Zara

Zara

ZaraCase Study

Submitted by-Nikita Jain 37223Saluja Tirkey- 37260MBA-1(Marketing B)Contents

S.NoContentsPage No.

1.Introduction3

2.Background 4

3.Business Model7

4.Zara in India9

5.Findings 16

6.Perceptual Map19

7.References20

IntroductionInnovation in Textile industryThe textile and clothing industry starting climbing the ladder post the industrial revolution. To cater to the growing need, there was an urgent need for constant innovation in spinning and weaving. And the growth of the industry fuelled scientific research and led to developments like the invention of synthetic dyes (which allowed a much broader range of colour) and the development of bleaching agents. one of the earliest forms of programmable control, long before the invention of the computer, was the Jacquard punched-card system which could control the weaving of different threads across a loom. But actually making material into various items of clothing is more difficult simply because material doesnt have a fixed and controllable shape so this remained increasingly a labor-intensive process.By the twentieth century, the industries had become huge and well established, with growing international trade in raw materials such as cotton and in finished goods. The role of design became increasingly important as basic demand was satisfied and certain regions for example, France and Italy began to assume strong reputations for design. Branding became increasingly important in a world where mass communications began to make the telling of stories and the linking of images and other elements into advertising, which fuelled demand for clothing as much more than a basic necessity purchase.Mass production methods and the scientific management approaches underpinning them diffused rapidly and, in the case of clothing assembly which remained a labor-intensive process, led to the quest for lower-wage-cost locations. So began the migration of clothing manufacture around the world, visiting and settling in ever cheaper locations across the Far East, through much of Africa and Latin America to its present home in China.Today this is a global industry embracing design activities, cutting and processing operations, assembly, distribution and sales all fuelled by a huge demand for differentiation and personalization. This is an industry in which price is only one element non-price factors such as variety, speed, brand and quality matter. And its an industry dominated by the need for high-frequency product innovation fashion collections no longer run along the old seasonal track with winter and summer collections. In some cases the range is changed every month and innovation in information and communications technology means that this cycle is getting shorter still. All of this has shaped an industry which is highly networked across global value chains and coordinated by a few major players. Much of the front end of the industry is about major brands and retail chains while the backroom operations are often small-scale subcontractors often in low-wage-cost areas of the world. Like so many industries it has become somewhat footloose and wandered from its origins leaving behind only a small reminder of its original dominance. Compared with countries like India and China todays European clothing industry is a small player on the global stage. There are some exceptions to this and they underline the power of innovation and entrepreneurship. Zara- BackgroundZaras Vision Zara is committed to satisfying the desires of its customers. As a result we promise to continuously innovate our business and to provide new designs made form quality materials that are affordable. Zaras Mission StatementThrough its business model, Zara aims to contribute to the sustainable development of society and that of the environment with which we interact.The desire for innovation and constant improvement with which we began this project 36 years ago is the motivating idea which has guided us up to the present time. Now we have the privilege of seeing how this original idea, from which many others, with an open and creative mind, have emerged and continue to emerge, has converted itself into the Inditex Group.Amancio Ortega Gaona, on Zaras path to success

IntroductionZarais aclothing and accessories retailer based inArteixo,Galicia, Spain and founded in 1975 byAmancio OrtegaandRosalaMera. It is theflagship storeof theInditexgroup. Inditex group also owns brands such asMassimo Dutti,Pull and Bear, Stradivarius,Uterqe andBershka.The first Zara store was opened in 1975 by Mr. Ortega in a central street in downtown A. Corua, Galicia, Spain. At first it featured low-priced lookalike products of popular, higher-end brand clothes. The store was a huge success, and Mr. Ortega decided to open more Zara stores throughout Spain. During the 1980s, Mr. Ortega changed the design, manufacturing, and distribution process to reduce lead times and react to new trends in a quicker way, in what he called "instant fashions". The companys improvements were based on the use of information technology and using groups of designers instead of individuals.Zara claims that it only needs two weeksto develop a new product and get it to stores, as compared to an industry average of six months. It launches around 10,000 new designs every year. It has resisted the industry-wide trend towards transferringfast fashionproduction to low-cost countries. It also follows a very unusual marketing strategy of zero advertising instead the company prefers to invest a percentage of revenues in opening new stores. Lack of advertisement is also in contrast to its direct competitors such as H&M, Uniqlo and GAP. This strategy has given Zara the identity of a "fashion imitator" company which produces low cost products. Zara has been described byLouis VuittonsFashion DirectorDaniel Pietteas "possibly the most innovative and devastating retailer in the world." Zara has also been described as a "Spanish success story" byCNN.

Manufacturing, Distribution and Supply Chain StrategiesZara is a vertically integrated retailer i.e. it controls almost all the steps, right from supply-chain to designing its products to manufacturing, and finally to the distribution of its products.Zara built its own factory in La Corua, Spain in 1980, and upgraded to reversemilk-run-type production and distribution facilities in 1990. This approach was designed by Toyota Motor Corp. and was called the just-in-time (JIT) system. It allowed the company to establish a business model that allows them self-containment throughout the stages of materials, manufacturing, product completion and distribution of products to stores worldwide within just a few days.

Fig.1: Stages of JIT System followed by Zara

One day its in and the next day its out a phrase that comes to mind when we talk about the apparel industry. The fashion industry runs on a high degree of uncertainty. As there is regular change in trends, it is even harder to predict the market and therefore forecasting the required raw materials and supplies becomes almost impossible. Its important to recognize what chimes with the consumer and quickly respond by satisfying their needs. Additionally, every geographic location in the world differs in terms of spending patterns, local fashion & styles, per capita income etc. and the clothing lines need to efficiently and precisely evaluate the demand that will exist in every market.

We rely on fast-changing fashion so have regular inputs to the design team. We work on minimum inventory model and the efficient distribution network takes care of the supply chain, explained Zara Store Manager, PuneZara has continuously maintained its position as a leader in the apparel industry and the reason its so profitable is its unique supply chain strategies. Following are some of the principles that are the secret to its long standing of being a brand that is both fashion forward and affordable. Quick response to Demand Zara follows a pull model in their inventory and supply chain management. In this model, based on the current trends in the market and the store sales, approximately 900-1000 designs are created. They keep a regular check on the customer spending in the store to assess and understand what types of designs are being consumed and then accordingly make changes in their next designs. Small Batch Productions Zara has a fast turnover i.e. it produces a small number of quantity for every product. This gives them the chance to quickly understand what is selling in the market and whats not. Its also an intelligent way to explore new designs and understand its acceptance rate in the market. This method also reduces the risk of suffering losses from producing large quantities of something that the customer does not want. Even though it may seem like a bad idea to invest in different designs, Zara makes the best use of the same material by using it in different ways. Fig 2. Annexure I for Zaras unique business model Central Distribution Center Zara has very strong IT systems that back its distribution. All the clothes that are manufactured at its different factories around the world are shipped back to Spain, the main central distribution center. From here, it is distributed to its different stores in the world based on their individual requirements and needs of the particular locality. Unique selling propositionZaras unique selling proposition is that it creates and imitates the latest trends within a short period of two weeks. The new styles are available on the shop floors for no longer than 4 weeks and if a style doesnt sell for a week it is removed from the stores.Analyzing Zaras Business ModelWho is the customer?Zaras target market is young, stylish, trendsetting, price-sensitive, and highly fashionable customers. They have an advantage over their traditional retailers as they do not define their target market by segmenting it into age and lifestyle, thus giving them a much broader market.They segment their product line by womens (60%), mens (25%) and the fast growing childrens (15%) department.Zara which started its operations in Spain in 1975, and now operates in over 74 countries worldwide.What is the value proposition?Fashionable, affordable clothesZaras strategy is to offer cutting edge fashion at affordable prices by following fashion and identifying which styles are hot, and quickly getting the latest styles into stores. They can move from identifying a new trend to having apparels ready for sale within 30 days (whereas most retailers take from 6-12 months). This has been made possible by their controlling of almost the whole garment supply chain which covers design to retail. Our main focus is on fast-changing fashion and we give regular inputs to the design team for the same. The efficient and wide distribution network takes care of the supply chain. We have a minimum inventory model. The stock which is a hit among customers, stays in the stores for around one month or till it runs out. The other stocks are changed or tweaked within 2-3 weeks, explained Zara Store Manager, Pune.Large choice of stylesZara produces around 12,000 apparel styles per year which is very high as compared to the retail average of 3,000. This means that the latest fashion trends reach the stores instantly. A typical Zaras customer visits the store around 17 times a year compared to the average of 3 times per year for other brands. These many number of styles also means that the commercial teams have a brighter chance to finding a winning style.ScarcityAnother strategy that Zara follows is of manufacturing only a limited amount of each style, Thus it creates artificial scarcity and lowers the risk of having stock it cannot sell.Scarcity in fashion these days increases desirability, which means that the shoppers need to buy quickly as the item may or may not be available next week.Lower quantities also mean there is not much to be disposed when the season ends; Zara only discounts 18% of its stock in sales, which is half the industry average.Prime locationsZara spends relatively less on advertising (0.3% of revenue) compared with traditional retailers (3-5%), instead they reach their target market by locating their stores in prime town-center locations.How do they deliver it?Most retailers outsource production to low cost Asian countries but in comparison to them, Zara uses a more vertically integrated approach where majority of production is carried out in owned or closely monitored facilities in Spain. This provides a lot of flexibility and speed but results into higher cost of production.Stores place orders twice per week and the supply of finished goods is matched to demand at the store. Having this data, the production is then increased or decreased in the flexible production facilities. The production is based on the amount of demand which means there is very little inventory in Zaras supply chain, therefore there is much lower working capital requirements.It takes around 1-2 days for the deliveries after ordering with most deliveries arriving by truck from the factories in Spain. Apparels are then put straight onto the sales floor for purchase.

Fig 3: Flow of Information in Zaras production model

Zara in IndiaThe world's most popular 'fast fashion' brand, Zara's Indian unitInditex Trent- a joint venture between the brand's owners Inditex with Tata Group's retail arm Trent - has made profits in two out of the three years it has been around. In comparison, Levi Strauss continues to make losses despite being in India for over a decade.Zara has replicated a model that has worked for it globally - creating imitations of the latest fashions or designer-wear at affordable prices and making them available to shoppers in double-quick time. Inditex being the owner of Zara, controls major part of the operations - from design to distribution and a large chunk of manufacturing. Zara is very proactive and takes any non-appealing clothing line off the shelves within a week. Even popular styles are not kept beyond 4 weeks. There is minimal warehousing and reorders are rare.Industry executives said demand is only part of the reason for Zara's financial success in India. It is observed that by striking a good deal with landlords and mall owners, Zara keepsreal estatecosts in control. Most of its back-end jobs and merchandise sourcing are handled by Inditex while the Tata expertise is mainly for identifying real estate and suitable locations. Also, speaking of the directors on the board of Inditex Trent, just three out of eight - Inditex Trent'sChief Financial OfficerP Venkatesalu, vice-chairmanNoelTata and the company's MD Sanjay Rao - are Indians. Rao, who was previously financial controller at the company inNorth America, relocated to India and launched the operations.Zaras annual sales in last fiscal soared to Rs 580 crores in India, with each of Zara's nine stores in the country making Rs 45 crore on an average, over six times more than the country's largest apparel brand Louis Philippe and a tad higher than the country's largest department chainShoppers Stop.

Runaway fashion at runaway prices is what Zara is for me. I visit the store for its unique clothing range having something new to offer on each visit, thus bringing exclusivity to my wardrobe, explained one of Zaras customers outside its Pune store.Inditex Trent, the Indian arm of Inditex, clocked 56% growth in sales without any new store addition in the year ended March 2013, according to its latest annual report.What Makes Zara Different From Its CompetitorsIn terms of revenues and growth, Zaras main global competitor is the Swedish firm H&M. H&M has already got permission from FIPB in November 2013 for opening its wholly-owned subsidiary in India. They have been eyeing India for some time now and have finally got the permission for opening their stores in India. The two leading fashion retailers have been competing to grab larger market shares across the globe which will also be the case in India, though Zara has a big first-movers advantage. In the rat race to supremacy, both the labels have transformed their philosophies into business models intricately, which has been a major motivator to drive towards success.In the Indian market, Zara is competing with Marks& Spencer (Major British multinational retailer), Tommy Hilfiger (American fashion designer) and French Connection (British multinational retailer commonly known as fcuk).Zara offers mid-market chic at down market prices. Zara when compared with its competitors is a clear winner when it came to turnaround time. For a typical brand, the entire process starting from defining a concept to receiving goods in the retail store took anywhere from 9 to 12 months. As Zara geared up to enter the US in a big way, it was being compared to Gap (a leading fashion retailer in the US) and H&M (Swedish retailer who had also entered the US recently) more frequently. A key differentiator was Zara having the shortest turnaround time. Zara's turnaround time was 14 days, whereas H&M took 21 days and Gap needed 9-12 months to reach stores.

Fig 4 : Brief Comparison of Zara with its Major Competitors in IndiaSource: Annual Reports & Industry Estimates (sunandchronicle.wordpress.com)

The profit margin on the products manufactured is also low, but Zara invests a meagre 0.3% of its sales to market its product because of the fast changing fashion trends unlike its competitors and as the manufacturing is done in less quantity, a failure of a fashion trend still leads to minimal loss. It has been proved that only 18% of the total production goes for an annual sale compared to 35% of its competitors in the international market. (Refer Fig. 7 Annexure I)Zara is a smart choice of those that want to combine fashion with great price. A customer survey in Pune reinforced this with the fact that 67% of respondents found Zara synonymous with fashionable clothing line and quality clothing brand (Refer Fig.7 Annexure I). Probably its ability to imitate and copy the great designs of the top firms and put them in the best located stores in the quickest time is the killer combination. The clear example of this strategy is the success story of its expansion to Italy. Milan is considered as one of the worlds fashion capitals. Many foreign firms have failed trying to open new stores there, because of the protectionist attitude of the Italian industry and the exigent Italians customers being used to getting the most radical and latest designs at a reasonable price. The best opening record made in Milan was by Zara and today is one of the most successful firms in the city.

In India, no brand provides fashion at such affordable prices. If we are not able to change the fashion trend regularly, we will not keep up to our reputation. We bring in new styles, new trends within a matter of 2-4 weeks having wide distribution system, Zara Store Manager, PuneIn India, Zara has been targeted towards the upper middle class and above, mainly in the age group of 18-35 years. In order to target the market, Zara strategically launches its outlets in high profile locations and provides customers with a turnover time of 4-5 weeks for its new collections made available at a fraction of the couture cost. Its styles include trendy, classic, contemporary, grunge, Latino and therefore is more preferred by women than men in India. The main objective for positioning the Zara brand in a market as mentioned by the company is to democratize fashion (Refer Fig. 6Annexure I).The company targets to deliver to its customers, trendy and high fashion products at lower prices to accommodate their requirements. Another pointer is Zaras marketing strategy of opening stores and outlets that provide the Zara experience at high profile locations to set the image of the brand as being trendy, hip, high fashion and accessible.Marketing StrategyThe fashion company Zara has a marketing strategy that is quite unique. As discussed above, Zara doesnt believe in advertising. This would be the reason Zara does not appear on television or poster advertisements. Prospective customers read articles on Zara in magazines, e-newspapers but no promotional activities are undertaken anywhere whatsoever. Zara also believes in word of mouth promotions, celebrity followings, said the Manager in charge of Zara Store, Pune.Zara focuses heavily on their product, place and pricing and not so much on promotion. Unlike other retailers, Zaras advertisements are limited and do not even include any store sales or sales promotions, other than sale items. A key point to note is that they never place their brand or logo on their products. It is their innovative products and affordable pricing that keeps customers returning to their store. Their products seemingly advertise themselves.

Fig. 5: Product Pre-commitments: Zara vs. Traditional Industry In addition, Zara has remarkable logistics and they are able to get a product from design to the shelf in just two weeks. Using such remarkable efficiency, they are able to produce thousands of new designs a year. In fact, Zaras website claims of it producing new products every week. Zara is famous for its fast fashion, due to which popular and trendy products may disappear off the shelf within days, which constantly pulls customers to stores to check for new items.

Fig 5: Product Pre-commitments: Zara vs. Traditional Industry

Zara also markets its brand through rapid expansion; it opens close to 150 new stores every year, thus expanding its footprint to around 1,500 stores in over 70 countries. With the brand becoming world renowned, the company is also focusing on sustainable marketing by opening stores which consume 30% less energy compared to the average conventional store. The new stores also save 50% of water consumption and maintain their CO2 emissions below 150 tons a year.Future Expansion PlansInditex Trent has plans to throw open over 18 stores in the next 3-4 years in Tier-II cities such as Mangalore, Surat and Indore.The pitfall could be that shoppers in these cities may not have the same attraction for Zara despite having the propensity to spend on international brands. As Zara expands in India, experts said the challenge will be to sustain sales momentum. But Mr.Anshul, Sales Manager at Zara, Pune was confident of Zaras growth plans, Regarding the strategy of expanding in the near future, we will be conducting a thorough research study and mapping various cities overall feasibility. We plan to open up in promising Tier 2 cities as well.

Survey on Zaras customer perceptionQuestionnaire:Are you aware of the brand ZARA ?* Yes NoDo you know that Zara has a fast changing fashion collection? Yes NoHave you shopped/visited the store?* Yes NoIf yes, how often do you visit the store? Less than once a week Once a week Once a month Less than once a monthPlease indicate how attractive the following features of Zara are to you*Very UnattractiveUnattractiveNeutralAttractiveVery Attractive

Latest Fashion Trend

Quality

Customer Service

Please indicate your level of agreement with the following statements related to ZaraStrongly DisagreeDisagreeNeutralAgreeStrongly Agree

Low prices

Contemporary image

A well-known brand name

Convenient location of store

A good store atmosphere

High quality products

Zara is a trendsetter

How did you hear about Zara? (Tick all that apply) TV or Radio Online Media (Facebook, online forum, etc.) Print Media (Newspapers, magazines) Word-of-mouth OtherDo you recommend Zara to others? Yes NoPlease rank the following brands in order of preference with respect to price*(1 being the lowest and 7 highest)1234567

Zara

Forever 21

Mango

Guess

Vero Moda

Esprit

FCUK

Please rank the following brands in order of preference with respect to quality*1234567

Zara

Forever 21

Mango

Guess

Vero Moda

Esprit

FCUK

Findings of the survey:Number of respondents: 1001) 97 % were aware of the brand zara2) 80 % are aware that zara has a fast changing collection3) 79 % have visited the store4) 57% of the respondents visited the store in less than a month.

5) Features of Zara:

6)

7) 80% of the people heard about Zara through word of mouth8)82% recommended Zara to others9)

Zara ranks high on quality but low on price when compared with other competitive brands whereas

References

1. http://www.zara.com/in/2. http://www.harbott.com/2011/03/03/analysing-zaras-business-model/3. http://www.bbc.co.uk/news/101988544. http://www.fashionunited.in/news/apparel/after-grand-success-zara-plans-18-stores-in-india-0507201356905. http://www.slideshare.net/anetxin/zara-107561766. http://www.studymode.com/course-notes/Stp-Brief-Of-Zara-1007804.html7. http://articles.economictimes.indiatimes.com/2013-07-03/news/40352021_1_zara-inditex-trent-brand-owner8. http://www.thirdeyesight.in/articles/why-we-love-zara.htm9. http://www.firstpost.com/business/how-zara-nailed-fashion-retail-in-india-924085.html10. http://www.fashionunited.in/news/apparel/exodus-of-managers-at-zara-india-04062010058011. http://in.reuters.com/article/2012/07/25/india-inditex-zara-idINDEE86O05J2012072512. http://www.livemint.com/Leisure/Haij1kOiMie8BvJdVgeFqJ/Why-we-love-Zara.html13. http://www.inditex.com/en/press/other_news/extend/0000086514. http://www.fashionunited.in/news/apparel/zara-opens-doors-in-surat-131220136406

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