Zara Case Study
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Introduction Zara, one of the brands of Inditex, founded in 1975, is the most renowned and famous fashion icon. It is not only generating the highest profit margins for organization but also is the most famous and recognized by customers in market. The majority of captured market by Inditex is for Zara. An estimated share of Zara in total revenue of group is 80%. It has 6 global chains including Zara which is the largest and most internationalized with 507 stores worldwide and accounting for 72% of the company’s capital. In 2001, Zara posted EBIT of €441 M (85% of Inditex’s total) on sales of €2477 M (27% of Inditex’s total) (C. page 8). It’s a Spanish based company, and has successfully proven itself as a leading company which is successful in positively providing service to their customers. It is the fashion icon which is serving industry since decades and still its customers are so satisfied that it is going to be even better in future. Management has taken decisions that were entrepreneurial at that time and still most of the companies in industry are not deciding on same fronts. How specifically do the distinctive features of Zara’s business model affect its operating economics? Zara’s business model allows for substantial economic savings throughout their value chain. Starting with raw materials, Zara has policy of acquiring only un-dyed fabric initially, allowing the flexibility to change color, designs and netting material savings. In term of manufacturing and production, Zara relies on heavily on their central location in Spain to reduce shipping and distribution costs, tap into skilled labor in a high wage economy. And keep the flow of items moving from production to distribution with minimal storage times. Based on case reading it could be said that Zara viewed warehouses more as pass-through area rather than storage area. Inditex relies on quick response and just-in-time inventory systems so the level of inventory in current assets will be far less. In the fashion industry, having a high level of inventory can be very risky as the likelihood of obsoleteness due to constant shifts in demand can mean significant markdowns in inventory. Keeping a lower inventory means Zara is able to minimize mark downs to 15-20% of sales in comparison to 30-40% for most European competitors (C. page 14). For the operating economic efficiency, Zara works simultaneously on multiple lines and process phases. As one item is being finished, another may be in early or mid-production phases. Analysts have determined that Inditex’s three closest comparable international competitors are The Gap, H&M and Benetton. When comparing Zara to its competition, the major difference is Zara owns most of its production and retail stores. In comparison, The Gap and H&M own most of their stores but they outsource production. Benetton focuses more on production and less on the ownership of retail stores (C. page 4). Why might Zara “fail”? How sustainable would you consider its competitive advantage to be relative to the kinds of advantages typically pursued by other apparel retailers? When comparing Zara to its competition, the major difference is Zara owns most of its production and retail stores. In comparison, The Gap and H&M own most of their stores but they outsource production. Benetton focuses more on production and less on the ownership of retail stores (C. page 4) Most of their factories owned by the company, together with a wide range of highly experience external suppliers who have a solid commercial relation with the format, which allow Zara to manufacture a model and to have it for sale in its stores within the average of two weeks.
Zara’s business is characterized by their vertical integration. The vertical integration enables their shorter turnaround times and gains greater flexibility while reducing their stock risk. Time will be their important factor for their decision-making, and this helps them controlled their production costs. The team of designers will be another advantage for Zara compare with other fashion retailers. The three lines of items help Zara achieve their different target market. One of the biggest concerns for Zara is the international model. This model may be over reaching it market. Fashions are not the same from country to country and most of international stores are franchises that are not completely responsible for upholding the Zara’s name. It is also hard to sell clothing internationally because of the possibility of tariffs and the cost of importing clothing. For trendy items that are based on fads and short term popularity and not to last for longer time periods. These cloths get worn out quick and are made to last. This indicates that the quality may encourage people to go for other brands that are more reliability and life span. The stress that Zara puts on being trendy also could a problem, since it delays its production on items until after the season has already begun. By reading the case and material available about Zara it may said that they have no real marketing plan, creating an unsuitable branding positions. Was Spain fertile ground for the emergence of an apparel retailing powerhouse? Inditex is headquartered in Galicia Spain which is the third-poorest region in Spain with an unemployment rate of 17% (C. page 6). Spain was productive in manufacturing but lacked a fully developed thread-to-apparel vertical chain, high-quality fabrics, and a strong international fashion image (C. page 7). During the Renaissance period, Galicians were tailors and Spain was home to thousands of small apparel workshops. Spain was fertile ground for the emergence of an apparel retailing powerhouse like Inditex but lacked a “strong base upstream in textiles, sophisticated local demand, technical institutes, universities to facilitate specialized initiatives and training, and an industry association to underpin these or other potentially cooperative activities” (C. page 6). Inditex’s founder, Amancio Ortego Gaona saw this as a great opportunity and opened the first Zara store in 1975 in Galicia, Spain. By the 1980’s Zara had expanded into adjoining markets and was soon in all major Spanish cities (C. page 7). The geographic location of Galicia in the corner of Europe has played a critical role in the success of Zara’s business model. With direct access to the railway and road network, 75% of merchandise is shipped by truck and only 25% is shipped by air allowing it lower its transportation costs. (C. page 12). This has allowed Zara to pursue a low cost and differentiation strategy. Zara’s internal operations and location support this differentiation and low cost strategy which has played a huge role in the company’s success (T. page 373). Eventually, even garments that were manufactured in house, were sent to workshops in Galicia for sewing, specialized by product type. These subcontractors had long term relations with Zara which provided them with technology, logistics, and financial support. This helped establish a stable relationship with Zara and provided value and service to customers. By using workshops near Zara’s manufacturing complex in Spain, product is sent to the adjoining distribution center again further reducing lead times and transportation costs.