Case Study of the Spanish Retail Chain Zara
The Spanish retail chain, Zara, owned by Inditex is a retailer that has been so successful in our world of globalization and new technologies today by simply adopting a new approach in the industry. With their simple business model of speed, flexibility, and high fashion, Zara has the competitive advantage to be sustainable. Zara was founded by Amancio Ortega Gaona (Ortega), in 1975 and went on to become the flagship brand of the holding company, Industria de Diseno Textil, SA, popularly called Inditex, which was founded in 1979.
As of 2002, Inditex operated six separate chains, that being, Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. However, each chain operates independently and is responsible for its own strategy, product design, sourcing and manufacturing, distribution, image, personnel, and financial results. Zara, which contributes around 80 per cent of group sales (Grant 2005, p. 398), is by far the largest, most profitable, and most internationalized of the chains. Its stores can now be found in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa.
With year-on-year sales increasing at around 25% over the last 5 years, it has become one of the world’s fastest growing retailers (University of Cambridge Institute for Manufacturing). Discussion The global apparel market is a consumer-driven industry (Criag, Jones & Nieto, 2004) in which profits derived from “unique combinations of high-value research, design, sales, marketing, and financial services that allow retailers, branded marketers, and branded manufacturers to act as strategic brokers in linking overseas factories”‘ with markets (Collins 2003, p. 44).
Zara’s business model can be broken down into three basic components: concept, capabilities, and value drivers. Zara’s fundamental concept is to maintain design, production, and distribution processes that will enable Zara to respond quickly to shifts in consumer demands and tastes. The main business tactics of the company in context of its business model is:- (i) Short lead time: More fashionable clothes and embracing quick changing customer’s tastes. (ii) Decentralized Management: Taking advantage of the intelligence and trust the judgment of employees. (iii)
Lower quantities: Inventory will be formidable burden in perishable products. (iv) More styles: Providing more choices for customers and more chances of meeting the customers taste. At the heart of Zara’s success is a vertically integrated business model spanning design, just-in-time production, marketing and sales. The distinctive vertical integration feature of Zara’s business model, has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Currently, H&M is Inditex’s major competitor.
Swedish retailer H&M has been growing at an average rate of 20% annually in the past two decades. These two European retailers are known for their ‘fast fashion’ had unique business models and growth strategies which have enabled them to expand quickly and successfully beyond their own borders. With the European markets becoming saturated, Both companies are expanding outside Europe and establish their hegemony in the world market. Yet what is it that distinguishes Zara from H&M and its other competitors? In its process of expanding globally, Zara, unlike its competitors such as Gap, Benetton, and H&M, does not use cheap Asian outsourcing.
Eighty percent of Zara’s materials are manufactured in Europe, with fifty percent made in Zara controlled facilities in the Galicia region of Spain near headquarters. Though the cost of production in Spain more expensive compared to Asia, Zara still manages to maintain competitive advantage over its competitors in regards to operations. Zara maintains local strategic partnerships with manufacturers and suppliers in Europe and this proximity gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behaviour while decreasing costs of holding inventory.
This proximity effect and the flexibility give Zara its competitive edge in comparison to their peers. However, the business strategies adopted by Zara, does have its setbacks to Zara’s success. The vertical integration concept often leads to the inability to acquire economies of scale, which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate which leads to higher costs being incurred as they have to set a higher pricing of Zara products outside of Europe in order to cover supply costs.
Zara has not invested in distribution facilities to support their global expansion. As a result, despite being able to quickly supply their stores at present, they may not be able to supply to a larger number of retail locations due to their “centralized logistic” model. Even though Zara has been successful at scaling up its distribution system, the centralized logistics system might eventually be subject to diseconomies of scale as Zara continues to open stores all around the world and ships product from its single Distribution Center in Europe.
This system may work well with the current number of stores because majority of the stores are centralised in Europe. However, Zara won’t be benefiting from short lead times and low operational cost with a single central Distribution Center model in terms of globalisation and branching out into other countries. Conclusion To successfully expand globally, Zara should focus on one country at a time. Our team concludes that Zara’s current focus should be international expansion in a country that has an open trade market with well formed trade regulations as this provides a safer business environment.
During the globalization process, Zara should maintain short lead time, quick inventory turnover, leading fashion brand and low advertising cost as its competitive advantage. As a result of their product cycle, Zara gives their customers the feeling of scarcity because new items are presented weekly and are often not restocked, and this encourages customers to come to the stores and buy frequently.
As such, Zara invests more in their store layouts as compared to marketing. Their cost advantage and ability to maintain brand recognition and customer loyalty along with other factors such as regional distribution center, vertical integration, outsourcing and eye-catching window displays are essential elements for Zara to build value in the company and to continue to re-invent and innovate themselves to stay fresh in the apparel industry.