Background
Zara is a Spanish apparel retailer brand based in Arteixo, Galicia. Founded by Rosalia Mera and Amancio Ortega in 1975, Zara is the biggest chain store of the world’s largest apparel retailer group, Inditex (Hansen 2012). Currently, the company operates in 73 countries and has more than 1,800 outlets (Hansen 2012). Zara is known as “fashion imitator” among other players of the industry. Zara has posted revenue of more than €8.0 billion in 2012. The main countries of operation for Zara include Spain, France, Italy, Germany, Russia, United Kingdom, Portugal, China and Japan. The company operates Zara stores as well as Kiddy’s Class stores in several nations. This essay will discuss the current resources and capabilities of Zara, five forces analysis, competitive advantage and actions required in the future to remain competitive.
Resources and Capabilities of Zara
Zara is one of the largest apparel chains in the world. It is a company unique than most of its competitors in the apparel industry. First of all, the company owns almost whole of the supply chain. Zara designs its products, manufactures them and then sells them through its own retail outlets. Even under tremendous cost pressure to outsource manufacturing from low cost countries, Zara maintained its model intact. In fact as of 2012, Zara manufactures 60% of its products from its plants located in Spain and Portugal (Zhelyakov 2013). Secondly, Zara has a zero advertising policy. Thirdly, Zara has a supply chain and design team that can introduce a design change from the concept to market in two weeks. Finally, it introduces almost 10,000 new designs in the market each year whereas the competitors, on an average, introduce only 2000-3000 new designs a year (Hansen 2012).
Porters Five Forces
Five forces model determines the ability of a company to survive in the industry environment, sustainability and profitability. Let’s analyze Zara using Porter’s five forces model to see how well-positioned Zara is compared to its competitors and industry.
- Barriers to Entry
Barriers to Entry in the apparel industry are high. It requires substantial initial investment to start a company. Also, once a company is founded, it requires minimum volume sales to reach economies of scale. Further, apparel industry requires high Sales General and Administrative (SG&A) cost for in-store promotions, advertising and other marketing activities (Zhelyakov 2013). The general concept to market time for a product is high which makes it even harder for a new company to enter as real cash flow starts many months after the initial investment. In the apparel industry, brand loyalty is also a big factor. Customers are very loyal to brands. Zara is a well-established brand in the market with a huge loyal customer base. It should not feel threatened from new entrants due to high barriers to entry.
- Substitutes
With big multi brand apparel retailers dominating the retail side of the clothing industry, it is becoming more and easier for customers to switch brands. In fact, the existence of several brands like H&M, GAP, Armani, Banana Republic, United Colors of Benetton and Zara under the same roof means that the propensity to switch brands by the customers is very high (Hansen 2012). This creates an opportunity as well as threat for the companies. Since Zara offers the largest selection of designs among all the brands, there is no real threat facing the company of its customers switching to other brands due to the lack of choice.
- Power of Buyer
Most of the buyers look for trendy fashion. The quality and uniqueness of an apparel design play a big role in the process of a customer choosing a dress. However, as these days most of the fashion brands come up with latest trends very fast, the cost factor also plays a big role in the buying process. Zara offers an array of trendy designs at a cost better than its competitors. Zara is known as “fashion follower”. It can quickly make changes and introduce products as per the recent trends. When competitors rely on designs that have been envisioned probably six months back, Zara can look at the actual fashion trend of the season and introduce products in the market as per the latest trend within weeks.
- Supplier Power
Power of the suppliers in the apparel industry is not very high. There are many suppliers all across the globe, and in case of a supplier not willing to deliver, there are many substitutes available. In the case of Zara, manufacturing is mostly in-house, and hence it is less prone to problems due to the bargaining power of suppliers. In recent times, we have seen some problems surfacing regarding the poor working conditions of textile workers in China and Brazil. Due to international pressure, all the companies that had suppliers from those countries had to take immediate action. Almost all the companies faced some serious financial implications due to that. Zara also faced some challenges, but it was relatively protected from such supplier related problem due to its in-house production model.
- Rivalry
Finally, the apparel market is highly competitive. Most of the apparel brands cannot exit in the market as they have huge SG&A expense and high cost overheads. It is very important for each one of them to do well as the exit barriers are also high. Zara owns almost the whole supply chain. The overhead cost for the company is substantial. However, Zara currently has no problem as it makes up for its fixed assets by not investing in advertising. It is also an established brand which continues to profit from its brand loyalty.
Competitive Advantage
Zara has a few competitive advantages over its competitors. Firstly, the main advantage of Zara is its capability of introducing a product within a matter of few weeks into the market. It can introduce a new product from concept to floor within 3-4 weeks (Zhelyakov 2013). On the other hand, most of its competitors including UCB, H&M etc. take almost 6 months to introduce a new product. It may appear that other competitors may be able to copy the supply chain of Zara and bring down the supply chain lead time. However, it is not an easy thing to achieve. First of all, Zara has created an exceptional forecasting and planning system with the help of the latest technology. Sales are tracked almost real time from POS and production, and delivery decisions are planned based on the real-time data. Retail outlets, warehouse and production plants, are integrated using technology and they function in a seamless manner. Secondly, owing to Zara owning the whole of the supply chain, the control of the company over the supply chain process is significantly high. It can easily change manufacturing plans and designs without any problem. However, most of its competitors, due to having manufacturing partners in low cost Asian countries, face a larger lead time for both production and delivery. This makes the whole new product introduction process slow for the competitors whereas Zara continues to enjoy this advantage over them. Zara is not a “fashion definer” in the industry like Louis Vuitton, Gucci and Prada (Zhelyakov 2013). It does not even try to come up with designs ahead of a trend. Instead it follows the market fashion trend, and the fast response time helps Zara a lot in that. It captures the fashion trend for the season and makes design modifications accordingly. It can then introduce the new product lines within 2-3 weeks.
Zara has another advantage over its rivals, and that is no advertisement cost. It has followed a policy of zero advertising always. Even after following this policy, it successfully launched itself in the apparel industry and made a reputation (Zhelyakov 2013). All of its rivals spend a lot of money in brand building and advertising. They cannot afford to cut down on that cost as they have never experimented with their brands in that way. This extra money saved by Zara from not advertising is used in opening new stores and even helps increase the profitability of the company.
It may seem that Zara has a greater input cost than its competitors as most of its production is out of Europe. The cost of the company is more than the low cost competitors, but it is significantly lower than others. Zara because of its unique ability to come up with 10,000 new designs every year commands the respect of a differentiated competitor (Hansen 2012). Its input cost is also low due to its manufacturing plants being located in Gaelic region in Spain and Northern Portugal, both of which have the availability of cheap labor.
Finally, Zara has one of the highest retentions of customers and also one of the highest repeat purchases per year. With its skill of introducing thousands of new designs every year, the company can hold the interests of the customers throughout the year. In a typical apparel industry store, a customer comes back 3-4 times a year to check out the new designs. In many of those visits the customers end up buying the new designs. In the case of Zara, customers come back 17 times a year to check new designs and new clothing lines and end up buying the new designs.
Areas of Improvement
One of the main problems with Zara’s model of operation is its high investment and high risk model. It owns manufacturing brands, design houses, plants, warehouses and even retail outlets. If the company faces a downturn anytime, this fixed overhead will become a big burden (Zhelyakov 2013). However, if it strategically owns some part of the chain and outsources the less value adding processes, then it will remain more flexible in its operation. For example, Zara sells some of its designs without change year after year as they are popular designs. Those types of apparels can be outsourced from low cost Asian manufacturers as those kinds of clothes have a more stable demand. Lead time is not an issue with that type of products.
Another weakness of Zara is its absence of products in the sportswear segment. H&M, one of ZARA’s biggest rival, has a significant presence in that segment, and most of the other competitors also have good product offerings. Zara can penetrate this segment, and with its unique ability to follow a trend and adapt its design quickly, it can become successful (Stock 2013).
Conclusion
Zara is one of the largest apparel chains in the world. It is a unique company that never advertises its products, but remains as one of the most successful brands. Zara is unique from its competitors mainly in terms of its ability to bring new products in the market within 2-3 weeks. It can introduce almost 10,000 new designs every year in the market. Zara has a huge base of loyal customers who continue to show their loyalty because of the company’s offering of a large design selection in its stores. Currently, the company owns a lot of assets that may become a burden if it fails to do well. Zara can also think of expanding its product line to the sportswear area. This will help Zara improve the top as well as the bottom-line.
Works Cited
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