Zara and Its International Expansion

Topics: Economics

Zara is one of the largest and the most internationalized retailers that Inditex Group owns. Inditex Group is based in Spain, which is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children around the world. Zara’s history The founder of Zara, Amancio Ortega, opened the first Zara store in 1975 in a central street in La Caruna, Spain. It was first featured as low-priced look-alike products of popular, higher-end clothing fashions. The first store proved to be a success, hence Inditex Group started to open more Zara stores in Spain.

In order to reduce the lead time and also react to new trends in a faster way, Ortega decided to change the design, manufacturing and distribution process during the 1980’s. This is what Ortega called “instant fashion”. The company made their improvements by the use of information technologies and using a group of designers instead of individuals. The core concept of Zara is they sell “medium quality fashion clothing at affordable prices”, and the vertical integration and quick-response are also keys to Zara’s business model.

Zara started to expand internationally in late 1980’s. The first Zara store outside Spain was opened in Portugal in 1988. Then they entered New York in 1989 and in Paris in 1990. The expansion of Zara stores keeps growing, and until now, it presents in seventy three countries, with 1,341 stores in prime locations of major cities. Business environment The apparel market is a consumer-driven industry, and globalization and new technologies have allowed consumers to have more access to fashion.

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Due to these reasons, consumer tastes are changing rapidly, competition is fierce, and companies are evolving to meet these demand. There are two types of considerations for Zara to successfully enter into the international market- internal factors and external factors, as will be explained in detail later in this paper in the section of international strategy. Market Structure for Clothing Industry ZARA is in a monopolistic competitive market. There are many competitors in this industry such as GAP and H&M. The clothing industry is facing high ressure of reducing costs as they try to have a lower price than their competitors, and aggressive price wars, initiated by competitors working to improve their supply chain management, have slowly removed less efficient makers out of the business. Due to the global financial crisis, the clothing industry slowed down in profit growth from the beginning of 2008, and because of this huge negative impact to the global economy, there are downward pressures on price for clothing makers. The worldwide sluggish economy has decreased the demand since previous affordable prices may not be affordable now.Company such as Old Navy has been able to take over some of Zara’s market shares by offering lower prices. Competitors Gap, H&M, and Benetton are considered three closest comparable international competitors. Zara is relatively more fashionable than all three competitors, and prices are less than Gap and Benetton but higher than H&M. Among these three competitors, H&M is considered the most closest competitor to Zara with some similarities and some differences. H&M differs from Zara in the way they outsource all of their productions and spend more money on advertising, while Zara does little outsourcing and virtually does no advertising.Also, Zara sells only trendy products and not trying to produce “classic” clothes which would always be in style while H&M does produce some “classic” clothes in addition to trendy products. The similarities are they both are European based companies, are fashion forward at low price retailers, and both have a strong international expansion strategy. Strategy and Core Competency Zara uses a combination of cost leadership strategy and product differentiation strategy to support its business model’s core concept of selling the latest style, medium quality fashion clothing at affordable prices.This is achieved through its core competencies of a vertical integration, a vast range of products, and a unique instant fashion system, creating speed and flexibility to the market that provides the chain with a competitive advantage over traditional retailers in the industry. Vertical Integration Since the global apparel industry is high-labor intensive, most retailers and manufacturers seek to lower costs by outsourcing productions to developing countries with cheap labor.However, instead of relying on outsourcing and offshoring, Zara owns great control of its factories, stores, and distribution network because it believes it can minimize the time to market by carefully coordinate the entire production process. The company’s employees make about 50% of its finished garments, with a majority of them being the most time and fashion sensitive products, in any of its 20 fully owned factories, 18 of them clustered around its headquarters. Zara has a centralized distribution facility in Spain, it is cost-effective and time efficient as the distribution center is close to the factory.Also, for Zara the distribution center is a place where products are moved rather than stored, and products shipped to farther destinations or of larger quantities are shipped by air. As a result, not only inventory cost is decreased but the delivery speed is increased. In contrast, most large fashion manufacturers rely on low cost manufacturing in Asia or South America but have to pay higher inventory costs and it takes longer time for the products to move to market. Product Variation By owning its in-house production, Zara is also very flexible in the variety, amount, and frequency of the new styles they produce.Instead of creating a few styles with mass quantity, Zara uses the style greater than quantity concept, launching new collections in increasingly shorter cycles, as it produces approximately 1000 new styles per month while producing in small batches. This creates a rapid product turnover and an environment of scarcity and exclusivity, prompting the customers to buy the product now in case it is gone tomorrow and visit the stores frequently, as said by the Toronto store manager of Zara “We receive shipments on Tuesday and Saturday, which means that we have different items in the store at least twice a week.While each shipment replenishes items that sell well, each also includes new items. That’s why our customers come in often. ” On average, Zara’s customers return to the store 17 times a year, compared to 3 times a year of most of the competitors. The vast range of styles also enables Zara to cope with the changing customers’ demand and to sell more items at its full price. Instant Fashion The instant fashion system, another core competency of Zara, permits Zara to respond to the demand of its consumer better than its competitors.Compared to the conventional idea of spring and autumn clothing collections, Zara is in favor of “live collections“ that can be designed, manufactured, distributed, and sold almost as quickly as its customers’ fleeting tastes. Instead of predicting the trend for the next season, Zara’s designers react to what they see in the current fashion, identifying and catching a winning fashion trend while the competitors are struggling to catch up. Zara is able to do this because it has a vertical integrated supply chain that reduces lead time as explained above.While it takes 60 to 90 days in order to design and deliver a new fashion style in a traditional value chain, it only takes 12 to 15 days for Zara. The fast fashion system also depends on the constant exchange of information throughout every part of Zara’s supply chain. To speed the information flow of consumer desires to their designers, Zara has teams in the manufacturing environment responsible for attending high-fashion fairs and exhibitions to provide the designers with the latest trends. Research on market and travels to the universities and clubs around the world are also conducted throughout the season.On the other hand, in the retail environment Zara’s managers and sales associates are responsible for providing sales analysis, product life cycles, and store trends to aid the designers. This communication system is further accelerated by the IT software for stores to report directly to the production centers and designers in Spain. For example store managers use PDA to check on the latest clothes designs and place their orders in accordance with the demand they observe in stores, while all salespeople are equipped with wireless handheld organizers that let them punch in trends, customer comments and orders.Value Chain Zara has a vertical integrated supply chain owning control of all of its retailing, designing, and manufacturing operations. As mentioned above, unlike most of its competitors that outsource their production to factories around the world, Zara has approximately 80% of its production carried out in Europe, with its various business elements such as the design and production centers in close proximity to each other, around its headquarter in La Coruna, Spain. Purchases: Zara purchases materials from external suppliers.It has purchasing offices in Barcelona and Hong Kong which gives Zara the competitive advantage towards the cost of goods sold as it can purchase from the region with lower prices. About half of the fabrics are purchased in grey to allow for flexibility in manufacturing a variety of colors and patterns, and by owning Comditel, a subsidiary to Inditex responsible for dyeing, patterning, and finishing the fabrics, Zara can always provide the necessary fabrics to the new styles of its products.As explained by Jose Maria Castella, Inditex’s executive, “We have the ability to scrap an entire production line if it is not selling. We can dye collection in new colors and we can create a new fashion line in days. ” Design and manufacture: There is one design center for each of the women’s, men’s, and children’s lines with separate design, sales, and procurement and production-planning staffs. Though it is more expensive to operate three channels, the information flow for each channel is fast and direct, making the overall supply chain more effective.The designers work their designs on a computer system called CAD while communicating with the store managers to receive feedback. Once the patterns are finalized, they are made available to the computers that would guide the high tech cutting tools in the factory. Zara’s factories are heavily automated, specialized by garment type, and focused on the capital-intensive parts of the production process. Inditex owns 20 factories for internal manufacture that apply the just-in-time production system, making the production process fully under its control.Assembly: The assembly of the cut pieces is done by a network of small workshops that are not owned by Zara. They are provided a set of easy instructions to follow for the purpose of quickly sewing up the pieces and provide a constant stream to Zara’s garment finishing and packing facilities. Distribution: All garments, both internally and externally made, go into Zara’s distribution centers in La Coruna or smaller satellite centers in Argentina, Brazil and Mexico to be distributed. Since Zara stores around the world receive new products regularly, Zara’s distribution center s a place for moving the products rather than for storage, therefore no style sits around very long at head office as products are shipped to stores within 48 hours. As mentioned before, this significantly reduces inventory cost and risk. Marketing: Zaea relies heavily on word-of-mouth to market its products to deliver its brand image of high fashion, reasonable quality goods, and rapidly changing product lines instead of using the ordinary retail marketing practices. Zara spends 0-. % on advertisement investment as compared to traditional retailers of 3-4% , because instead of spending on collaborating with big-name designers and advertising campaigns, the money saved is spent on purchasing prime real estate locations around the world, for example Fifth Avenue, Tokyo’s Ginza, and Rome’s Via Condotti. Great emphasis is also placed on the store’s interior design and image by having frequent refurbishing of store layouts and common window display for all of its global stores, as shown as exhibit 1, that position Zara with a prestigious and elegant image.Service: Zara has been growing by looking to its customers for innovations. Instead of viewing the employees as costs, Zara’s in-store staff is young and very sensitive to fashion who serves as trend spotters. Through providing services to the customers, Zara’s employees can understand the constantly changing demand of the customers and transfer this information to the designers to find better way to meet the needs of the customers. IT: The most important support activity in Zara’s value chain is the information and communication technology, which provides speed to the market and exists in every stage of the chain, as shown in exhibit 2.In the upstream supply chain, IT is needed for managing the inventory of supplies, design specifications, and trim specifications. In the downstream supply chain, it is used for managing distribution and collecting information on consumer needs. International Business For international companies, globalization radically influences their production and business model. More importantly, it provides growth opportunities for them to enter foreign markets and thus gain larger market share and increase revenue.Also, it has forced global companies to improve and upgrade themselves through increasingly fierce market competition. Zara has been taking advantage of the globalization to expand its global footprints all around the world. As of August 2009, there are totally 1,560 Zara stores around the world. About 80% of its stores are located in Europe. In North America, there are only 60 stores. In Asia, there are about 91 stores . Currently Zara is still planning to aggressively plot its global expansion though at a slower pace than before mainly due to the global economic slowdown.More new stores are set to open mostly between Europe and Asia . International Strategy To establish such globally diversified presence, the highly successful international strategy Zara has been implementing a strategy with a mixture of standardization and customization. There are three steps associated with Zara’s international strategy: market selection, marketing entry, and marketing approach. Market selection: there are many key considerations involved like labor cost and productivity, distribution cost, shipment cost of raw materials.Characteristics or behavior of consumers, for example the people in France are more fashionable and quality oriented while the people in Germany are more price sensitive, and income per capita are also important considerations. By carefully considering these elements and following a systematic procedure to insure extensive market testing before expanding its operations, Zara so far hasn’t retreated from any selected markets. Market entry: the related considerations include economics factors, government regulations, and entry barriers.More specifically, the economic factors include macroeconomic factors such as tax, political condition, and export tariff, and the microeconomic factors which include local competitors, demand, and location of stores. Zara adopted three modes of market entry- joint venture, franchise, and company-owned stores that depended on local factors. However, Zara would always make sure it has the most control to its stores no matter what forms they take. Marketing approach: Zara customizes its marketing approach according to the unique conditions of each country.For products, the local stores would place order on products that reflect the local preferences and trends. For price, different pricing strategies are used for each country, for example prices in Italy and France are higher because the people there are less price sensitive but are fashion oriented while prices in Germany is lower as it is more price sensitive. For placement, Zara stresses on efficient distribution and ensures all the stores are located in the best locations. Offshoring and Outsourcing By definition, offshoring means outsource their works to another foreign country.In global apparel industry, the general trend for global fashion retailers is to totally offshore their manufacturing to tens of thousands of small apparel makers in developing countries and mainly focus on design and marketing. However, counter-intuitively Zara is taking a different path. It still produces some of its products by itself. 50% of the Zara’s products are manufactured by factories fully owned by it in Spain, 26% in the rest of Europe, and 24% in Asian and African countries and the rest of the world.Only long shelf life clothes like T-shirts are mostly offshored to Asia and Turkey. Due to international expansion, Zara may consider more production out of Spain or Europe in the future, as the high transportation cost from Spain to other far foreign markets like Asia and North America is still a big concern especially when oil prices continue to remain high. Zara has purchasing offices in Beijing, Barcelona, and Hong Kong. Zara also purchases clothing materials from numerous suppliers in Spain, India, Morocco, and the Far East.Under Zara’s inter-connected network, suppliers are coordinated with Zara’s sales projection. Therefore, Zara’s production demand can be quickly met on time. Problems Encountered in International Expansion As Zara continues its ambitious global expansion, there are still some problems that exist. One major problem is the increase of transportation cost and time for Zara as the company is expanding globally while trying to retain a centralized distribution system. In order to meet the global demand, Zara has been increasing its production through outsourcing and offshoring at a higher level.However, this raises the transportation cost and time since all of the products have to go through the distribution center in La Coruna or smaller satellite centers in Brazil and Mexico before being sent to different stores around the world. As a result, international customers have to pay higher prices to bear the transportation cost, as this goes against Zara’s principle of providing quality and fashion at a low price. Also, increasing outsourcing and offshoring means less control, which s one of the fundamental factors in achieving a successful vertical integrated value chain. Another problem regarding Zara’s global expansion is related to the North American market. North America is a highly competitive and vast market, with people living in different parts having different profiles and thus different fashion needs. Moreover, consumers in North America are price sensitive and less trendy. Many fashion retailers there are simply competing on price and discount which is not Zara’s favorite marketing strategy.Also, it is quite difficult to grow business in the North America without advertising. As earlier mentioned, Zara rarely advertises. These problems cause Zara to still not have a major presence in North American. Conclusion Trading higher production cost for competitive competency, Zara has been a successful retailer in the apparel industry; it also has been doing fairly well in expanding globally. It has been able to penetrate foreign markets by producing trendy clothes that satisfy most of the customers around the world with low prices.Zara however can still raise its global market shares by expanding more in North America. To do this, Zara has to conduct more research on North American markets. Another way to increase global market shares is to develop a second central distribution center or production center, perferably in the Americas, which will not only allow Zara to deliver goods in a faster manner, but the close proximity to the American market will also allow them to effectively interpret the particular American fashion.Zara has been increasing its production through outsourcing and offshoring to meet the global demand; they have to also be careful on these outsourcing and offshoring activities since they may have less control. Zara has to make sure that they keep their core competencies in order to maintain its competitiveness in the highly competitive clothing industry.BIBLIORGAPHY CUC, Tripa, Strategy and Systainable Competitive Advantage- The Case of Zara Fashion Chain, Oradea University, Volume VI, 2007, p. 2522 Craig A. , Jones C. , Nieto M. 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Zara and Its International Expansion
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