Zara: a Spanish Success Story - Case Study Example

Background Zara, the Spanish clothing company is the flagship brand of Inditex, a holding company located in Spain. In a very short time Zara has become the second largest clothing retailer with 2692 stores in 62 countries worldwide as at January 2006. Zara accounts for 66 percent of the group’s turnover and in addition to Zara, Inditex own several other well known brands - Kiddy´s Class (children’s fashion), Pull and Bear (youth casual clothes), Massimo Dutti (quality and conventional fashion), Bershka (avant-garde clothing), Stradivarius (trendy garments for young woman), Oysho (undergarment chain) and Zara Home (household textiles). Due to its unique but effective practices, it is acclaimed as the high fashion/low cost brand for all. Zara has been described as "possibly the most innovative and devastating retailer in the world," by LVMH fashion director Daniel Piette (CNN, 2001). They break all rules of the apparel industry. Zara wanted to conquer the world of fashion using a low-cost approach (Heyden, 2007). In the apparel industry demand is uncertain because it is difficult to foresee the fashion trends in advance for a certain season and product failure rates can be as high as 10 percent (Diaz, 2005). Demand can also be volatile because demand can change suddenly due to a variety of external factors. Zara is able to react to the market trends immediately. It always keeps itself abreast of the change in trends and its product life cycles are shorter. Because it has control over the entire process from the factory to the shop floor, it can react fast to the changing fashion trends and consumer tastes (CNN, 2001). While competitors like Gap and H&M take up to nine months to change the product line, or get new lines to their outlets, Zara takes just two to three weeks. Zara introduces about 12,000 new items per year and maintains an SKU of 300,000 per year which is four times higher than industry average. Their product life cycles are three weeks, twelve times faster than industry average (Diaz, 2005). Zara’s product range is updated constantly. They cater to a broad range of customers – right from infants to the forty plus range. They run three parallel, but operationally distinct product families. Their product range includes mens, womens and childrens good quality, mid-price fashions (Dinero, 2004). Bakewell, Mitchell and Rothwell (2006) contend that clothing for every season is being produced to suit every market and every generation. The emergence of market power concentration is strongly linked to the development of strong retailer brands (Moore, 1995). Zara’s fashion clothing keeps in tune with the seasons and responds quickly to customer preferences. To expand its brand it counts on its flexible structure and can adapt to any market (Wharton, 2003). Despite having a solid backing and a unique strategy, there are two problems that Zara should be prepared for – ineffective brand management and inefficient IT infrastructure. So far Zara has done away with traditional advertising and relied on word-of-mouth publicity. It has also been enjoying customer loyalty. They proudly claim that a Zara customer visits the stores 17 times a year against 3 to 4 times that customers visit other stores. Zara needs to rethink its operational processes as economic pressure and consumer slowdown has already affected business and sales volumes. Inditex shares have fallen 24% in the last twelve months. Investors are worried about an economic downturn in Spain which generates a third of the $12 billion in sales for Inditex (Rohwedder & Johnson, 2008). Brand management Internationalization in the clothing industry became rampant after the removal of the quota in the textile and clothing industry from January 2005. This has given rise to emergence of international competitors. Zara is vertically integrated and democratized the fashion sector. They offer latest fashion in medium quality at affordable prices. Inditex has multiple brands and Zara, one of its brands is getting diluted unless protected. Zara is its flagship brand and generates almost two-thirds revenue for the group and if Zara fails, Inditex as a group will fail severely. A brand is no more about a name or a logo or even image protection. It is more of a relationship and the experience that the consumer has with the brand. The brand builds a relationship with the customers over time and ensures the company gets a premium price compared to unbranded products. In the fashion sector exclusivity of the brand image is very important. In the past the critical success factors for fashion companies were manufacturing and production technologies but today it focuses on brand and retail management. Brand more than the product plays a fundamental role because it is a tool to stabilize the relationship between the company and the client (Saviolo, 2001). Branding is a way of organizing and extracting value from scarce resources in the fashion industry. Zara on its part has been building on its efficient supply chain management and fast changes in styles. So far Zara has been successful in its operations but Christian Dior too was successful for twenty years. It then became the most classical, conservative company losing touch with the brand’s original spirit. They brought in new designers and started giving importance to the emotional values that were prevalent when the brand started but returning to the past is not the answer in today’s fast paced world. The fashion brand has to connect to the identity that the consumers hold with the brand at this moment. Hence Zara should focus on maintaining its brand image which is fast getting diluted due to various reasons. Zara has been building brands within the domestic market and then launching it in international markets. Brand management in the internationalization process in the fashion industry is of great importance. Internationalization is based on the transfer of a retail brand, with its associated image for consumers across national borders (Lopez & Fan, 2003). The brand image has become an important tool in the internationalization for a retailer. Through the multi-brand portfolio, Inditex targets different segments effectively. The cost of maintaining several brands and the hazards of cannibalization are major drawbacks (Lopez & Fan, 2003). Inditex has differentiated the brands mainly through product, target market, presentation and retail image. Zara too has transformed itself from a local brand to a global brand in less than twenty years. While its image and positioning strategy are global, it adapts to the local conditions of each country. It follows the dualithic brand name strategy - it has sub-brands like `Zara Woman´, `Zara Basic´ and `Zara Trafaluc´. Zara’s product positioning again differs across countries. It is also based upon design, quality and price. Sometimes Zara has to educate the market and influence the consumers’ shopping habits. Keeping a higher price in the international markets also affects product positioning and therefore its brand image (Lopez & Fan, 2003). Usually the association of a product or a brand with the country-of-origin adds positive value to a product and enhances its positioning. The Spanish fashion sector has not been able to take advantage of such association. On the other hand there has been an adverse effect on its image. Consumers globally are unaware of the country-of-origin of many Spanish brands that are sold internationally. According to international survey about 40 percent of consumers globally do not recognize Spanish products. Spain carries a weak image as an international reference point in the fashion sector and hence does not have an international strategic positioning. Because Italy has a high image in the fashion and design industry, Spanish products adopt names that sound like Italian to draw a positive image and hence try to gain a strong positioning. Zara too is not associated with its country-of-origin. French consumers regard Zara as being of French origin. The product positioning also affects the store in which they are sold and the overall image of Zara. In Mexico they cater to 14 million inhabitants from the upper and the middle class (Ghemawat & Nueno, 2003). In South America they cater to the high-end rather than the middle segment and they have to emphasize that the products are “made in Europe”. They would not be able to sell if they said it is “made in Spain” as people presume they are made in France and hence attracts customers. Zara tries to justify that this is the image they want to have in each country they operate – the consumers should feel that they are from the same country where the consumer is buying the product. Zara’s product positioning is such that it has different pricing for different countries. This can create an adverse image in the minds of the consumer as has been realized by Austin Reed. David Ogilvy also feels that a coherent image is essential to build customer loyalty (Evans, 2000). While fashion requires constant styling changes as Zara has been practicing but this does not mean they can be inconsistent in promoting a long-term brand image. Wrangler and Levi products keep changing their styles but their brand is stable in image terms. Consumers develop a self-image when they use clothes from a particular fashion company. Brand images allow fashion products to communicate the same symbolism to senders as well as receivers. Consumers associate brand image dimensions with self-image and they also seek opinion leadership like celebrities to buy a product especially in the fashion sector. To remain stable and consistent Zara would need to use celebrities to endorse its product. As if now they spend only 0.3 percent of their revenue on advertising for their products and rely heavily on word-of-mouth (WOD) publicity (Ghemawat & Nueno, 2003). No doubt WOD is the best form of advertising but for long-term maintenance of brand image, Zara has to start rethinking its strategy. This is because as Evans (2000) contends, the era of fashion dictators has gone and the consumers cannot be forced into buying any product. Focus should be on brand image which allows longer life cycles. Zara keeps a large portion of its production close to home and hence loses benefits as many its stores are located far away from home. This in turn creates pressure on the efficiency of the supply chain and to make up for costs, Zara charges higher for goods sold overseas. In the US Zara clothes cost 40 percent more than they do in Spain and this could lead to an inconsistent brand image, which is a risky proposition in the globalized world (Rohwedder & Johnson, 2008). The company produces a third of its goods in Asia but has very few stores in that region. So the logistics are lopsided which adversely affects the pricing of the goods and consequently the brand image. By diversifying its product range and attempting to cater to all segments, Zara runs the risk of affecting its brand image. They are trying to add larger sizes to their product range and this would mean that teenagers would have to shop where their mothers shop, which might not be appealing to the younger generation. Zara may lose out on the teenage clientele if this continues, says Reiner Triltsch, chief international investment officer at Westam, a Dallas asset management company (Tagliabue, 2003). The company says they are merely experimenting but have not committed. But then if they do meet with success would it be easy for them to stop the product line? They are cash rich and are experimenting on various fronts before choosing the line. They justify that since they do not stock huge inventory, they would not lose much even if it was a failure but in the process they would affect their brand image. IT Infrastructure The second issue that needs immediate attention is its IT infrastructure which has not been upgraded to the extent it should be. Zara’s information and communication protocol are significantly different from its competitors. Just as in the case of advertising, in the IT also Zara spends less than 0.5% of the total revenue against the industry average of 2 percent (Slashdoc, 2005). Zara utilizes human intelligence (from store managers and market research) and information technology (PDAs) to facilitate informal exchanges (Ferdows, Lewis & Machua, 2005). Hand-held computers are given to each store manager and through these PDAs the managers are in constant touch with the head office. This PDA based application interfaces with the POS. Most of the information systems infrastructure at Zara – from POS to the accounting system has been developed internally. Zara’s POS systems are built on a now obsolete version of MS-DOS, and the whole ordering process relies entirely on an IBM AS/400 server (Diaz, 2005). They do not have any data analytics software nor do they have the manufacturing planning system in place. They need to invest in advanced analytics or forecast technologies based on data mining of POS data which can reduce the workload of the store managers and fetch better results. Competitors like Gap buy software instead of developing it internally. Gap uses different software for planning, forecasting, supply chain, warehouse management and inventory management. They have bought their Financials and Purchasing, iProcurement and Product Development Exchange from Oracle and other different software from different vendors (Diaz, 2005). Zara’s hybrid model relies on human intelligence assisted by IT whereas competitors rely totally on IT (Slashdoc, 2005). While this has helped to reduce inventory levels, Zara’s investment in IT is very low and there is scope for improvement. This system may provide cost advantages to Zara’s operations but for future success and sustainability they will have to enhance their IT infrastructure. At the moment the store managers have to manually assess their inventory which is a slow procedure and resources are wasted in administrative tasks. Store managers do not have any idea how much inventory is held at the distribution centers. This information could help them to place orders accordingly. Zara operates in an uncertain environment but they claim that they can deal with this uncertainty by accelerating operations and responsive action. They contend that they do not need any sophisticated software to make demand estimation as their forecasting period is as short as half a week (Diaz, 2005). Since their operations are unique they further justify that no commercial package will fit their requirement. Zara has expanded globally and is planning to keep adding stores every year in different parts of the world. Zara’s shortcomings in brand management have already been discussed above. Branding has been recognized as a very important issue for fashion competitors. Brands convey value to the customer through a value surround which is developed through the careful management of the marketing mix elements. Fashion competitors like Zara operate worldwide and the brand must convey the same value worldwide. Zara has developed diffusion brands as it caters to different market segments and targets different age groups. This diffusion of branding and adoption of new distribution channels or sourcing of supplies requires the management of a wide range of products through a common core database. Zara needs this efficiency as it has such a fast turnover of products. This enhances the importance of an efficient IT system. Zara should enhance its IT strategy further so that the production department can assess what items are fast moving, including the color and fabric. The shop managers can inform of fresh designs or suggestions but the sale can be monitored through the production department, which can directly download the daily record of sales. They can thus determine the ideal inventory based on past sales of style and color. At the moment, store managers manually assess their inventory and there is room for improvement (SlashDoc, 2005). Manpower resource is wasted as the managers are occupied with administrative task. This can be done through remote computers at the production end. They can keep a track of what sells and what does not while the managers can concentrate on the new customer demands. Such arrangement would help speed up information and better utilization of resources. Zara needs to urgently change the outdated operating system and upgrade from DOS. This would leave them way behind in technology but at the same time changing it in all their shops would be risky too. If they slack in this, competitors are quite likely to takeover and Zara would miss its initial advantage. New software could be used to automatically update the POS terminals for every sale that is made which would prove useful not only at the store level, but throughout the entire supply chain (SlashDoc, 2005). With this, manual sales would not have to be tallied as the inventory can be available through any POS terminal in the store. Pressure on the employees and store managers could be reduced due to this. If all employees use the same system and remain connected, it would promote togetherness and community feeling amongst them. Zara does not have any Chief Information Officer to manage its IT operations and take care of its strategy for expansion and upgrading (Slashdoc, 2005a). Their investment in IT employees is also much below the industry average. They can derive benefit if they have a two-dimensional strategy regarding their POS terminal. It would enable them to cover their short-term and long-term risks and oppurtunities associated with the POS terminals. They can continue with the current POS terminals but at the same time attempt to upgrade their current functionality for better inventory management. Nevertheless, in the long-run they do need to invest in IT and enhance the software that they are currently using for their POS terminals. Technology becomes outdated very fast and their system will become obsolete very soon. At that juncture upgrading will be more complex, costly and time consuming. Their POS applications should include all functions provided by the handheld PDAs. Apart from their drawbacks in the software, the current IT infrastructure at Zara also lacks in hardware. If it does not upgrade its system it will not be able to sustain growth. All there terminals must be connected to the headquarters as their expansion plans are enormous and in order to have better control over all their stores and efficient information management, they need to make upgrading technology an ongoing process. They need to earmark a certain portion of their revenue towards technology. Conclusion and Recommendations Protecting brand image or intellectual property rights is important. To become a global brand it has to have more outlets in Asia, it has to expand its network. Zara should consider these two angles – marketing and selling more intensely in the US and entering the Asian market. It has to analyze whether it would be wiser to produce locally or ship from their headquarters. It has to follow the pattern of Wal-mart or Dell computers. Zara’s brand image is likely to be diluted as Inditex, the parent company of Zara is expanding in various directions like home products and bringing in larger garments for the older women. It is also diverting its investment into its other retail chains. It should not follow the principle of different pricing in different countries as it affects the brand image especially as globally there is a slowdown in spending. IT resources are helpful in attaining the competitive edge. In the supply chain management sector IT investments pay off provided the business processes are in place. Zara uses IT strategy to integrate extensively its store managers with its design and manufacturing executives Technology is extremely important in the supply chain management. With a competitive market scenario cost reduction has to be kept without compromising on quality and increasing the lead time. This requires heavy investment in the IT system, and companies who are proactive will have the advantage. Technology gets outdated very soon and hence they need to adapt to frequent changes to remain competitive. Zara uses an outdated Operating system which needs to be replaced. In a world where technology changes overnight, they can make better use of IT to improve on the information system. Their investments in IT are minimal and today there are service providers that customize software according to individual company’s needs. Zara should invest in IT which would help it to get accurate inventory figures and practice better brand management. References: Bakewell, C Mitchell, V & Rothwell, M (2006), UK Generation Y male fashion consciousness, Journal of Fashion Marketing and Management Vol. 10 No. 2, 2006 pp. 169-180 CNN (2001). Zara, a Spanish success story. Available from: http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/ [accessed 21 August 2008] Diaz, F. C., (2005), An Integrative Framework for Architecting Supply Chains. Available from: http://sdm.mit.edu/docs/cela_diaz_thesis.pdf [accessed 21 August 2008] Dinero (2004). Inditex - Spains world-beating business model. Available from: http://www.businessweek.com/adsections/2004/pdf/0423_inditex.pdf [accessed 20 August 2008] Evans, M. (2000). Consumer Behaviour Towards Fashion. European Journal of Marketing. Vol. 23. No. 7 pp. 7-16 Ferdows, K. Lewis, M. A. & Machuca, J. D. (2005). Zaras Secret for Fast Fashion. Available from: http://hbswk.hbs.edu/archive/4652.html> 04 Dec 2007 [accessed 21 August 2008] Ghemawat, P., & Nueno, J. L., (2003), “ZARA: Fast Fashion,” HBS Case 9-703-497 Heyden, L. (2007). Business Model Innovation - M&S vs. Zara, INSEAD. Available from: www.solvay.edu/FR/Programmes/documents/ulb_gestd201_MSvsZARA.ppt [accessed 20 August 2008] Lopez, C. & Fan, Y. (2003). INTERNATIONALISATION OF SPANISH FASHION BRAND ZARA. Available from: http://bura.brunel.ac.uk/bitstream/2438/2003/4/Zara.pdf [acessed 20 August 2008] Moore, C. M., (1995), Rags to Riches, International Journal of Retail & Distribution Management, Vol. 23 No. 9 pp. 19-27 Rohwedder, C. & Johnson, K. (2008). Pace-Setting Zara Seeks More Speed To Fight Its Rising Cheap-Chic Rivals. Available from: http://online.wsj.com/article/SB120345929019578183.html [accessed 21 August 2008] Saviolo, S. (2001). BRAND AND IDENTITY MANAGEMENT IN FASHION COMPANIES. Available from: http://www.sdabocconi.it/files/wp66_WXJYXKZLUARZ7FH8GE01T01192111699.pdf [accessed 21 August 2008] Slashdoc (2005). Zara; should they change their IT infrastructure to remain sustainable? Available from: http://www.slashdoc.com/documents/49095 [accessed 21 August 2008] Slashdoc (2005a). Zara Fashion. Available from: http://www.slashdoc.com/documents/54309 [accessed 21 August 2008] Tagliabue, J. (2003). A Rival to Gap That Operates Like Dell. Available from: http://query.nytimes.com/gst/fullpage.html?res=9E0CE4D71F31F933A05756C0A9659C8B63&sec=&spon=&pagewanted=3 [accessed 21 August 2008] Wharton (2003). Fashion Chain Zara Reclaims the Glory of Spain. Available from: http://wharton.universia.net/index.cfm?fa=viewArticle&id=565&language=english&specialId= [accessed 21 August 2008] Appendices Learning A study of the two operations in the fashion industry teaches that one has to flow with the time. Organizations can no longer follow their own policies but they have to follow the requirements of the customer. Fashion changes very fast and so does technology. Technology helps to have better control over the process and derive competitive edge. Planning may have been done at some point and the factors were relevant to that time but as circumstances change the companies too need to adapt to the changes or risk being left behind. For long–tem sustenance any company be it in the fashion sector or otherwise, has to take into account the strategies adopted by competitors. While differentiation is important, diluting the brand impacts the image and reduces customer loyalty. Zara has enjoyed unique strategy so far but currently the market is volatile and they do need to rethink their operations. Challenges The study of Zara and its operations has been challenging because it required accessing several journals and websites to get the latest information. It required reading through a lot of material and understanding the concept in the first place. Branding was a subject alien to me and hence I had to devote a lot of time to understand the concept before I would write about it. Success I used to think that Zara is an established brand but this study made me realize that Zara has to re-think about its brand image. The study made me realize how poorly informed we are about different issues unless we go to the depths of it. I feel I have been successful because I could extract the relevant material required for me to complete this paper and I also feel I have understood the concept. I have been able to distinguish what is from what needs to be done. Read More