource based view and study the internal analysis. Zara’s main assets are the designers, the logistics process, in store sales people and the store ambience. The designers are in charge of churning out new designs in a short span of time. After receiving the feedback, they have approximately 2 weeks to deliver the garment to the store. Each of the designers is a valuable and costly resource and this quick turnaround time is not imitable and therefore exploited by Zara to the fullest. The competitors have not been able to turn around designs as quickly as Zara. Hence, they give Zara a competitive advantage. Since Zara follows zero advertising policy, the word of mouth medium is heavily dependent on how much a customer is satisfied. New designs which satisfy customers go a long way in making Zara an important brand. The logistics process is also a source of competitive advantage. It is because of logistical capabilities that Zara can display 12,000 new designs annually. Assisted by IT and workforce, it forms a competitive advantage but this can be imitated by competition and hence does not present a sustainable competitive advantage. However, along with new designs it plays significant roles in preventing stock outs and piling inventories to help reduce unwanted costs. The sales people, staff and store ambience, although valuable but are easily imitable and hence are at comparative parity Capabilities: Sourcing Materials Inbound logistics Flexible manufacturing / Outsourcing outbound logistics in-store sales. Market research Product design Procurement Outsourcing Distribution Centralized planning Corporate vision and mission Brand Image 7. Competitor Analysis The main competitors are H&M, a Swedish brand and GAP Inc., an American brands. Now, GAP Inc. boasts of large network of stores and has a strong financial leverage as it aims to tap into growing online retail segment and into franchising to expand into new market. GAP Inc. is also targeting growing global footwear market. Some of its shortcomings are geographic concentration and weak performance of comparable stores. It also suffers from low customer loyalty and rising labor wages. On the other hand, H&M are matching Zara in terms of designing and also have strong procurement practices. Unlike Zara, they collaborate with designers and have much wider presence as compared to Zara. They are at present looking to target new niche. However, they are also plagued by issues of customer loyalty and product recall. Currently, all of them are focusing the same segment and added to it the high entry barriers and high profit potential makes it an attractive industry. From the above graphs and the financial data available (refer to Appendix), we can see that although sales revenues of H&M are better than Inditex, operating expenses as a percentage of sales are lower for Inditex mostly due to their operational and marketing strategies which lowers the inventory and due to instant fashion generates more sales. 8. Corporate Level Strategies The Corporate level strategies of Zara can be said to be similar to that of its parent, Inditex Group. Its strategies can be classified based on three frameworks – Ansoff Matrix, BCG Matrix and GE-Directional Policy Matrix. Based on the Ansoff Matrix, Zara follows the following Strategic Directions: * Market Consolidation and Product Development by bringing in the latest fashionable designs from the design stage to distribution within 2-3 weeks, much shorter than the industry average. * Market Development by introducing products to new markets by opening up stores in new locations and countries. It had around 1500 stores in 78 countries, in December 2008,around the globe and is expanding. Zara is operating in an Industry of high growth of about 40% while having a high market share in most of the  countries. This puts Zara as a Star for Inditex Group in the Growth-Share BCG Matrix. Also the strength of its business is high, thus putting it in the Investment and Growth direction of theDirectional Policy Matrix. Thus Zara is one of the main Business lines for Inditex Group garnering about 67% of the revenue for the parent organization. 9. Business Level Strategies Zara defines its target markets as â€Å"Young, educated one that likes fashion and is sensitive to fashion†. This target market is very broad because it is not segmented by ages and lifestyles. Thus the scope of Zara’s business is broad. Zara also follows both the Cost leadership and Differentiation strategies. Thus Integrated Cost Leadership/ Differentiation Strategy are followed by Zara by the following approaches: * Cost Leadership 1. It achieves low cost by lowering lead times which in turn leads to lesser inventories, thus reducing the cost of the supply chain. * Differentiation 2. It differentiates itself from its competitors by providing lead times which are far lower than the industry standards. 3. Zara produces about 11000 designs every year as compared to about 4000 by competitors. 4. Replenishes stores twice a week as compared to once by major competitors. 5. Produces in small batches and takes advantage of shortages in stores by replacing them with new designs. Thus customers who find that a particular design is out of stock may buy a new design in fear of losing the opportunity to but it. Thus it guarantees that customers visit Zara’s stores around 17 times per year on an average as opposed to 3 times for competitors. 6. The designs remain in the stores for only about 4 months when they are taken out. Only about 10% of designs are taken off stores by Zara as compared to 17% of competitors. 7. Takes the feedback of customers in determining the needs of the customers. 8. Takes advantage of IT in vertical integration of the supply chain by maintaining a smooth flow of information through the chain. According to Mile’s and Snow’s Adaptive Strategies, Zara can be classified as a Prospector because of the following characteristics: * Zara has built its entire business on innovation in the supply of fashion apparels to customers. * Zara continually modifies its existing designs to match the  latest fashion trends and needs of the customers. * The competitors have not been able to copy their supply chain strategy. 10. Functional Level Strategies The designs at Zara change every week and this result in manufacturing systems that have to be flexible to cope up with these changes. Thus Zara uses Flexible Manufacturing Technology or Lean Production which reduces setup time for equipments, increases utilization of machines through better scheduling and improves quality control at all stages of manufacturing. The various functional strategies for Zara have been laid down below. * Marketing Strategy * Only one item of each size in each color option was placed on the stock floor requiring stores to maintain a considerable restocking policy. * Customer feedback was taken by all the sales personnel at the stores to gauge the needs of the customers. * New product introductions were planned twice a week to maintain fashion freshness. * Zara stores were located in prime retail locations, thus avoiding the need for advertising to attract customers. Marketing expenses were0.3% on sales as compared to 3.5% of competitors. * Materials Management Strategy * The raw material was stocked in advance according to forecasts. They were sourced from countries like Spain, the far east, India and Morocco. * Due to low lead times, very less inventory needed to be maintained. * Inventory turnover is high leading to lesser capital needs. * Zara outsources its sewing activities to contractors, thus lowering cost. * R&D Strategy * Design team consisting of young individuals in their 20’s who are more conversant with latest fashion. * Around 40000 designs were done throughout the year out of which around 11000 were selected for manufacture. * * Human Resource Strategy * Zara emphasized learning from mistakes and accepting criticism. * Everyone was encouraged to express their opinion. * No performance appraisal system in place but a system of immediate feedback from colleagues at all levels. * Personal empathy given more importance than formal qualifications in recruitment. * A significant portion of salaries varied according to performance. * Information Systems Strategy * IT was used to integrate the chain vertically and horizontally, for smooth flow of information up the chain and across the various functions, respectively. * Infrastructure * Zara had a relatively flat structure in comparison to other firms in the same industry. Cross-Functional Integration existed between the various functions to ensure that: * New designs are developed according to customer needs. * Information flow is quick. * Time to manufacture the new designs and their presentation to the customers reduces. * The costs of development are low. 11. Global Level Strategy Zara had opened up around 1500 stores in around 78 countries in December 2008, and it is still expanding by looking for opportunities. The main factors that helped Zara achieve Global competitiveness are: * Fast growth in the Spanish market * High demand for exports from Spain * Rivalry with other firms like H&M and Gap. The main reasons for Zara to expand globally were: * Expansion of its market by taking advantage of its â€Å"instant fashion† concept, so that it could increase its market share and bring in more revenue. * Since Zara believed in providing the customers with the latest fashion at lowest cost, it supplied the stores with low quantities. So to lower the costs it expanded globally so that it could take advantage of some sort of Economies of Scale. Global Strategy Zara did not follow any localization in the countries where it was present and provided only standardized products. Also it believed in providing the latest fashion at the low costs. Thus from the Global Strategy Grid it can be seen that Zara Followed a Global Standardization Strategy. By doing so it hoped to increase its profitability by reducing costs and achieving economies of scale. Zara chose to enter the different markets using various entry strategies. The strategies are outlined below. * Exporting: Zara exported its products to a few markets where opening up a manufacturing facility would not have been profitable like Monaco, Oman, etc. * Franchising: Zara also opens up stores in various locations through franchised deals avoiding development costs and risks of opening up a foreign market on its own. Examples of such locations are Cyprus, Venezuela, etc. * Joint Ventures: Over a period of time Zara entered various markets by forming Joint Ventures to take advantage of the partner’s knowledge of the foreign country. It entered the Italian Market in 1996 by forming a JV with Benetton. Then in 1998 it entered the German market by forming a JV with Otto Versand, the country’s largest catalogue retailer. It also entered the Japanese market by forming a JV with Japan’s BIGI Group, forming Zara Japan. * Wholly Owned Subsidiaries: Zara entered most of the markets by opening up wholly owned subsidiaries, to take advantage of the controls that it could exercise in those countries. Examples of such locations are US, UK