C a s e S t u d y : Zara Zara opened its first store 1975 in La Coruña, Spain, as a store selling medium-quality fashion apparel at affordable prices. By the end of the eighties, the brand was located in most major Spanish cities including Madrid, and in the nineties it began to expand overseas as well. Since 2002, Inditex, the parent company of Zara, now comprises several brands: Massimo Dutti (sophisticated urban fashion), Pull and Bear (casual laid-back fashion), Bershka (street fashion), Stradivarius (young cutting-edge fashion), Oysho (lingerie), Zara Home, and Uterqüe (accessories), with Zara still the largest of its brands. Inditex Inditex is a vertically integrated company where most products, especially fashion-sensitive items, are designed and manufactured internally, then dis- tributed to stores. Its design strategy is not to be a trendsetter but rather a fashion follower, responding to customers’ preferences and new trends seen on fashion runways, trade shows, and magazines. Zara’s competitive edge lies in how fast and effi- ciently it is able to transform these ideas and trends into quality products that are available in its stores with a short lead time. As a result, both internal and external production channels direct to a cen- tral distribution center from where merchandise is shipped directly to stores twice a week. The system is based on the concepts of quick response, a set of policies meant to improve coordination between retailing and manufacturing to ensure more flex- ibility and better response to market changes such as just-in-time manufacturing (a strategy based on orders, not inventory built-up) and the use of bar codes and electronic devices to share informa- tion, thus eliminating the need for warehousing by keeping inventory as low as possible. This system allows the company to shorten its cycle from design to store placement to about five weeks for new designs and almost two weeks for modifications or restocked products. Compared to an industry stan- dard of an average six-month cycle, it manages to beat the system and stay fresh and competitive. The shorter cycle also means reduced working capital and the ability to continue supplying the stores with new merchandise, as well as having the capacity to commit resources to new seasons’ merchandise later than most competitors. Merchandise Zara produces three lines—women’s, men’s, and children’s—through a team of designers who follow fashion trends and base their new collec- tions on them. Zara has adopted a philosophy of quick response rather than prediction of trends. Fabrics and trims are picked, samples prepared, and prices are determined, followed by production. Zara’s designers produce two basic collections each year for Fall/Winter and Spring/Summer. The whole process of product development is done with close consideration for and link to the stores. On many occasions, they will produce limited quantities of new items and place them in a few stores for testing. The brand produces large quantities based only on consumers’ reac- tion. In general, 89 to 90 percent of basic designs are common in all stores, while 10 to 15 percent
vary according to country. Items that are slow are swiftly cancelled, and returns are either shipped to and sold at other Zara stores or disposed of through a small, separate chain of close-out stores near their distribution center. The target is to minimize the inventory that has to be sold at marked-down prices in stores during the sales period that usually ends each season. Retailing and Distribution The company designed a centralized distribution system based in Arteixo, Spain, with a network of satellite centers in other countries. Warehouses are regarded as centers of distribution for moving mer- chandise to stores rather than storing it as inventory for a long time, and shipments are generally made twice a week to their stores. Zara owns and oper- ates many of its own stores. In 2001, it operated over 200 stores in 18 countries other than Spain. Its vertical integration is more backward oriented, focusing on responding to fashion trends quickly, so in retailing, they also rely on franchising as well as joint ventures in areas where there are market bar- riers to direct entries, such as in Japan. The vertically integrated model built on the concept of quick response has generally proven to be effective and profitable for Inditex by reducing merchandising cycles and errors as well as inventory risks. Promotion The stores play a major role in promoting the brand because Zara spends very little on tra- ditional media advertising—approximately 0.3 percent of its revenue compared with 3 to 4 percent for most other specialty retailers. Its advertising is generally limited to the start of the sales period at the end of the season. Accordingly, the brand relies heavily on its store front to market the brand (see Figure 5.8). As a result, their stores are usually large in size and located in central locations. The company always prefers to enter a market with a flagship store and considers expansion based on results after they gain local experience. Thus, compared to H&M, for instance, it will usually be running fewer stores in countries where both these brands exist. It also histori- cally has preferred new markets that resembled
the Spanish one with a lower level of economic development and easier entry. Store windows are also of great importance because they are meant to showcase the brand. Store window prototypes are usually set up at headquarters to indicate design themes and direction, which are later car- ried to stores around the world through a team of visual merchandisers and window designers with some allowance for adaptation. In-store music and employees’ uniforms are also determined to achieve a consistent look and atmosphere throughout the stores. Store managers decide on which merchandise to carry, then transmit their orders electronically to headquarters, and manufacturing is planned accordingly. Pricing A major aspect of Zara’s global expansion is its pricing strategy. It adopts a strategy whereby it passes the extra cost of distributing overseas to its customers. This creates a large price discrepancy compared to prices in Spain. For example, prices would be 70 percent higher in the United States and 100 percent higher in Japan than in Spain due to this policy. As a result, the brand is positioned differently in each of these markets. (See Figure 5.9.) In Latin America, for instance, it is positioned with a high-end status emphasizing its “Made in Europe” image (as opposed to being made in Spain), while it is still positioned and priced at the middle market in Spain. Such discrepancies may be among the reasons why the company was late in offering online shopping at their Web site. Recent Growth In recent years, Inditex celebrated a few growth milestones, for example:
• In 2009, Inditex signed a joint venture to open stores in India starting in early 2010. Massimo Dutti, Bershka, and Pull and Bear have opened for the first time in China.
• In 2008, Inditex launched Uterqüe, a retailer specializing in accessories. Inditex achieved a new milestone by reaching 4,000 stores in 73 countries.
• In 2007, Zara Home introduced Inditex’s first online store. Zara also celebrated the launch of shop number 1,000 in Florence, Italy.
After reading the case study on Zara on page 172-174 (highlighted) in your eText: 1. What do you think are the main challenges in the business model adopted by Zara? 2. As per the article, due to Zara’s pricing strategy, the brand is positioned differently in different markets. Do you think this is a good strategy for the brand and why do you think this pricing strategy might have slowed Zara’s on line shopping presence? 3. Zara spends very little on traditional media advertising. Do you feel this is wise? Do you think the company could increase its market share with increased advertising? What single media would you choose to add to the Zara promotional strategy and why?
2) The pricing strategy adopted by ‘ Zara ‘ is not a viable one as it doesn’t add value to its existing and potential customers. The pricing would serve as a deterrent to its overall growth as the exorbitant differential pricing across countries would erode the customer base, in the near and distant future. In the present times,as there are a plethora of brands across the particular segment. The target group is willing to pay a premium for the offered products / services. Besides this could have also served as a constraint towards establishing ZARA online shopping presence because of the high difference in pricing offered in countries across the globe. This is in striking contrast to the business model of online shopping being pursued by different brands which offer discounted pricing and lucrative promotional offers on a regular basis to appeal to the target audience.
3) Lesser spending on traditional media advertising is to a considerable extent a correct and wise move. This is because considering the pros and cons of traditional media advertising in context of ‘ Zara ‘ as a premium brand targetting a niche segment of customers / section of people. The company could certainly enhance its market share by delving in other modes of advertising such as Print media and outdoor advertising to leverage the brand and create awareness among the target group.
The single media chosen / preferred taking into account ZARA as a brand would be print media. As the company range of products / offerings are for a specific segment of customers primarily. The target group are people who belong to the middle / upper middle class / affluent sections of society. Thus advertising in the newspapers / magazines would optimise ROI ( Return on Investment ) add value and create awareness among the target group both potential and existing ones.