Zara Analysis

Turning the Fashion World Upside Down

13 December 2007

Introduction
ZARA is the flagship chain store for the Spanish Inditex Group owned by Spanish tycoon Amancio Ortega, who also owns brands such as Massimo Dutti, Pull and Bear, Stradivarius and Bershka. Today, Inditex is probably the world 's fastest growing clothing retailer with over 3,100 stores around the world in over 70 countries (more than four times the 2000 figure) the Zara format taking around 1,000 of those stores. In March 2006, the group overtook Sweden 's Hennes & Mauritz (H&M) to become Europe 's largest fashion retailer.
A. Industry Analysis
Inditex belongs to the clothing industry (also called ‘textile products’ - SIC sector 2299). Although the company is also involved in the design and the manufacturing of its products, its main activity is the retail by means of its own stores present in Europe, North and South America, Asia, and Oceania.
This industry is extremely large and gathers a huge number of firms sorted in sub-categories like footwear, men/women/children clothing, fashion, et cetera. As no comparison can be made between companies of other sectors, Inditex (and Zara in particular) must be filed in the sector of fashion family clothing, which consists of the design and the retail of trendy clothes for young men and women. The direct competitors of Inditex are Gap Inc., H&M, and Abercrombie, for example. This specific sector of industry appeared by the end of the XVIIIth Century when the use of sewing machine led to the standardization of textile products. In the following century appeared several manufactures that introduced the notion of trend related to the brand name and not only the product. Fashion clothing, an adult market, has been aimed at young people -especially teenagers- only very recently (beginning of XXth Century).
This sector is growing because of several factors: the increase of brand recognition and the fashion importance in nowadays’ society and the increase in population coupled with the globalization of the cultures and trends. This sector is mainly led and owned by Western European and North American Companies and the retail takes place mainly in the biggest cities of developed countries first. However, the manufacturing activity of the clothing industry is often concentrated outside these countries because of relocation in countries where labor and facilities are cheaper (Asia, South America, Maghreb, etc.).
The volatility of the industry’s economy is high because it is linked with the economy of the developing countries that provide the manufacturing of the products. Thus a big impact on market prices can result from a very minor political, economic, or social crisis. This is what happened in 2004 when the textile crisis exploded: customs’ fares as well as regulations of ethics and quality led to a decrease of the industry’s growth. But such crisis are often short in duration because of the important demand that allows the biggest companies to make up profit very quickly, and especially in the field of fashion products where the demand is quasi-inelastic and for which an increase of price does not have a very strong dissuasion effect (what is fashionable has to be expensive to introduce customer selectivity). The usual growth rate for the last ten years has been between 12% and 18%, in comparison to 17.95% in 2006 and during a recession of -1.98% in 2004 (See Attachment 1).
B. Environmental Scan
The companies that share the market have different profiles and can be divided in several economic groups related to their financial performances. On one side, Gap, H&M, and Inditex are seen as the dominant players. They have very high sales numbers. However, Gap and Inditex make more profit with a lower amount of sales than H&M. On the other side, smaller brands are gathered in another group (Abercrombie, Esprit, American Eagle, and Camaieu for example). They have more or less the same ratio Sales versus Income, but their dynamic is totally different. Whereas Abercrombie and American Eagle are on the rise and have an increasing ‘fashion’ image, Esprit and Camaieu are leaving the ‘trendy’ sector and moving toward the ‘classic’ clothing sector. This chart shows the complexity and the high variability of the industry. The target market as well as the image of the company is in perpetual change, and quick adaptability to follow the trends is needed.
A factor preventing quick reaction times to bring trends to market is the very complex and heavy processes required to design and manufacture the products. As the competition with low-cost countries grows stronger and stronger, the European and American designer must bet on their creativity and quality first, and in order not to be imitated (the use of patents are very rare in the field of fashionable clothing), they must be proactive and catch the fashion while it is hot. Most of the time, the businesses work on timelines that stretch into 4 to 12 months, but the most competitive like Zara can produce a response within 30 days which allow them to join the profitable trend rather than setting it themselves .
The industry is now regulated by strong policies, concerning employment first, but also about environmental impacts of the manufacturing. The relocation of facilities in developing countries is often motivated by the low labor costs. But international policies now impose very strict rules of employment, and incentives are made to encourage companies to deal with ‘fair labor rates.’ However, a lot of clothing companies prefer not to outsource their manufacturing activity, avoiding a potential bad image and still have the products at low cost, without an ethical dilemma. The use of polluting additives during the manufacturing process is now also regulated as well as the products made from animal skins.
The cultural and social impacts on the fashion industry are characterized by an upward/downward spiral: the products have to be popular to be bought. The more people buy them and show that they possess them, the better the popularity of the brand is. However, at a certain point, if the product is sold too much, it becomes a common good and falls in desuetude (old-fashion).
The demographics are also an interesting factor that affects the market: the more diversified the products of the companies are, the wider their target market. This is why a lot of companies in the fashion family clothing sector (Gap, H&M, etc.) choose to develop collections not only for women, but also for men, with an extension to the market to clothing accessories. It is now socially accepted that such stores are not only reserved for the young women, but for every type of population.
C. SWOT Analysis of ZARA
Internal Strengths: Within summer 2007, Zara and its parent company Inditex surpassed Sweden’s H&M Stores to become the number one clothing retailer in Europe. In addition, within 2007, they overtook Gap to become the world’s largest fashion retailer.
Zara has an unparalleled ability to offer new products to the retail market in comparison to its competitors. This is its core strength. While its competitors such as U.S.A.’s Gap and Sweden’s H&M take the industry average of nine months to get a new product to the store floor, it takes Zara between three to five weeks. This is the source of Zara’s primary competitive advantage. In an ever changing industry like clothing retail, the speed to which a company reacts to changing trends directly correlates to its sales. Store managers watch and survey consumers, they enter the information regarding what is selling and what customers are looking for that they cannot find into hand-held devices. This information is relayed to a regional manager who is in constant contact with a product-development team. Zara’s ability to bring new clothes to its store floors quickly is unmatched.
Instead of having to deal with the “prima donna” designers of the fashion industry, Zara hires young designers straight out of design school who are willing to work in Zara’s fast pace environment. There is also less pressure on the designers because if a design flops, a new design is going to replace it in two to three weeks regardless. This constant movement of inventory gives the designer a “sense of empowerment” and allows for more creativity since the designers’ jobs are not at risk with every design. Zara tells its designers to get it “approximately right, not perfect” in order to not hold up production. Zara’s other important resources include elements of its supply chain. It is a vertically integrated company that owns its own design, manufacturing, and distribution facilities almost exclusively within Spain. Therefore, there is constant communication among the supply chain elements that allows for flexibility and “just-in-time production.” Because speed to marketplace is Zara’s advantage, they have low pre-commitments and low inventory in order to constantly and quickly change their products. “Cheap, chic fashion” is Zara’s identity. It is not looking to compete with high-end fashion or clothes that test time. Zara is all about the new designs in the fashion world now at low prices. Through open store design and minimal decoration, Zara makes its customers feel that they are shopping in an exclusive store, such as Gucci, versus the traditional, merchandise-packed superstores, such as Target. To add to the air of exclusivity, Zara “encourages occasional shortages,” which makes customers “shop and shop often” since customers are not guaranteed that if they leave a product in the store, the same product will be there upon a return visit?
As mentioned above, Zara targets teenagers to young adults, both male and female. It also recently expanded into a home goods line. Regardless, in reference to clothing retail, Zara positions its clothing lines to target young adults who have a desire for high fashion. Stores are located in prime real estate locations throughout the world to help align its clothes with high fashion, but at lower prices. Zara stores can be found in the most well-known shopping districts, such as New York’s Fifth Avenue, Paris’ Champs-Elysees, Tokyo’s Ginza, and Rome’s Via Condotti.
Internal Weaknesses
While Zara’s market share in Europe is very strong, its market share in the U.S. in minimal with approximately 25 stores. Zara does hope to double this number by 2009. However, its biggest competitor, Sweden’s H&M, has hundreds of stores in the U.S. and is better known. Both H&M and Zara are entering the emerging Asian markets.
Zara’s ability to offer new products quickly is a strength; however, it can also be a weakness. If a customer discovers a favorite product, he or she cannot count on finding that product again for repeat purchases. Zara’s products have a shelf life of approximately three weeks. By the time a consumer returns to repurchase a specific product that product is long gone off Zara’s shelves and out of its production lines.
Because of its integrated supply chain and “onshore” production facilities throughout Spain, Zara’s prices are very low for European consumers. However, this low price changes for consumers in the U.S. and Asia because of shipping costs. For example, Zara’s prices in the U.S. are 65% higher than prices in Spain. In addition, the timeliness that gives it its advantage decreases with distance. Zara’s identity is high fashion at low prices; this identity faces the threat of losing its core business by expanding its stores without expanding its distribution centers.
By focusing on younger markets, Zara consciously does not gain market share in older markets that have more expendable income. In addition, its low price inventory keeps away shoppers with more expansive wallets. Zara is aware of this and consciously does not compete for those customers; however, it does miss out on market share by keeping to its one image of cheap, chic fashion.
The most fashionable streets in the world are not accessible to the majority of shoppers. Because Zara depends on in-store sales, it loses out on potential market share by not providing access to its inventory to people who live outside city confines. Zara spends a lot of time and money on its locations to provide the exclusive air it champions; however, it may be at an increasing opportunity cost of unrecognized earnings from consumers who live and work outside of major metropolitan areas.
External Opportunities
The rise of the Internet has affected almost if not every industry across the world. Especially in consumer industries, the Internet has drastically affected sales because of the emergence of online sales that can instantly turn a small, home town store into an international marketplace. The vast majority of clothing retailers offer online catalogues and sale rooms. While Zara and its main competitor H&M offer online catalogs, neither offer online ordering.
In an environment with high consumer spending, Zara could also look to branch into complimentary goods, such as shoes and other accessories. Stores like Gap already have strong complimentary lines, featuring shoes, hair accessories, and handbags in their stores alongside their clothing lines.
With increased globalization, fashion has become more main stream, regardless of country. Zara can take advantage of this by not changing every clothing line depending on the end country. Instead, they can design one line of clothing and replicate it across cultures.
External Threats
Zara’s plan to expand in the U.S. will be more of a challenge than its expansion into Europe. Within the apparel market, “fast fashion” only makes up one percent in the U.S. market. When Zara expanded into the rest of Europe, fast fashion made up a much bigger percent of the European apparel market. For example, fast fashion makes up 18% of apparel in Spain, 12% in Great Britain, and 8% in France. Zara will be facing a challenge to not only expand its brand awareness in the U.S. but to also promote the fast fashion industry at the same time.
From the economic point of view, if the dollar gets weaker, Zara will have a more difficult time creating profits because they produce in Europe. With a strong Euro, it becomes more expensive to export their products.
Inditex’s other stores, such as Bershka, present a threat as well in the form of cannibalism. Cannibalism occurs when a corporation’s multiple entities compete for the same market share. This can also occur by the same company, for example, if Zara opens too many stores within close proximity of each other, they only serve to take away from each other’s profits.
Traditional competitors also pose threats, such as H&M, Gap, and Benetton. If H&M reduces its design-to-store time and continues to expand, they can become a greater threat to Zara. In addition, H&M spends a lot more money on advertising and marketing, utilizing billboards and magazine advertisements.
D. Analysis of the Company’s Product and the Market
As a comparison with its direct competitor – H&M - the Zara’s strategy differs regarding several points. First, Zara does not outsource its production; rather it keeps it in Spain. Then, Zara does not spend a lot of money in advertising on the contrary to H&M. Finally, Zara is not price-oriented, but offers low-cost fashion.
To be able to have an in-depth analysis of a specific market and product, team JELM has decided to study ZARA’s women’s product line.
Zara has the advantage of having superior capacity to adapt very quickly. Thus, Zara can behave as a follower and let other brands forecast the trends. This allows Zara to not take the risk of the Chasm and can then aim at the pragmatists with a low probability of failure.
Zara’s target market is very broad because the brand does not define its target by segmenting ages and lifestyles as traditional retailers do. The main target of Zara is young (20 to 35 years old), educated, urban, and is sensitive to fashion. As people around the world get more access to information about fashion, through various communication devices, fashion becomes more globally standardized and Zara uses this fact to its advantage to offer the latest in apparel. That is why between 80% and 85% of the product lines that Zara offers globally are quite standardized products. This results from the fact that according to Zara’s philosophy, in the sector of fashion, what sells well in a fashion capital as Milan, New York, or Paris will most likely sell as well in other big cities such as Sao Paulo or Madrid since fashion has become more globally accessible.
Finally, in the target of Zara’s women product line, several sub-targets have appeared. While the most mature would be attracted to Zara because of the cheap and good quality products, the younger would consider the fashionable point of view first.
E. The Four “P’s” of the Marketing Mix
Product Strategy
Zara and its women’s line in particular, use a pull process in its marketing versus the traditional push process. To increase foot traffic in its stores, Zara constantly changes its products. While its competitors produce approximately 80% of their products ahead of a season, Zara only produces 50% of its products ahead of time. Therefore, customers are never sure what is going to be on Zara’s shelves the following week. Zara designs clothes to consumer demand, attempting to pull customers in, versus designing ahead of time and pushing those designs on consumers.
The core of the women’s line is to clothe people of course and keep them from the elements; however, this is only the core purpose behind its clothes. The actual product is a highly fashionable line of women’s clothes. Zara’s women’s line of clothing is positioned in the clothing market as the latest in fashion at cheap prices. The line’s competitive advantage is its element of high fashion. No one in the retail industry gets high fashion items to the consumer faster than Zara. As one example stated, fans at a Madonna concert can see what Madonna is wearing the first night and the fans can be wearing that same outfit the last night of the same concert tour. Only Zara can take customer opinion and turn it into tangible, buyable items with such speed. The line’s primary attribute is its sensitivity to fashion; this is the augmented element of the product. Although it is intangible, consumers feel more elegant and with the times by wearing clothing designed off runways. Customers walk into a Zara store or page through its catalogue and they see the clothes that are modeled from the famous runways of Paris and New York. Zara has actually been accused of copying those runway designers. The prime difference is the price. Zara sells the same designs for a fraction of what runway designers sell their items.
Pricing Strategy
“Zara 's prices are extremely reasonable; standard price points include men and women 's pants priced between $19 and $89 per pair. Average prices for jeans are $55 to $75 per pair, while tops are typically $19 to $59.” Zara’s objective is to stay as cheap as possible; it is what it prefers to be known for – high, fast fashion at cheap prices. Zara constrains themselves to lower prices to allow every day people to indulge in high fashion without the customary financial investment. Also, it allows middle class people to buy fashionable clothes and not experience buyer’s remorse if the item suddenly falls out of style since the item did not cost half of their salary, like traditional high fashion clothes items. The quality of the line matches the cost. Buying Zara’s clothes ensures the buyer that she has bought a fashionable item; it does not ensure high quality. The material is of less quality than its more expensive competitors, such as Ralph Lauren or Gucci. However, Zara is not trying to break into the upper echelons of fashion. In regards to its direct competitor H&M, their qualities are comparable. Zara does its best not to adjust its prices. By keeping low inventories, Zara rarely discounts. Zara prefers to meet demand or possibly be below demand. When stores offer price adjustments or discounts, it is usually because they overestimated demand and need to clear out inventory. Zara does not do this because of its just-in-time inventory system.
Considering its actual pricing scheme, Zara fits into Economy Pricing of the pricing matrix. Economy pricing refers to products offered at low prices with relatively lower quality (see Attachment 2). There are not “frills” attached to the price, and marketing and manufacturing are kept at a minimum. As discussed further below, Zara uses minimal advertising and keeps its production and manufacturing costs to a minimum.

Promotional Strategy
As mentioned, Zara does not engage in large advertising campaigns. While its competitors spend between three to four percent (3-4%) of their sales on advertising, Zara only spends zero point three percent (0.3%). Instead of costly television and magazine advertisements, Zara spends its money on location. It uses its stores to do the advertising for the company. The firm has won numerous awards on its window and store decorations, and as mentioned previously, its stores are only found in the most fashionable of districts. Therefore, Zara’s advertising plan is its stores themselves. It also has a highly technical website that shows many flash images of the latest fashions for its women’s line, as well as its men’s line. As for any personal selling, Zara’s trained sales staff is responsible for that.
Distribution Strategy
Zara uses a direct distribution channel, meaning that it sells directly to the customer. It does so to reduce cost therefore increasing profits and reducing the price to the customer. Zara’s manufacturing and distribution system is dramatically different than what most firms are doing at this point. Instead of outsourcing, Zara does its best to keep everything in house as much as possible. It uses onshore manufacturers in Spain and Portugal to keep costs down for its European stores. Just recently, Zara opened up a manufacturing center in Asia to attend to its Asian stores. Its supply chain is known for having a very rapid response time based on feedback from store managers. By using onshore manufacturers, Zara also avoids many “tariff issues and import quotas,” saving the firm money.
As for controlling distribution, all distribution is housed at Zara’s headquarters in Galicia, Spain. All design and half of production are also housed at the same location. By combining all of these resources in one location, Zara is allowed to form teams consisting of designers, buyers, and production planners so lines of communication are completely open to share problems and successes with Zara’s “drawing board to shop floor within two weeks” promise.

Critiques and Recommendations of Marketing Plan
While keeping its distribution and manufacturing centered in Spain has reduced Zara’s costs for European consumers, it drives prices higher for North American and South American consumers. As one of its chief executives said, the 1970s were all about Galicia, the 1980s and 1990s were all about Spain and Europe, and the 2000s are all about “true internationalism.” What this says about the company is that it was not looking forward in the 1970s and 1980s when it was building its distribution channels. At this point in time, as it continues to expand, Zara needs to open a distribution center in North and South America to cater to those stores. Zara’s advantage is its low prices; however, it is losing that advantage in these markets because it has to raise prices to account for increased shipping and distribution costs. If Zara were to expand its distribution channels, it could continue to keep costs down. In addition, by distributing and possibly producing in the U.S., Zara could take advantage of a weakening dollar. Right now, Zara loses money by producing in Euros and selling in dollars. It could cover itself by having distribution and manufacturing centers on both sides of the Atlantic Ocean.

Although “fast fashion” does not make up a majority of apparel sales in the U.S., the U.S. apparel industry is still a $181 billion industry. With only 25 stores, Zara is not taking advantage of potential market share. It needs to open more stores in more diverse areas. Traditionally, Zara’s stores have been found in only urban centers. However, in the U.S., many affluent centers are located outside of cities that draw fashion-conscious consumers. Zara has already entered some of those areas like Georgetown outside Washington, D.C. and Natick, Massachusetts outside of Boston. Zara could open locations in King of Prussia, Pennsylvania, outside of Philadelphia as well as Walnut Creek, California, outside of San Francisco.

Zara has a fancy, highly technical website. It contains an abbreviated catalog and current fashion trends. However, Zara is under utilizing this asset. To reach a broader market, at low distribution costs, Zara can offer online sales. Internet sales continue to climb every year as more and more consumers go to the Internet for purchasing. Zara’s main competitor, H&M, has not entered online sales yet either. H&M has a more user-involved website with a virtual changing room. To counter H&M, Zara needs to offer online shopping. Since it already has an IT team constantly changing its website to reflect the newest fashion, it would not increase its cost structure to add an orderable online catalog. (Its current catalog is more of a reference; it is not active.) By giving consumers online access, it also broadens Zara’s reach to consumers outside of urban centers.

H&M has a strong advertising campaign, via trendy magazines and billboards. Zara can add magazine advertisements to its promotion plan without significantly taking away from its profits. Without the use of celebrities or other promoters, Zara can instill high quality ads at low prices if placed properly in magazines such as Cosmopolitan, Biba (French), and Vogue (American and international). These magazines have a reader base that is aligned with Zara’s target market. Attached to this report (see Attachment 3) is a sample advertisement that Team JELM suggests for a fashion magazine. It is simple yet stylish to get across Zara’s theme of high fashion at a low price, so there are no celebrity endorsers.

One of Zara’s threats is cannibalism. Cannibalism is when the same store over saturates a market, stealing consumers away from each other, as mentioned above. Zara wants to have a strong presence in cities. However, because of its diverse product line, such as women’s clothing, men’s clothing, and teen clothing, Team JELM suggests that Zara diversifies its stores within the same city. Instead of having two identical Zara stores in the same area of Madrid, the two stores can break into specialties, when housing men’s and women’s clothing, while another houses teen clothing. Within the women’s line, stores could further be segmented into a sports store, formal clothing, and future diversifications of its product line. In this manner, sales continue to increase for the respective stores without the stores having to compete with each other for the same consumer base.

Conclusions
Zara is experiencing fantastic growth and has great opportunity to continue that growth. By creating a distribution and manufacturing process onshore, that is completely contrary to the rest of the clothing industry; Zara has created a competitive advantage for itself in the sense of low prices and quick cycle times, introducing new fashions. It is going to take an increase in advertisement and new distribution centers to develop more market share in the U.S. market, but Zara is on the right track because it has recently opened a distribution center in Asia to meet its Asian stores’ needs. By adapting the above-mentioned recommendations, Zara will be able to continue to keep its market share in Europe as well as becoming a highly competitive force in the global market. Attachment 1
Economic comparison of the direct competitors of Zara:

Attachment 2

Addendum to Syllabus Requirement:
Team JELM feels that this paper and presentation was a complete team effort. We all researched it and we wrote and collaborated on different parts. It would be inaccurate and impossible to give credit to individual members for individual parts. Our efforts were not divided by any individual portion; we accepted the assignment in a holistic view.

Works Cited
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Craig, Amanda, et al. “ZARA: Fashion Follower, Industry Leader” Philadelphia University: April 2, 2004.

Ferrer, Jaume, et al. Supply Chain Management Review. “Integration: The Key to Global Success.” March 2007.
Hoover’s Online. www.hoovers.com, Accessed 6 December 2007.
Murphy, Robert. Women’s Wear Daily. “Inditex Net Leaps, Paced by Openings.” 22 March 2007.
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Tiplady, Rachel. Business Week Online. “Zara: Taking the Lead in Fast-Fashion.” 29 August 2006.
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Additional websites used for background information unless previously quoted: http://www.3isite.com/articles/ImagesFashion_Zara_Part_II.pdf http://memoireonline.free.fr/12/05/25/pub-pret-a-porter.html http://www.cafebabel.com/fr/article.asp?T=A&Id=1739 http://www.zdnet.fr/actualites/informatique/0,39040745,39342239,00.htm
http://www.infinancials.com

Cited: Craig, Amanda, et al. “ZARA: Fashion Follower, Industry Leader” Philadelphia University: April 2, 2004. Ferrer, Jaume, et al Zara’s Annual Report, 2006.