Introduction
Zara, an international fashion retailer, is Inditex’s key flagship brand. It sells apparel for all genders and key demographic groups. The brand is regarded as the leading clothes retailer in Europe and is among the top five in other key markets around the world. This organization already has a winning formula that made it one of the leading brands in the fashion-retail world. It has the fastest lead times and customer response rates in the industry. The firm uses a counterintuitive approach of reacting to consumers’ needs rather than predicting their likely tastes and preferences. As a result, the firm experiences less wastage than most fashion retailers, and also has optimum quantities of inventory for clients.
The fashion retailer’s successes have not come without challenges. The firm is not doing well in large markets such as the US. Additionally, the business has engaged in a rapid expansion program, but it needs to ensure that the successes in those new markets match results in its older Spanish market. Through an analysis of the present external and internal market environments, it will be possible to assess the prospects for success in this organization as well as the likely direction that the company should take in order to sustain its high returns. Short term and long term strategic challenges must be addressed in terms of foreseeable factors. The company ought to adjust its approach in accordance with these findings.
Strategic Issue
Zara’s success stems from its exceptional business model, which is difficult to initiate for new entrants. However, competitors are well aware of Zara’s uniqueness and many of them are starting to replicate its business practices, in part. Now the company must stay vigilant in order to reduce the effect of this competition. Additionally, the company must contend with the fact that growth rates in its key markets are not as promising as they were. It must think of a way of building its business more strongly in emerging markets so as to remain profitable.
Zara is under immense pressure to adopt e-commerce in the sale of its commodities. Its products are much higher in overseas locations than they are in Spain because of transportation costs. Clients can save up to 40% if they purchase commodities from Spain rather than the US. Issues of leadership transition may also prove to be problematic for investors and employees alike. The founding President has been the face behind the success of the business, so his departure will cause uncertainty. Many firms have also noted Zara’s exceptional business model and success, so they are imitating them by using their former personnel. Additionally, others are starting to move production close to source markets. The company cannot control the rate at which other competitors borrow their business strategies, but it can control how it implements its model. Currently, the firm only has a dozen designers in China, yet hundreds are located in Europe. Additionally, it also produces it products in the same location. All these challenges imply that the organization has moderate prospects, if it continues with its current business practices. To make its prospects high, it must make a number of changes.
External Environment
Life cycle of the industry
The fashion industry has reached maturation levels due to a lack of growth or increase in growth from some of the vital players in the markets. Companies such as GAP and Benetton have done relatively poorly over the past few years. This may be attributed to the short product cycles and the business strategies adopted by the respective market leaders. Some organizations simply have a difficult time in determining the right approach for their competing interests. Additionally, making the wrong decision could result in immediate and adverse reactions. This has been the case for some companies that did well in the past but have now lost their charm. Zara has superseded these difficulties by its concrete business strategy. Most companies in the fashion retail industry report periods of high growth and then witness minor fluctuations. So it is likely that the sales trends currently may increase in the future.
Macro environment
Regulations are a crucial factor in the fashion retail industry. This stems from export or import quotas mandated by source countries. The textile market has been liberalized since 2005 and this initially led to an influx of cheap products from China. To protect its local businesses, the EU imposed quotas on Chinese-made textiles. However, these regulations did not apply to products from other cheap, Asian economies. Consequently, Europe and many western nations still have a number of products from other Asian economies in their markets; although these were not as formidable as the ones from China. Therefore, a fashion retailers’ profitability pegs on its source markets’ ability to protect it from cheap imports through government regulations.
Economic conditions also have a large role to play in this industry. Fashion items are regarded as luxury commodities, whose demand can reduce depending on the state of the economy. Some countries are recovering from the global economic crisis, so they are in a position to buy luxury fashion brands. However, others like Spain are still struggling with the recession. Since a large portion of Zara’s market share stems from Spain, then the company’s profitability may be put into question. However, diversification into other markets that were not as hard hit by the economic recession is solving this problem. Currency strengths also affect the degree of profitability within a certain industry. If a country sources its raw materials in dollars and then sells its products in Euros then its success will depend on the strength of the Euro. Once the currency that a fashion company uses to purchase its raw materials is reduced, then the organization will have to contend with high production costs and lower profits.
Demographic factors have an adverse impact on the level of profitability within this industry. Companies that target markets with low income differentials tend to have higher chances of succeeding. A case in point is Inditex, which sells most of its products to Spanish consumers. The gap between the rich and the poor in Spain is low, so many of them can afford its luxury brands. On the flipside, demographic factors are affecting many fashion retailers negatively if they depend on Europe as their source markets. The continent has one of the largest aging populations in the world. This means that fashion retailers have reached saturation levels in most of these markets. On the other hand, the Asian continent has a high income gap between the rich and the poor; therefore, only a small portion of the population can afford expensive luxury brands. In the US, which is one of the fashion capitals of the world, many clients have a preference for comfortable and easy to wear apparel, which is rarely the specialty for most fashion designers. Therefore, slim designs, that are characteristic of many high fashion retailers like Zara, do not do well in the US unless major cities are targeted.
Several fashion retailers do not think of technology as a determinant of productivity in their operations as many of them outsource productions to cheap Asian economies. However, if an organization is vertically integrated, then it will need to incorporate technology in synchronization of its supply chain. Additionally, the use of the internet for online purchases has been embraced by many fashion retailers. Furthermore, customers are getting product information and comparing prices through their computers. Fashion retailers must stay competitive by meeting the needs of this highly informed market base. Social media interactions are also providing a fresh alternative for marketing and customer relations management. Customers are also getting plenty of information about their commodities from members of these online communities.
Societal values also affect the degree of success for fashion retailers. Companies must consider whether markets respond to fashion trends quickly and promptly. Successful players in this industry tend to think of their products as perishables, which can loose value depending on their in-store availability. However, this only works in markets that are fashion-conscious. Most European markets are known for this characteristic. Asia is emerging as another fashion-conscious society. Fashion retailers would be better-off if they placed their stores in metropolitan areas as residents there are quite fashion forward.
Industry Environment
Driving forces
Europe’s aging population is affecting fashion retailers like Zara immensely. Most of these markets have reached saturation point, thus prompting the organization to go global. Many fashion retailers are moving East because they predict that Asia will be a formidable force in the future. Others are also selecting markets in the Middle East. This move to go global may happen slowly over a long period of time or it can take place aggressively. Companies that expand haphazardly may face the risk of failing to meet local customers’ needs or diluting their brands by excessively customizing their products.
The immense level of competition in the fashion industry is causing many fashion retailers to reconsider their pricing or quality of goods. Clients are willing to pay more for clothes if they believe that they are buying high quality goods. Therefore, fashion retailers are working on the quality of their commodities. Others are cutting down on operation costs in order to reduce prices. One of the common trends is to move production to low cost economies. However, this has its challenges as it increases lead times and inflates costs. The other option is to use vertical integration or manage one’s supply chain efficiently. This increases response rates, ensures that product quality is high, and also minimizes costs.
Information technology is driving numerous fashion retailers. Many of them are using it to make online sales. However, certain obstacles exist to hamper the success of this strategy. For instance, local online retailers may challenge global businesses. Additionally, some emerging economies lack the infrastructure needed to deliver online deliveries. However, no one is ignoring the online platform, including Zara, which launched its e-commerce platform between 2010 and 2011. The strategy chosen for e-commerce will determine how successful a company becomes. Sometimes inequality in e-commerce may prevent some nations from using the platform. For instance, Sri Lanka and Mexico are two countries with moderate internet penetration, as most users belong to the wealthy classes. Firms should adjust prices for online buyers in such countries in order to encourage them to participate in e-commerce. In countries such as China, where internet penetration is high and facilities are affordable, retailers often market aggressively to the individuals concerned in order to let them know about their presence.
They achieve this by carrying out post-purchase surveys. For those nations with hesitant online shoppers, it is imperative for organizations to offer individuals options for inspecting products and paying at the door, a country like Turkey has unfriendly digital laws, cultural biases and logistical issues that may hamper e-commerce success. The organization would have to lure them into e-commerce through such a strategy.
Porter’s five forces
These forces include competitive rivalry, barriers to new entrants, strength of suppliers, threat of substitutes, and bargaining power of consumers. A high degree of rivalry exists in the fashion industry, which is created, in part, due to the short product cycles inherent in the industry. Zara’s closest competitors are GAP and H&M, and the latter target similar market segments. Zara has an edge over its competitors owing to its business model, which ensures that the organization responds to its consumers needs more promptly and effectively than the other players. Even sales growth rates have been higher for the company than those among its competitors. The industry has a low threat of substitutes because few replacements exist for clothes. Furthermore, Zara is a trendy company that offers its products at an affordable price; this sets it apart.
In fashion retailing, there is a low threat of new entrants. The industry is dominated by a small number of brands. These companies have established departmental stores across their markets and often take advantage of economies of scale. Zara’s economic model took time to build thus giving it a first-mover advantage of new entrants. Buyers or consumers have moderate bargaining power in this industry. Customers want high quality items, which fashion retailers must fulfill. They are also highly informed because of aggressive marketing and internet information sharing. Nonetheless, fashion retailers can charge more for their products if they have loyal clients. The bargaining power of suppliers is low in this industry because fashion retailers have huge brands that control market share. This is certainly true for Zara, which has a substantial degree of control over its vendors. The firm has many standards that it sets for its vendors and can discard its suppliers if the business fails to meet Zara’s obligations. If a company is vertically integrated, such as Zara, then it can have even more control over its suppliers than other industry stakeholders.
Industry profile and attractiveness
This industry is only moderately attractive to current incumbents. Generally, the industry heavily relies one its traditional markets such as Europe and the US, yet the latter markets are saturated. Those companies that are thinking of emerging economies in Asia must consider the viability of their business models in the region. They need to reengineer their business practices in order to succeed in these markets. Additionally, because most firms have long supply chains, then this leads to price increases and reductions in profit margins. Those firms that minimize their supply chains by bringing production close to key markets also risk business losses when the countries they depend on experience economic difficulties. Zara produces in Portugal and Spain, yet the latter nation is undergoing an economic crisis. It also has to increase the prices of its commodities in countries like the US and China in order to account for high transportation costs for its products. Therefore, incumbents are loosing whether they have long supply chains or short ones. Nonetheless, the future will be promising for those firms that intensify their presence in Asia and also move production in response to the move.
Company Situation
Financial analysis
The company’s financial situation has been quite impressive. In 2010, Zara’s store sales increased by 13%. This occurred irrespective of the fact that other nations were still recovering from the global recession. The company also reported an increase in net sales of 11% in 2011. The increases corresponded with the launch off online products in target markets. The company also opened approximately 358 stores in that same year. In 2012, the company reported a net increase of 15% in the sale of its products. Most of the company’s investment was directed towards the launch of new stores in various markets. These results were very impressive and since most of them coincided with the launch of an online platform as well as the development of new markets, then the company should think of ways of strengthening those strategies in the futures.
Swot analysis
A SWOT analysis of the firm reveals that the company’s biggest strength is its unconventional business model; it is vertically integrated. Unlike other organizations that outsource production to low-producing economies, Zara has moved production close to its source markets. This provides the company with the flexibility it requires to meet its ever-changing customer needs. The firm owns about 60% of its manufacturing process. The business also has a unique distribution system, which reduces lead times. In contrast to competitors, the organization does not have distribution centers in all the places it operates; it has one distribution centre that does all the coordination for the rest. Additionally, the firm has extremely low marketing costs as it does not advertise. Instead, the company focuses on opening new stores and working on the existing ones.
Zara’s store management system works well for the company. It gives store managers autonomy over work, but also creates an incentive to work hard by tying their earnings to sales made. They often locate the stores in prime areas, and organize them thoroughly. This organization responds to customers’ needs promptly owing to the flat organizational structure. Most store managers tell vendors about market trends and apparel shortages. The company moves swiftly to eliminate slow-moving products and thus eliminates the need for knock-down inventory.
Additionally, the company artificially creates scarcity in its stores by stocking designer ware for a short while. The strategy prompts consumers to buy their products as soon as they see them. When the company makes international expansions, it often does this through franchise systems, which ensure that it maintains control over the organization. Zara has control over its vendors because it is the exclusive client for most of them. Other competitors work with vendors who have wide client bases, so the retailers have minimal control. Lastly, the company invests heavily in research and design of trends and merges these efforts with technology in order to ensure that they have more styles and more designs for customers to select.
Several weaknesses are evident in the case. One of the firm’s key problems is its Eurocentric model. The company does not do very well outside Europe, such as in the US. In fact, it has been struggling in the US because these buyers prefer spacious clothes, which are not Zara’s specialty. While the lack of advertising saves the company a lot of money, it also minimizes its opportunities within the industry. Clients would have to hear about the firm’s product or physically see the company’s stores to buy from them. Additionally, the company has a reputation of being an imitator rather than a fashion innovator.
The company can expand its line further in the United States. This market has a lot of potential as it is one of the fashion capitals of the word. Further, Zara can adopt internet retailing more intensely. It is only beginning to do so for some of its key markets; consequently, it can revamp these actions by intensifying them. The organization also has the opportunity to grow in emerging markets, which happen to be less fashion conscious. It could save on inventory-turnover costs in such locations. Additionally, the firm can work on diversifying its product portfolio.
A major threat for the organization includes emerging competition from China, where most competitors make their apparel. Additionally, some firms are already starting to copy Zara’s strategy of bringing production closer to key markets. If more of them have fewer product cycles, then Zara could loose its competitive advantage. Additionally, the European fashion retail market is highly saturated, so this could minimize the organization’s prospects for future growth. The question of the sustainability of Spain as its manufacturing base must also be considered. The organization may have difficulties in maintaining this model in the future. It should be noted that certain rivals, like C&A, are poaching former Zara employees in order to learn about its agile business model and hopefully replicate it. In addition, the company must consider issues of leadership transition when its President retires. The company’s founder Amancio Portego, has been largely responsible for the firm’s success. Therefore, his departure may create uncertainty for the firm.
Recommendations
Situation profile and prospects
The firm has already launched an e-commerce portfolio, but the project it still in inception, so it is difficult to tell whether or not the organization will succeed in this new approach. Additionally, the company has difficulties in large markets such as the US, and is closely watching China. Consequently, it needs to rethink its model in light of its globalization strategy. Furthermore, the company is selling most of its commodities to a saturated European market, yet there are unsaturated markets in Asia. More should be done to intensify business in these areas. Leadership transition and cases of imitation from the organization are also ailing the firm.
Strategic problem
Should the company consider reorienting its Euro-centric model, brick and mortar system as well as its leadership management in order to stay profitable?
Strategy recommendations
The key change in making Zara sustainable is alteration of its business model from being Eurocentric to being one that is close to large source markets. For Zara to remain profitable, it must set up production facilities in China as one of its new source markets. It should also place designers near China. The company already has several stores in the region; it should back this up with production centers there. The firm ought to identify other key markets that already have a large market base but are far from Spain. It should then establish production centers in those locations as well.
The company should work on developing its e-commerce platform in accordance with the market chosen. For instance, in a country such as India, infrastructural impediments prevent online firms from reaping the rewards of doing business online. Delivery methods are a particularly challenging issue for those firms. Consequently, Zara should use collect-on-delivery cash sales for nations such as these.
Zara should create an in-house promotional system that would prevent poaching of employees from its organization. Some of these individuals give away crucial company information, yet they can be used for the overall good of the firm. As a result, they must give their employees an incentive to stay loyal to Zara. In line with the above issue is the appointment of a successor after the company founder retires. He already gave his assistant the position of CEO. Now he should give the new successor more room to carry out the roles that he is currently responsible for. Additionally, he should minimize his appearances in public and instill confidence in the public about the new successor.
The firm should also embrace product diversification. In order to win the confidence of the aging population, the company should introduce products for them. Statistics indicate that these populations have just as much spending power as members from younger demographic groups.
Objectives
After establishment of production centers near source markets, the company needs to measures sales growth rates after a period of one year. Sales growth rates in those markets should increase by 5% in those markets.
The company will measure the success of its online portfolio by assessing product sales made via online customers. The number of online consumers should have increased by 5% four months after launching the channel in a certain market.
If employee retention of mid level to top level managers increases by 10% within the first year of implementation of the promotional system, then the firm’s efforts will have succeeded. Furthermore, the company will assess whether or not the public has accepted its new leader by measuring the number of times he is mentioned in newspapers, internet blogs or other news platforms in comparison to the founding President. Once the appointed successor achieves the same amount of publicity or supersedes the founder’s level of publicity, then the strategy will have succeeded.
The success of the new product portfolio will be analyzed by sales revenues. If sales revenues keep increasing, then the strategy will have worked. The aim should be to get sales revenue to the same level as other conventional products. Measures should be taken on a monthly basis and then compounded for the entire year.
Strategy Justification
The biggest problem for Zara is its Eurocentric model. The company’s is passing on high transportation costs to overseas consumers. Its centralized control is not sustainable as the company continues to expand internationally. Nonetheless, it still has a winning formula for meeting consumers at their point of need through its reactive product life cycles. Therefore, it is imperative for the company to maintain this advantage by moving production centers close to its new source markets. The only sustainable way for Zara to stay profitable is if the company had a market other than the saturated European market. It should build its business in China by having production facilities there, and thus cease being dependent on the European market alone.
It is also necessary for the company to work on its e-commerce platform because this is the distribution channel of the future. Its competitors are embracing technology in product sales, so Zara should not be left behind. Besides, consumers also expect sellers to use online distribution channels; Zara should not disappoint them.
Working on the human resource problems in the company is also crucial in securing the company’s future. Stakeholders need to know that the firm will survive even after the founding father retires from active business. Promotional opportunities often minimize the problem of poaching by ascertaining that the concerned individuals remain loyal to the firms. It was imperative to introduce a new product portfolio for the aging demographic group in Europe. The firm is not exploiting the full potential of the European market with regard to this group.