Fashion Retail in the UK - Case Study Example

Fashion Retail in the UK Organisation Profile Zara had its humble beginning in 1963 in Spain when Amancio Ortega who had a lingerie manufacturing unit in Spain was forced to open a showroom to dispose goods that got accumulated with him due to cancellation of one large order. Since that day, they are conscious of producing what customers want; this is the basic business philosophy that they have remained stick to so far. Ortegas Inditex factory in the town of Galicia in Spain manufactures fashion garments round the clock and ships goods to its thousands of stores across the globe. Zara is recognised as one of the most top fashion brand in the garment industry. Surprisingly, Zara does not advertise in real sense. Zara follows unique business model and it works best for Zara. Zara does not even engage any international marketing agencies at different locations across the world. All corporate communications are done from its headquarters in Spain. It is important to note that Zara’s nearest rivals such as the UKs Top Shop and the Swedish retailer H&M spend nearly 3-5 percent of their annual revenues on advertising. Zara rely more on window fronts and store locations to advertise in any location. They spend a significant amount of time and efforts in designing window fronts to entice customers (Kwan, 2011). In the UK, as on Jan 2014, Zara operates 65 stores and has become one of the top fashion brands after launching its first store in 1998 (Goldfingle, 2014). By end FY2013, Zara sells in 87 countries through a network of over 6,340 stores globally. Its sales in FY2013 reached to €16.7 billion (Inditex, 2014). Strategic Theory Involved Successful businesses spend considerable time to understand their business and accordingly devise their strategies to increase their revenue and profits. Zaras business strategy adopted in last several decades can be very well understood by applying the Ansoff Matrix. Ansoff Matrix is a strategic approach that has four cornerstones: market development, diversification, market penetration, and product development. These approaches can be described as per the following (The Ansoff Matrix, 2014). Source: http://www.mindtools.com/pages/article/newTMC_90.htm Market Development In market development approach, organisation aims at targeting different geographical locations at home and abroad. The firm targets at different groups of people based on their age, sex and employing other demographic profiles of the customers to lure them. Diversification Through diversification the organisation adopts a different strategy to maximise profits. Selling altogether different kinds of products or services with a different customer base is in the basis of this approach. Merit of this strategy is that should one business receives setback, the other may compensate. Usually, it is certainly a risky business strategy. Market Penetration By adopting market penetration, the company attempts to increase its sale to more people within existing market or aims at increasing consumption of the same product within same customer base. It could be done through special promotional efforts, or through pricing strategies, or increasing sales force or buying a rival company so that market share could be increased overnight. Product Development This strategy relies on either developing product variants or creating different packaging to accommodate more customers. Improving quality or making a product of different quality also falls in this category. Adopting related services or develop related products for the same market is a product development strategy. Lowering servicing time is a known product development strategy in service industry. How Zara Adopts Different Strategic Options Porter (1996) argues that operational effectiveness is necessary but that alone cannot ensure business success to firms. Porter clearly distinguishes operational effectiveness, as one aspect of business, from strategy to provide a competitive edge over rivals. While operational effectiveness brings costs down, strategies help expand market, locally and globally, and penetrate new markets to increase revenues. As competition increases, operational effectiveness results into diminishing returns and that is the time when the firm has to think strategically for safeguarding its market share, total revenue and profit margins. Porter (1996) asserts "The essence of strategy is choosing to perform activities differently than rivals do". What Porter speaks about a variety-based positioning in the market place to make advantage home, Zara has successfully deployed the positioning philosophy to lure customers at its stores across the globe. While operational effectiveness decides about individual activities and positioning about the kind of activities that a firm will perform, strategy leads to combining those activities. In other words, the success of strategy largely depends upon combining and integrating many activities together in one coherent loop. And precisely, Zara has been able to combine operational effectiveness with a variety-based positioning so as to create a perfect fit of all activities that forms a part of its business strategy. How Zara adopts multiple business strategic options to expand and increase its global market share can better be explained by Ansoff Matrix. Market Development While Zara began its operations in Spain in year 1963, it opened its first store outside Spain in 1988 in Portugal. Thereafter, it began rapidly expanding geographically in the newer markets. In 1989, Zara opened its first store in New York and very next year in France. Zara launched its store in Mexico in 1992 and Greece in 1993. In 1994, the company expanded in Belgium and Swedish market. In 1998, the company was in strong footing and began expanding rapidly by opening stores in UK, Kuwait, Japan, Argentina, Venezuela, Lebanon, Turkey, and UAE. In quick succession, in year 1999, new stores came into existence in the countries such as Germany, Saudi Arabia, Bahrain, Brazil, Chile, Canada, Poland, Holland, Uruguay. The company sales were increasing at a rapid rate. In 1985, Zara had 41 stores with annual sales of $86 million and by 2000 it grew to over $2 billion (Dutta, 2002). Thereafter, it grew exponentially and touched almost $8 billion in 2005. Zaras major sales growth came from abroad. Zara kept on harnessing its global expansion strategy to capture new markets successfully. Zara surpassed Gap–its main rival in 2008 as reported in the Marketing Magazine, "The company reported a total of €2.22 billion in sales in just the first quarter of 2008, cementing its position as the leader in the clothing industry" (Kwan, 2011). Zara’s market development strategy is a huge success by any standards across the globe. Global online retailing in 27 markets is in line with the market demands and that will significantly boost sales of Zara (Inditex, 2014). Market Penetration Zara, being in a fashion garment industry, faces a high level of uncertainty in assessing the customers’ needs, especially when it markets its garments across the world. To counter this uncertainty, Zara’s market penetration strategy becomes crucial for the company’s growth. Zaras one of the key market penetration strategy has been brand acquisition across the globe. In 1991, Zara acquired `Massimo Dutti ́ and in 1999, `Stradivarius. As on 2012, while Zara’s contribution to total sales is over 66%, ‘Massimo Dutti’ with over 369 stores contributed to 7.11% sales of Inditex. ‘Massimo Dutti’ caters to men and women conventional clothing for age group between 25 and 45. As on 2012, ‘Stradivirus’ with its over 263 stores across the globe contributed 6.03% of the total Inditex annual sales meeting mainly Trendy clothing needs of consumers in medium to low price range. Zara created some more brands to expand in the market and they are: Kiddys class in 1993, Pull & Bear in 1991, `Bershka ́ in 1998. Kiddys class caters to children needs while Pull & Bear meets the needs of men and women for casual clothes. Bershka contributes to 9.31% of sales of Inditex meeting men and women Avant-garde clothing needs (Statista, 2014). This implies that Zara expanded significantly in the market through acquisition of the brands along with developing some new brands to cater a wide variety of consumers across the globe. This broadly helps Zara to assess customer needs periodically through the feedbacks that it receives from its retail stores. Zara’s market penetration strategy through brand acquisitions has been extremely successful in the last more than two decades as is evident from the increasing revenues from the variety of brands under Zara’s fold. Product Development Strategy at Zara Being in fashion industry, Zara’s product development strategy is robust. Zara employs a team of around 300 persons exclusively to create new designs and styles in clothing. The team creates over 1000 new styles every month. This averages around 60 styles created in a year by each designing personnel (Goldfingle, 2014). Zara is known for developing new styles rather fairly quickly. Each style results into the sales of around 200,000-300,000 pieces of retail sales; this is significantly lower than what other prominent brands generate. This certainly inflates designing cost at Zara designing center but then it is strength too in the highly competitive market of fashion clothing where customers keep on asking new styles and designs. As such, it is a highly creative process and keeps infusing freshness in Zaras all product lines. The companys up-to-date information technology and communication system constantly keeps on providing real time sales data from their worldwide stores to marketing department so that they know instantaneously what is hot in the market. That is why Zara design-to-retail cycle is shortest in industry (Goldfingle, 2014). Gulati et al. (2013) argue that designers at Zara track consumer preferences and accordingly, create 11000 distinct items in a year using variations in fabric, color and sizes. This is significant when compared with its rivals developing 2000 and 4000 items in a year. Moreover, customization is accomplished in small batches and the products are delivered twice a week to different stores across the world without any necessity to keep warehouses, thus, reducing inventories and overall product costs. Zara plans much in advance ­– in fact, much before the season starts to procure fabrics because that is the basic to which value addition process begins. Computer-aided fabric cuts help achieve quality parameters; some of the tasks such as sewing and coloring are moved to third party. To maintain less than 0.5 percent of error rate in differentiating hundreds of thousands of pieces of fabric, Laser barcode scanners are employed. This helps in streamlining all processes (Zhang, 2008). Zara gets feedback from customers from all their stores about fabrics, cuts, and styles almost on daily basis and their product development department constantly takes cognizance of it to create new styles in the ever-changing fashion world. There is no doubt that Zara’s product development strategy has contributed immensely to the development and expansion of market globally. It is important to note that only 18 percent of Zara clothing does not click with its customers and needs to be discounted. Industry average stands almost two times of Zara at 35 percent. For this Zara has to resort to only two discount sales in a year instead of constant price discounts (Dutta, 2002). Diversification Zara has refrained from adopting any major diversification strategy to a new kind of business. However, Zara did launch home furnishing business in 2003 that very well matches with current designing and production activities. The home furnishing business currently constitutes around 1% of the total Zara sales. Zara proposes to continue providing thrust to home furnishing business across the globe as and when market opportunities arise (Inditex, 2014). Conclusion From the above study, it is amply clear that the company is extremely successful in implementing market development, market penetration, and product development strategies to expand globally. With the company’s operations in 87 countries and 6,340 stores across the globe provide ample evidence of its successful business and market strategies. Zaras overall success in the different segments of the market such as fashion, trendy and traditional garments can be largely attributed to its understanding of customer needs quickly and making the clothes available in a short duration of time. Even Zaras major competitor such as Gap does not deny Zara’s astounding capabilities. When a new piece of clothing is designed, processed and shipped in less than four weeks time, it is certainly a big feat displaying not only work efficiency but the product development talent that few can match. ]] References The Ansoff Matrix (2014). Understanding the Risks of Different Options. mindtools.com [Online] Available from http://www.mindtools.com/pages/article/newTMC_90.htm [Accessed 24 November 2014] Dutta, D. (2002). Retail@the speed of fashion. thirdeyesight.in [Online] Available from http://thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf [Accessed 24 November 2014] The Economist (2012). Zara, Spain’s most successful brand, is trying to go global. economist.com. [Online] Available from http://www.economist.com/node/21551063 [Accessed 24 November 2014] Gulati, R., Mayo, A. J., and Nohria, N. (2013). Management. South-Western Cengage Learning. Mason. Inditex (2014). FY2013 Results. inditex.com. [Online] Available from http://www.inditex.com/documents/10279/98142/Full+year+2013+Results.pdf/e667212d- a457-4df7-b8c3-f8f0acaebedb [Accessed 24 November 2014] Goldfingle, G. (2014). RetailWeek. retail-week.com [Online] Available from http://www.retail-week.com/companies/zara/company-profile-zaras-expansion-slowdown-boosts-profitability/5056954.article [Accessed 24 November 2014] Kwan, B. (2011). Spanish domination – Zara brand profile. [Online] Available from http://www.marketingmag.com.au/blogs/spanish-domination-6575/#.VHLuoWfWAwo [Accessed 24 November 2014] Lopez, C; Fan, Y. (2009). Internationalisation of the Spanish Fashion Brand Zara. Journal of Fashion Marketing and Management. 13 (2). 279-296. Porter, M.E. (1996). What is Strategy? hbr.org. [Online] Available from https://hbr.org/1996/11/what-is-strategy [Accessed 2 December 2014] Statista (2014). Sales distribution share of the Inditex Group worldwide in 2012. statista.com. [Online] Available from http://www.statista.com/statistics/268825/contribution-of-sales-of-the-inditex-group-worldwide-by-format/ [Accessed 24 November 2014] Zhang, Q. (2008). Analysis on the Successful Case of Efficient Supply Chain in ZARA. IEEE Xplore. 1-4 Appendix Number of Stores and Operations in Number of Countries between 1997 and 2011 Source: http://www.economist.com/node/21551063 Read More