Zara Spanish Apparel Brand

Zara

ZARA ASSIGNMENT INTERNATIONAL BUSINESS ANALYSIS

SUBMITTED BY : NELUM SHEHZADE

1.Explain how Zara utilizes its design strategy and how it helps its business model.

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Zara Zara produces up to 11,000 different articles each year. The company employs 200 designers who work in collaboration with each other based on feedback taken directly from in-store customers. Partial vertical integration, with owned factories; owned factory production is reserved 85% for in-season production. The designers worked in large open spaces at Zara’s headquarters, with one design center for each of the women’s, men’s and children’s lines. Designers often prepared sketches by hand but eventually worked on a CAD system to illustrate the design and associated specifications. The store specialists worked in the same rooms, reviewing daily detailed printouts of store sales and speaking to store managers by phone to gather informal feedback. Patterns once finalized could be made available to the computers that would guide the cutting tools. Based on samples, the initial collection for the season is finalized and shown within Zara. The company uses a vertical integration system (devised by Inditex) to fulfil demand for its wares. This business model covers all phases of the fashion process: design; manufacture; logistics; and distribution to its own managed stores. The key is the ability to adapt product to customer demand in the shortest time possible, offering a significant advantage over competitors. In fact, the turnaround time for bringing a design concept to the shelves at Zara can be as short as 15 days. All Zara stores receive new product twice a week. This compares favourably with many of the chain's competitors, which usually receive new styles just once or twice each season. The fact that new stock arrives so frequently has several benefits. Most 2

Zara importantly, it encourages customers to come back regularly and, because styles are only available for a limited period, it promotes a sense of exclusivity. Small batch production creates encourages impulse purchase.

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The process starts with an order from the store manager. Because of the logistics system, the time between receiving the order at the distribution centre and delivering the goods instore is, on average, 24 hours for Europe and 48 hours for the remaining stores. Inditex's roots as a manufacturing company served as a great asset in devising the efficient fulfilment model it uses today. From 1975 onwards its factories manufactured specifically for its stores. The advantage of having started the supply chain process from inside the company meant customer service was always at the forefront.

2.How does its pricing structure impact the marketing and business strategy? Zara’s business model makes it more profitable then any other retailer. We already know from marketing that the retailer gets almost half the price of the commodity sold. So by playing both the role of the manufacturer and the role of the retailer, Zara is definitely much more profitable than the average retailer with similar posted prices. Zara’s pricing strategy is to set price equal to cost plus a target margin. “Zara prices are based on comparables within the target market, subject to covering costs plus a target margin.”

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Zara Zara sources fabric, other inputs, and finished products from external suppliers. It has purchasing offices in Barcelona and Hong Kong. This gives Zara a competitive advantage towards the costs of goods sold, as it can purchase from both Europe and Asia according to prices. Inditex fully owns Comditel that managed dyeing, patterning and finishing of grey fabric of Inditex’s chains, and supplied finished fabric to external as well as in-house manufacturers. This gave Zara further competitive advantage, in terms of both cost and control. Inditex also fully owned 20 factories for internal manufacture. These factories apply just-in-time production (JIT). Again, this gave Zara further competitive advantage, in terms of both cost and control. Zara has a low price strategy because they can use a lower cost structure than their competitors. The quality of the products is unique and they can cut costs so offer a lower price. So we can speak of a cost leadership strategy, low cost what gives low prices.

3.Explain how its distribution and inventory system helps provide competitive advantage. Zara’s competitive advantage mainly revolves around the high turnover of its products, low level of inventory, efficient distribution system, and commitment of its employees as well as meeting the consumer demands relating to fashionable clothes. Zara’s high tech distribution system makes sure that no style sits around for long. The garments are quickly cleared through the distribution center and shipped to stores arriving within 48 hours. The distribution center is centrally located among fourteen manufacturing plants. Garments moved along two hundred and 4

Zara eleven kilometers of track from the cluster of factories located there to the distribution center. Hanging garments were arranged on coded bars that sorted automatically by style within the distribution center; stock-picking of hanging garments was done manually. Folded garments were sorted on a carousel, with each garment dropped down a chute toward a box for its destination store based on its bar code. About 2.5 million garments could move through the distribution center each week. Zara’s merchandise does not waste time waiting for human sorting. Zara air expresses goods from its single distribution center in Spain, usually in small quantities. In Zara’s strategy, however, the speedy shipments are part of the core strategy. Zara also ships frequently, allowing lower inventories while serving its multinational market from a single distribution center in Spain. The density of Zara’s store locations in Europe helps achieve logistics efficiencies. They can fill trucks for frequent shipment in markets close to production and ship larger quantities by air to more distant stores. Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. This contrasts radically to most large fashion manufacturers, which rely on low cost manufacturing in Asia and South America, but then pay higher inventory costs and move goods to market more slowly. No inventory was held centrally, and there was almost no inventory at the stores that was not on the selling floor .Final allocations of inventory were made centrally, taking into account current store sales and inventory information, and sometimes included new items not requested by the store manager. Stores received new inventory several times a week. Items that were not sold could be returned for possible reallocation to other stores or for outlet sale. Sale periods were 5

Zara heavily regulated in Europe; only items previously in stock could be marked down. In general, Zara tried to minimize the volume of merchandise moved at end-of-season sale prices, since under their system there was no need for a large inventory clearance. Zara experienced 15-20% markdown sale of season volume, compared to 30-40% for much of the industry. Efficient distribution and inventory systems helps Zara minimize costs and speedy deliveries to the stores across all over the world thus attaining competitive advantage. 4.The lack of advertising may play a role in Zara’s branding effort, how would you defend their approach? At Zara’s management do not believe on a lot of advertising as a marketing tool yet Zara is leading brand of Europe. Zara management decided that they would no longer talk about itself (through mass marketing campaigns), but would instead let the customer talk about it and so increase brand awareness through word of mouth. It has been pretty well received and is growing internationally. The focus of Zara’s management for its branding efforts is on following points: Zara's five-point customers

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1: Store location: The company always tries to find the perfect location and ensure its brand is visible to as many people as possible. 2: Store window: The first meeting point with the customer and the place where Zara advertises the next season's look.

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Zara 3: Interior design and store image: Has to be right every time. Zara renews this image every six to eight months in all of its stores.

4: Goods display: A dedicated team of co-ordinators display the collections by showing off the best trends, fabrics and colours.

5: Customer service: Something Zara believes it's excellent at. The aim is to have as much personal contact with the customer as possible. Zara’s biggest marketing tool is “Word of mouth”, this helps Zara personalize the services and penetrating into the masses with its unique yet affordable pricing.

5.What is the rationale of making a combined tag for European countries? During its long expansion through 2001, Zara printed price tags for multiple jurisdictions showing on the single tag all of its different prices by country. The rationale of making a combined tag for European countries was:

1. This simplified the pricing and tagging procedure. 2.

Saving time and resources.

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Zara 3.

This system permitted goods to be moved from store to store without retagging.

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Unified tagging permitted goods to be trans-shipped between one country to another without retagging.

However at the beginning of 2002 Zara switched to a system of local price marking in the stores, using a device that read the bar code and printed the appropriate local price.

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