Zara - Case Study

Anne Chen

Zara: Case Analysis Retailing - Final Project Parsons the New School for Design Fall 2011

Fashion is constantly changing.

When it comes to the buyer-driven, vertically-structured, and labor-intensive apparel market, what consumers are demanding one week may not be as popular the next; thus, those who wish to enter such a capricious industry must identify and successfully put into effect strategies which will allow them to always be one-step ahead of both their customers and their competitors. Furthermore, the apparel market usually consists of many players and thus requires that all these numerous actors be coordinated in an organized, efficient manner. Thus, when Amancio Ortega emerged from his humble beginnings as an errand boy in the clothing trade and founded the large Spanish fashion corporation Inditex, he had to aware of its tiered production chains and its accumulation of costs; he also had to recognize the importance of IT. And through Inditex—and most distinctly seen through its Zara chain—Ortega was able to create and capture value and achieve sustainable growth via unique strategies that gave Inditex competitive advantages over its leading threats such as the Gap, H&M, and Benetton.

Inditex, headquartered in Galicia, Spain, is comprised of Zara and five other specialty retailing chains. Each chain is responsible for itself— thus they’re organized as separate, independent business units with a similar overall structure. However, as chains interacted with each other more, it became increasingly evident that coordination would be necessary, and that lesser chains observe and learn from the more matured and experienced chain of Zara.

Zara, the largest and most internationalized of Inditex’s chains, has employed the vertical structure of the apparel market to its advantage in numerous ways. To grasp how Zara obtained these upper-hands in the fashion industry, one must first understand how its business system is organized, why it was structured in such a way, and the strategies that drive the coordination of its many parts.

When it comes to fashion, designs come first, and Zara’s ability to generate affordable yet fresh and attractive attire relies on its creative teams and its capacity to quickly and effectively learn what shoppers are demanding to wear. Its three product lines each have their own team of specialists who design and develop products simultaneously to create two basic collections a year. The process begins with developing initial sketches. Fabrics are then selected, prices determined, samples created, and then

these models are sent to sourcing personnel, who decide how the company will go about producing such an item.

After a design is approved for manufacture, sources, either external or internal, must be selected to provide inputs and other raw materials. If sourcing specialists decide to use an external supplier, the fabric is purchased and then sent to Inditex’s subsidiary, Comditel, to dye, pattern, and finish. This “finished” fabric is then sent to external and in-house manufacturers, where production take place in small batches at a principle manufacturing complex that consists of factories unique to garment type. When items are ready, they’re sent to a central distribution center, then shipped directly from the center to stores.

In Spain, the centralized distribution system of Zara can be seen as a “hub-and-spoke” system, in which the central “hub” is located at Arteixo, through which all of Zara’s merchandise passes through.

Shipments are then sent to individual stores and retailers via a third-party, either a truck or a plane. Once garments reach stores, it’s up to store managers to oversee personnel to maintain stores and their image, work with customers, distinguish which items are flying off the shelves and which ones are lingering behind, and transmit such data to the design teams.

Zara’s strengths can be seen right at the beginning of the designing process, where it’s evident from the start that the quick and efficient diffusion of information is critical. The accessibility of information is vital; “quick responses” between manufacturers and retailers, for instance, and more focus on concentrated downstream intermediaries are unique elements of the apparel industry. Zara’s strategies of innovative IT systems and keeping failure rates low by “testing” out new designs at key stores and increasing volumes only if shoppers receive them positively not only reduce inventory costs and shorten cycle times, but also allow them to respond to changing demand faster than competitors. The importance of information transmittance and speed can also be seen during the distribution and retailing processes— at the central distribution center, handheld computers, for instance, are used so that workers know what items need to be restocked or are overstocked. Orders can thus be completed rapidly, leading to high inventory turnover rates. Furthermore, retailers and designers have to have accessible means of

communicating to each other—thus, store managers are instructed to keep detailed accounts of store volumes and mixes and give such sales data back to designers so that they can begin sketching the next collection.

Zara’s ability to cut costs at all levels of its business reflects another one of its strengths. Speed in not only the movement of information but also in the sourcing, manufacturing, and delivery processes is imperative. Zara needs to both identify and release new designs that adhere to changing trends as rapidly as possible. Thus, its centralized system of having a central distribution center that ships garments directly to stores saves both time and expenses, allowing Zara to design and issue goods in a matter of just 4 to 5 weeks. Other strategies to lower costs in the manufacturing spectrum include having close, long-term ties with external suppliers and workshops, having more control by pairing risky designs with internal suppliers and more basic items with outside ones, and utilizing outsources in developing countries like China, where labor is cheap. In retailing, Zara uses its store’s chic ambiance, prime locations, and seeming “scarcity” of items to draw in customers. Its ability to create such an attractive image with little advertising not only saves Zara money but helps them forge a strong, loyal consumer basis. Zara focuses on refurbishing stores to maintain up-to-date, elegant appearances that are well-adjusted to reflect local regions. Here, it’s important to recall two important characteristics of the apparel industry: it’s highly labor intensive and vertically-oriented. Most chains cut costs by outsourcing production; Zara is unique because it has developed a system which efficiently touches on all parts of the entire value chain because it has successfully vertically integrated many of the chain’s components into its system.

Zara creates value via new designs reflected in their regular merchandise releases and captures it successfully through its prolific IT systems, cost cutting methods, and understanding how the verticallystructured apparel industry works. However, it does have its weaknesses. In the always-changing fashion industry, much money must be put into research and design. Fashion also varies from region to region, and this affects how Zara must present its different stores and train its employees—all substantial costs.

Moreover, vertical integration is limited, such that Zara is unable to utilize economies of scale. There are also many constraints facing international expansion, which can be extremely lucrative to a business if

done correctly. Zara, however, because of its overall system structure, is quite deterred—thus, it is my prediction that the threat of Zara extending into the U.S. market is small and not of great concern for GAP. To begin with, all of Zara’s success in creating and capturing value is predicated on the tactful positioning of its suppliers, distribution centers and stores—its “cost-cutting” abilities rely greatly upon the close proximity of these players. The farther Zara dares to drift from its home base in Spain, the more limitations it will face—it has been quite successful in broadening its reaches in Europe, but the economical situation and fashion sense in a market that’s as distant as the U.S. may result in too many costs. Zara, with its longer history in the European fashion market, knows what those specific consumers desire—upon entering the U.S., however, they must start afresh not only in establishing new distribution centers and satellite stores, but also in adjusting to the American fashion sense, which is far less fashion forward than the European’s. There is thus great resource commitment, high operating costs, the need for experienced management, and the risk of weak demand.

Also, when entering a new international market, Zara must consider micro- and macroeconomic shifts, trade limitations, government regulation, and tariffs. Legislation may tighten import-export abilities to protect local producers. There’s also the issue of foreign exchange rates—since 2002, the euro has become the only accepted currency within the European Union, and so Zara would have to consider the factor of converting euro amounts into dollar prices when attempting to secure itself in North America.

In the fashion industry, success revolves much on establishing a prominent brand name. People follow trends and turn to well-known designers, such as Gucci, Prada, and Chanel, to determine where to spend their money. There is the mentality of “you are what you wear”, which is why fashion labels tend to display logos on their clothing, such that shoppers will buy their product and not mind spending more money so long as they can proudly flaunt that the polo they are wearing is from Ralph Lauren. Thus, if Zara were to enter the U.S., it would be an unknown, unappealing name—consumers will be hesitant to buy this foreign merchandise unless they’re at very low prices. Zara could either cut the prices that they

sell their garments, which may trickle back and take away from their net marginal revenue, or gamble with maintaining prices to cover the costs of production—either way, there is a lot of heavy risk involved.

Italy’s Benetton and Sweden’s H&M’s struggles in their previous attempts to enter the American market already show how difficult it is for foreign retailers to establish formidable roots in the U.S. GAP has its advantages: it is an already well-established, American company, with a strong, loyal customer base, which is critical for a brand to take off. Zara is an inarguably successful retailer—with its multiple competitive advantages, innovative technology, and smartly-organized business system—but GAP must remember that this eminence exists fundamentally in Europe, and trying to replicate such a model in the U.S., which is a completely different environment, both economically, politically, and socially, will not be easy, if at all possible. And even if Zara does manage to begin setting firm footings on American soil, GAP can quickly move to draw shoppers away and destroy fledgling stores, as GAP has been in the U.S. since 1969 and thus has more experience and understands the American shopper’s tastes.