TAPMI

Capstone Project
To identify and evaluate international business strategies of Zara(Inditex)
Sriparna Neogi 12/10/2012

Contents

1. Company Information 2. Porters Generic Strategies 3. The 4C Model 3.1 Consumer 3.2 Company 3.2.1 Internal Analysis (KSFs, Core competency, Value Chain, Financial Analysis) 3.2.2 External Analysis (Technological trends, Macroeconomic factors, Social trends) 3.3 Competitors 3.4 Collaborators 4 5 6 Global Expansion Strategy SWOT analysis Conclusion

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1. Company Information Industria de Diseo Textil S.A., or Inditex, founded by Amancio Ortega, is one of the world's largest fashion distribution groups. Ortega started off as a clothing manufacturer in 1963, and integrating forward, in 1975, he opened the first Zara store at A Corua. Inditex, the holding company, was created later, in 1985. Apart from Zara, Inditex Group owns seven other brands Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqe.

Brand Pull&Bear Massimo Dutti Bershka Stradivirus Oysho Zara Home Uterqe

Primary Offering/Target Segment Young peoples free-and-easy fashion For sophisticated shoppers
For the young and avant-garde. Stores are said to have cutting edge look and are meeting points for fashion, music and street art Young women with an informal and imaginative style. Womens lingerie, underwear and nightwear Home furnishings Fashion accessories such as handbags, footwear, etc

The Group, by the end of 2011, had presence in 82 countries across the globe. Inditex has a total of 67,439 shareholders, of which 56,242 are individuals and the rest institutions. Ortega is currently the President of Inditex Group. He is also the majority shareholder of the company wherein he owns 396,600,063 shares through Gartler, S.L. and Partler 2006, S.L. See chart below:

We shall focus on Zara since it is the oldest, biggest and the most internationalized retail chain in the Inditex Group, also 65% of its sales comes from Zara.

2. Porters Generic Competitive Strategies Porters generic strategies help businesses achieve and maintain competitive edge. We use this model to examine Zaras competitive strategy.

Zara follows the strategy of differentiation. Its considered a fast -fashion retailer, which essentially means that Zara can deliver an item from catwalk to stores in 15 days or less. Also, instead of two collections (fall collection and spring collection) Zara rolls out close to 16 collections a year. It is considered as fashionable mass-market brand, yet it provides fashion at affordable prices. Zara provides clothes at prices that are much lower than upscale brands like Prada and Gucci. So, although Porter implied that any firm attempting to follow both cost leadership and differentiation strategies, Zara have shown us that it can be done. Although one might argue that both fashionable clothes at low prices - are a part of the differentiation strategy. 3. The 4C model To identify and subsequently analyze the strategies of Zara, we shall use the 4C model Consumer, Company, Competitors and Collaborators.

We further analyze the business unit by internally by, firstly, identifying its key success factors and its core competencies and then analyzing its operations using Porters Value Chain and financial ratios. For external analysis, we shall concentrate on recent technological trends and macroeconomic factors that have affected the business. Lastly, we shall focus on its competitors and its positioning with respect to its competitors.

3.1 Consumer Zaras target customer has mostly been the young, fashion-conscious female. The whole concept of Zaras fast fashion applies to the fashion-conscious consumers. The average Zara shopper wants to be one of the few women to own a particular item of clothing and for her, to own Zara clothing is to be in tune with the latest fashion trends. The consumer is influenced by celebrity fashion and runway fashion of Paris and Milan. The average Zara shopper is said to visit the store 17 times a year. Additionally, the purchase of fashionable clothing is a high-involvement decision hence brand awareness is an important criteria while choosing. 3.2 Company Analysis of internal and external factors affecting the business will be done in this section. 3.2.1 Internal Analysis In this section, Zaras key success factors together with its core competency will be identified and value chain analysis and financial analysis will also be done. Key Success Factors Key Success Factors (KSFs) can be defined as factors that directly affect customer satisfaction such as cost, quality, time and innovative products and services. Accordingly, some of Zaras key success factors are: Stylish clothes at affordable prices Thousands of new designs every year Zara churns out approximately 22,000 new designs a year. Upscale and prime store locations Zaras stores are located in prime locations such as New Yorks Fifth Avenue, Paris Champs Elysees, Londons Regent Street and Tokyos Ginza district. Clear and differentiated brand proposition Zara is known worldwide as a fast-fashion retailer. It has the shortest lead time from design to distribution. Small collections/Limited edition products resulting in frequent stock-outs .This compels customers to buy Zaras clothes now as they may not be available later. Low inventory levels Since Zara practices JIT, inventory levels are low, with zero safety stock which reduces overall cost of the product. Core Competency can be defined as a discrete activity, skill, technology or asset which is performed better than the competition, enables the generation of significant customer value and provides access to a wide variety of markets. We can rate the activities of Zara and qualitatively examine which of the activities from its core competency.

Activities

Difficult to imitate

Significant contribution H H M M H L

Exploiting Customer H Data Spotting trends H Maintaining low M levels of inventory Production in small L batches Quick fulfillment of M orders Brand Value H [H= High, M = Medium, L= Low]

value Provides access to a wide variety of markets M M L L L M

Thus, from the table above we can observe that exploiting customer data and spotting trends form Zaras core competency. Porters Value Chain We shall use Porters value chain mainly to identify and evaluate the operations strategy of Zara.

Inbound Logistics Zara- the retail shop- has a backward integration with manufacturing. It obtains the clothing items from factories located in and around La Coruna, Spain. Operations Zara has not outsourced its manufacturing to low-cost countries like China or India. Instead, it keeps a tight control on its production with majority of its production taking place in at Zara-owned facilities at Europe (Portugal and Spain). There are 22 factories in Spain, 18 of which are located in and around La Coruna. Other production locations include Turkey and Morocco. Huge quantities of neutral colour fabric are stocked at the production facilities, which can quickly be dyed or printed according to sales trends. It employs a pull strategy by gathering data from the store level and designing clothes accordingly. In other words the choice of colour and print is postponed till last minute. So, if a new style is not selling well according its sales

data, the manufacturing of that item is cancelled. The production batches are small so that inventory levels are always low. Large inventory turnover rate characterizes Zaras operations strategy. It has effectively eliminated the need for safety stock since stock-outs are a norm. Outbound Logistics Each chain in Inditex Group has its own logistics facilities. Zaras distribution centres are located at Arteixo and Zaragoza, in Spain. Distribution is done twice a week and time taken for distribution to European stores is around 24 hours while to American and Asian stores it is around 48 hours and 72 hours respectively. In 2011, Zara opened a distribution center in Long Island City, USA to cater to its NYC stores. Marketing and Sales Zara does little or no advertising. It solely relies on word-of-mouth marketing for its products. It spends less than 1% of its revenue on media advertising. Firm Infrastructure Organizational structure: For its stores, store managers are given a lot of autonomy. For instance, they can decide which items should be on sale, and can place orders for items they thought would sell at the store. For its designing activity, there are a group of people named commercials who decide what should be designed and produced. These teams usually consist of two designers and two product managers. Human Resource Management For manufacturing, Zara relies on a network of hundreds of local sewing cooperatives in northwestern Spain and northern Portugal. It employs around 500 local subcontractors. It mostly hires locals from in and around Galicia and from other local universities. Technology Development Zaras executives do not believe in buying commercial software, instead, applications are written by the IS department that has approximately 50 people. They are divided into three groups Store Solutions, Logistics Support and Administrative Systems. Zaras factories have a high degree of automation. They use CAD/CAM tools for designing and cutting of garments. Procurement Procurement of designs occurs in-house: Zara has a team of 300 designers who design Zaras clothes according to latest trends or customer feedback. Forty percent of raw materials are procured from another Inditex-owned subsidiary Comditel. Another company with whom it works closely is Fabricolor, a dyestuff producer. Apart from these, it sources other raw materials from its 260 odd suppliers, based in Europe and Asia, to reduce its dependency on one single supplier. Financial analysis Inditex, Zaras parent company, is listed on the exchanges of Madrid, Barcelona, Bilbao and Valencia. Its share prices show a positive trend. In 2012 alone, its share price jumped from 63 to 105 per share, denoting the confidence of investors in this company.

Historical Share Price

120 100 80 60 40 20 0 5/24/2001 5/24/2002 5/24/2003 5/24/2004 5/24/2005 5/24/2006 5/24/2007 5/24/2008 5/24/2009 5/24/2010 5/24/2011 5/24/2012

Share Price

Particulars for Zara Net Sales EBIT ( million) ROS

2011 8938 1725 0.19

2010 8088 1534 0.189

3.2.2 External Analysis In this section, major trends and events around the globe, which have affected Zaras operations, are examined. Technological Trends Out of the ten technological trends that Gartner identifies, three are of strategic importance to retail industry. Mobile Applications and Interfaces Social Experience Big Data Mobile Apps: Retailers such as Amazon, Best Buy, eBay, Target, and Walmart have successfully tapped into the mobile ecommerce market. According to a study, their mobile applications collectively reached a total of 60% of smartphone owners in U.S. in 2011. Zaras app, on the other hand, is a classic case of failed mobile application strategy. Good retail apps are those which provide the users with details about products, enable them to purchase through phone and also point out the nearest store. Zaras app lacks all these features - it provides a virtual window shopping experience, allowing users to see its latest collection only. Social Experience: Rise of social media sites like Facebook and Twitter reinforce the idea that the online experience is becoming more social. Organizations need to tap into this system in order to generate benefits. However, it is common knowledge that quantifying the impact of social media marketing is tough. In Facebook, converting fans to purchasers is considerably challenging.

Zara currently has a fan base of 15 million in Facebook. Although Zara regularly posts its latest collections on its Facebook page, there have been complaints that Zara does little to monitor its page and that its frequency of posting news feed is low. Due to low monitoring of the page, solicitations, which have no connection with the brand, frequently come up in the Comment section of the post. In addition, since Zara does not have an online retail store presence in many countries, fans who wish to buy the brands clothes are unable to make the purchase. This is clearly a case of missed opportunities for the company. Big Data: Big Data has huge implications for the fashion industry, especially for fast-fashion industry which thrives on trends. Big Data can be useful in identifying those trends and manufacturing clothes in line them before those trends disappear. Gartner defines it as high volume, velocity and variety information assets that demand cost-effective, innovative forms of information processing for enhanced insight and decision making. Out of this definition, three major characteristics of Big Data emerge volume, velocity and variety. Zara daily captures a high volume of data from the retail level which enables it to identify current fashion trends. Zaras retail staff uses Personal Digital Assistants (PDA) handheld computing devices to take feedback from customers, and provide information about order quantities to its headquarters. Data is also gathered through its point-of-sale system that collects data on how many garments are sold, which garments are selling the most, et cetera. Data from the retail level is entered into the companys database from where designers gather the relevant information and feed it to the factories. However, sifting through the volumes of qualitative and quantitative information collected from thousands of Zara outlets across the globe can be challenging. Using data analytics tools, these data can be structured in a form that is useful to the designers. Macroeconomic Factors Import Quotas: Global textile trade was regulated by the Multi-Fibre Agreement (till 1994) which had replaced Long-term Cotton Textile Agreement before it to include fibres other than cotton. The MFA was dismantled in a 10-year regime starting in 1995 and replaced by the Agreement on Textiles and Clothing (ATC). Following the Agreement on Textiles and Clothing (ATC), EU abolished its import quota system for textile and clothing sector. As a result, there was a surge of imports, especially from China, and EU imposed quota restrictions again on imported Chinese clothes. Finally, in 2008, EU set up a joint monitoring system with Beijing to reduce dumping and protect EUs domestic industries. The removal of import quotas and the resulting flood of Chinese garments into EU markets compelled the European manufacturers to re-think their business strategies. While their Chinese counterparts competed on price, companies like Inditex had to rely on quality, differentiation and shorter lead times, among other things, to compete in the global market.

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Eurozone Crisis: The Eurozone crisis and the depreciation of the euro against other currencies have resulted in two things: one, goods exported from EU countries is now cheaper in the foreign markets, and hence more competitive. Secondly, for retailers like H&M, which outsource more than 60% of its manufacturing to China and other low-cost countries, the subsequent import is no longer cheap, which affects their profit margins. Social Trends Go green: Consumers are increasingly demanding products that are eco-friendly, while businesses are aiming to reduce carbon foot-print. Going green is the new business trend that is affecting businesses everywhere in the world. Zara has recently faced flak for not adhering to safety norms. Greenpeace tests on Zaras clothes found that it contained hazardous chemicals (amines) that could cause cancer. In response Zara has pledged to remove all traces of amines from its clothes by 2020. 3.3 Competitors The companies which operate in fashion market can be categorized into two groups - fast-fashion retailers and non-fast fashion retailers. The companies falling into the former category are Zara (Spain), H&M (Sweden), Topshop (U.K.) and Uniqlo (Japan). The Gap and Benetton fall in the other category since their clothes remain on shelves for six months or more. Moreover, the prices of their clothing items are comparatively higher than their fast-fashion counterparts. To understand Zaras positioning strategy with respect t o its competitors, we observe the positioning map below:

Source: ZARA: Fast Fashion, Harvard Business School Case, 21 December, 2006

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Hennes and Mauritz (H&M): Founded as Hennes (hers) in Sweden in 1947, H&M is the closest competitor to Zara because its business proposition is to offer fashion and quality at the best price. Unlike Zara, H&M does not own any factories but instead outsources product manufacturing to around 700 independent suppliers through H&Ms 16 local production offices in Asia and Europe. To ensure good quality, various tests are performed on the items of clothing. H&M has around 2,206 stores around the world and it operates in 38 markets. Topshop: A part of Arcadia Group, Topshop is one of the top emerging U.K. fashion brands. Topshop clothes too are targeted at the young and the fashionable and the brand reveals new collections every now and then. But unlike Zara, Topshop puts a lot of effort into marketing. It has tie-ups with celebrities like Kate Moss and it also supports and nurtures young designers, while promoting its brand, by sponsoring Graduate Fashion Week. Apart from having around 300 stores in Britain and 125 outlets abroad, Topshop has a large online presence too. The GAP: The Gap was founded in 1969, in San Francisco, U.S. It operates through three store chains Old Navy, Banana Republic and The Gap. Gaps failure as a fashion brand was attributed to its confusing ad campaigns and conflicting marketing efforts. In 2010, Gap decided to enter Asia. The company now has 300 stores in Europe and Asia. The company spends a huge amount of money on marketing - Gap Inc. reportedly spent $114 million on marketing during the second quarter of 2011. 3.4 Collaborators

For suppliers, see Procurement in Value Chain analysis on page 7. Zara handles its own distribution; it delivers stock to over thousands of Zara outlets from its distribution centres in Spain. 4. Global Expansion Strategy

Market Selection Zara chose Portugal for the first leg of its global expansion strategy in 1988. Subsequently it chose New York and Paris, both considered as fashion capitals of the world, for its store expansion. Following a rapid expansion strategy, it opened up stores in 16 countries from 19981999 and in 8 countries in 2000-2001. Zara first opens one flagship store in a major city and then establishes other stores in and around it. Market Entry Zara has used both equity (joint ventures) and non-equity arrangements (franchising) while entering foreign markets. Out of its 5044 stores around the world, 710 are franchises while the rest are company managed. The company uses franchise model for smaller markets such as Cyprus. Zaras franchises are usually given exclusive rights to open country wide chains. For

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larger and more competitive markets, like Japan and Germany, it uses joint venture model. For instance, Zara entered Australia through its joint venture partner with its Melbourne-based partner Premier Investments. Integration Responsiveness Grid While expanding into international markets, companies follow any one of the four strategies global, transnational, international or multinational (multidomestic).

ZARA

Zara falls into the Transnational category. Although, Zara tightly control global operations from its headquarters, in Spain, it provides enough flexibility to its local stores, which can place orders according to what is selling the most and also suggest tweaks in the garments design according to customer feedback. 5. SWOT analysis Strengths Weaknesses Stylish clothes at affordable prices Small online presence Thousands of new designs every year Hasnt been able to tap mobile ecommerce market Upscale and prime store locations Centralized distribution Clear and differentiated brand proposition Has not taken advantage of cloud computing yet Small collections/Limited edition products Low inventory levels High inventory turnover ratio Opportunities Threats US markets are still untapped Imitating Zaras model - Domestic brands in some countries (like Other emerging markets Zenner, Hergi, Arezzo in Brazil) have already started copying Zaras business model

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Saturation of European markets Increased pressure on its responsive supply as it expands Increasing Spanish labour costs 6. Conclusion To sum up, Zara is a fast-fashion retailer that targets young and fashionable women around the world. Its JIT strategy coupled with the ability of its designers to spot emerging fashion trends has made Zara a success story in retail. Zara has followed an aggressive international expansion strategy; it plans to have a presence in all the advanced nations of Europe. Although it has a huge fan base globally, it has not been to fully tap into it. Moreover, its online presence is still meager compared to its rival, Topshop.

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References

Mobile Shopping Top Apps http://www.marketingprofs.com/charts/2012/8652/mobile-shopping-top-appsretailer-websites-and-more The Best and Worst Retailer Apps Part III Link: http://socialmediainfluence.com/2010/12/02/the-best-and-worst-retailerapps-part-iii/ Dont Let This Happen to Your Facebook Page Link: http://socialmediainmarketing.wordpress.com/2011/04/01/dont-let-thishappen-to-your-facebook-page/ Why Zara Store became a Customer Magnet, Link: http://www.snaptasticblog.com/why-zara-stores-became-a-customermagnet/ https://www.fidelity.co.uk/investor/news-insights/21-centurythemes/episode5.page http://www.wibidata.com/author/omer/ Clustering for Competitive Advantage Link: http://www.supplychainquarterly.com/topics/Logistics/20121001clustering-for-competitive-advantage/ John Gallaugher, Information Systems: A Manager's Guide to Harnessing Technology Dr Liz Barnes, Gaynor Lea-Greenwood, Fast Fashion Mike W. Peng, Global Strategy Philippart Michel; Michel Philippart; Christian Verstraete; Serge Wynen, Collaborative sourcing: strategic value creation through collaborative supplier relationship management Keenan, Michael;Saritas, Ozcan;Kroener, Inga, A dying industry - or not? The future of the European textiles and clothing industry, Foresight : the Journal of Futures Studies, Strategic Thinking and Policy; 2004; 6, 5 Andrew McAfee et al, Zara: IT for fast fashion, Harvard Business School Case study