Zara in China - Term Paper Example

Introduction Globalization has dissolved boundaries between countries and companies have started to expand on a global level. Evolution of communication technology has contributed to the flow of ideas between the countries and that has created an international culture. Consumption patterns have become similar all over the world with evolution of internet. People of even the remotest areas are aware of international brands and products through internet. Firms are therefore using this to their advantage and are starting operations on a global level so as to cater to international demand. Zara is a well known fashion retailer based in Spain that has stores all over the world. The company started its operations in China and things have worked out well. In this paper we will talk about Zara’s operations in China and how the company is evolving in the country with respect to global competiveness, global strategic alliance, and its overseas operations. Also issues the company is facing alongside with recommendations will be given in the paper. Zara’s presence in China and a brief background of the company will also be part of our discussion in this paper. Background of the Company Zara is a world renowned fashion retailer based in Spain. It was founded in 1975 and since then the company has grown substantially. The company is regarded as a great success story as it has made itself an international brand over a few decades. The unique thing about Zara is that it rejects the industry trends by investing no money in advertisements. The company focuses on low cost strategy by providing fashion garments and accessories to everyone. The target market of the company is not only the rich people. In contrast company has made fashion within the reach of everyone. The company has up till now refused to follow the market trend of outsourcing its production to low cost developing countries. By doing this fashion retailers attempt to save costs but Zara believes that providing customers with latest fashion products in the fastest possible time. Zara is known for providing a new product to the customers within 2 weeks while the industry average is about six months (Tiplady, 1). This shows how efficient the supply chain of Zara is compared to other retailers in the industry. The vertical integration helps Zara control its supply chain and this makes it possible for the company to stay ahead of the trends. The company has audacious growth plans for future. Operations of Zara in China Zara entered the Chinese market in 2006 and since then the company has grown substantially in the country. Zara has 91 stores in China and the company is planning to open more stores in future. China is a huge market for the company given the population of the country is 1.2 billion people. But still most companies do not enter China due to strict regulations and lower standards of living. Zara on the other hand entered China and has shown tremendous success because the company was able to attract the middle class population of the country. As mentioned earlier Zara does not believe in extremely expensive garments rather it is known for its new fashion and cost effectiveness. With this business model Zara was able to capture the market of China. The company aims at opening more stores in future in the country as well. The domestic consumption of the country is increasing and people are getting more and more aware daily about the new fashion trends. This is why it is expected that fashion retail giant will continue to pursue its expansion policy in China as well. Stores of Zara are mostly seen overcrowded which shows the potential of Chinese markets (Xinhua 1). The urban middle class of China is multiplying at a great pace and this means that more and more people are demanding fashion products. Zara is the right choice for them because of the cost related advantages the fashion retailer offers. Objectives of Zara in China The objective of Zara in China is to capture the emerging middle class which is fashion conscious. The company wants to move into China because of the markets the country has to offer. The population of China coupled with its fast moving growth makes the country an extremely desirable place for fashion retailers. Another objective of the company is to cater to the working ladies of China. Women are now getting out of their traditional roles and are joining the workforce. This presents an excellent opportunity for fashion retailers because office going ladies are usually fashion conscious (French, 1). This trend can also be seen in other eastern societies therefore it is high time that companies start to look China as a viable market. Zara will be looking to capture the attention of the Chinese youth before other firms enter the country. The company wants to cash in early mover’s advantage in the country by creating brand loyalty among the Chinese youth. Competitors like H&M are also entering China therefore Zara needs to capture the attention of Chinese population quickly. This seems to be the main objective of Zara in China. Positioning for Greater Global Competitiveness  Zara’s entrance into China was a step towards achieving global competitiveness although it was not similar to what other organizations are doing in order to achieve global competitiveness. Most retail companies look China as a source for cheap labor. These companies shift their production base to China in order to lower their operational costs. This is done to achieve global competitiveness. But Zara is treading on a different path. The company is manufacturing accessories and apparel in China but Europe remains the main production base of the company. Moreover the company wants to tap in the local consumer market of China in order to achieve profitability. The company is aiming for consumer markets in order to attain greater global competitiveness. A loyal customer base in China is something that Zara sees as essential for greater global competitiveness. The move of starting operations in China was also good for positioning of the company in the global markets. By starting its production in China, Zara can cater to nearby countries in the Central Asia and Middle East. This will in future give Zara room to grow even more all over the world. The purpose of starting operations in China was not to lower costs but it will give an idea to the company about the region. Also Zara can reach to nearby markets of India and Middle East from China. It is also important to mention that Zara’s competitor H&M has also started its operations in China. H&M launched its first store in China in the same year in which Zara started its operations in the country. This shows how timely the decision of Zara was about entering the markets of China. Competition for Zara is increasing as ever and in order to stay ahead of the competition it was important for the company to position itself in China. Global competitiveness is not all about low costs but it is about brand loyalty and market share. Zara aims to stay competitive in China by exploiting the newly established and growing middle class of the country. The move was also of strategic importance as H&M was entering Chinese market. Zara is known for staying ahead of the trends at all times therefore the company could not afford to lose this’ uniqueness’ to some competitor. This is why starting operations in China was strategically important for the company. The force of competition and public perception about the company made it essential for the company to enter China. Since 2006 Zara has grown substantially in the country with close to 100 stores at the end of 2011. This shows that Zara was able to capture the Chinese clientele. The country has provided a new fashion statement for the Chinese consumers. The development of stores also indicates that no significant cultural barriers were experienced by the company in China. Internet and other communication technologies have created a bridge between the east and west from which ideas are flowing from latter to the former. Zara was successful in China because it was able to provide the market with latest fashion products. Vertical integration helps Zara innovate on a regular basis. Consumers know that every few weeks new products will come in stores and therefore they visit stores more often. This is the main reason behind the success of the company in China. The company is also manufacturing its products in China therefore it gives the company flexibility. Zara can arrange products in the market in the shortest possible time and consumers in China know this. This is why customers overcrowd stores of Zara. Product development was something Zara was good at previously but the company has also proved itself in the new market as well. The evidence for this is the number of stores Zara has opened in China. Development of Global Strategic Alliances Zara although is a vertically integrated firm has alliances with different partners. These strategic alliances help Zara in maintaining its goal of providing customers with wide range of fashion products. The company recognizes the fact that it cannot work alone in the retail industry and it needs to take help from outside experts in order to remain competitive. In China too the company has developed strategic alliances to ensure timely delivery of products to the customers. The company operates on a tough schedule with new products coming up every few weeks. This requires alliances with shipping companies, logistics suppliers, and other small and large firms. No matter how big Zara is it cannot do anything alone in the world and it needs to collaborate with other companies and suppliers in order operate efficiently. In China Zara first had to develop its strategic partnership with suppliers of raw material. Zara is producing some part of its products in China therefore raw materials are needed. Zara has to develop an excellent network in the country because demand for Zara products is at an all time high (Jingjing, 1). Zara has alliances with local yarn manufacturers which makes sure that the company receives all the raw materials at the right time. The evidence of the efficiency of Zara’s supply chain is that one cannot find any information regarding mismanagement in Chinese markets on the internet. Zara is a well renowned name all over the world therefore Zara didn’t have any difficulty in finding partners in China. Everyone wanted to work with Zara given the reputation of the firm all over the world. In this regard Zara didn’t face any difficulty whatsoever. Another important strategic alliance Zara has is with transportation companies (Jingjing, 1). The company requires readymade garments to be picked from production houses and sent to stores. This is a delicate process because handling of garments is an important factor. Also timely delivery is required so that customers can get the product at the right time. Zara targets customer locally meaning that every store is given to select its inventory. This provides great flexibility to the store as they can work according to the customer demand. Local stores can keep inventory that they think will attract customers. This also gives customer a sense of exclusivity. Pampering local consumers like this can be regarded as a reason why Zara has achieved so much success in a few decades. Although this is a good step but this calls for strategic alliances at store level instead of alliances at organization level. The lower level managers adjust the products according to the demand of the clientele therefore they develop their own partnership with the suppliers. A local store must have excellent relationships with the manufacturing unit and other logistic suppliers so that it can ensure smooth flow of garments to customers. For Zara strategic alliances mean everything as the company aims to build local brand instead of one international brand. It is because of this reason that Zara does not advertise heavily as a Spanish brand. Country of origin is not something general public associates with Zara rather they see it as a local brand (Lopez, 279). In order to sustain this strategy the company needs to have suppliers in China that compliment this strategy. This is why everything from stitching to packaging is done in Chinese style. This is only possible by using strategic alliances with yarn suppliers, manufacturing units, transportation companies, and logistics firms etc. Implications for Zara’s Overseas Operations With its entrance in China, Zara has learned to operate in a society which is considered extremely closed. The important implication for the company’s overseas operation is that local culture is extremely important. China is not similar to Europe and the value system and traditions of the country are different. The success of Zara was because of its excellent planning and understanding of the local culture. Zara also found out that quickly tapping in the emerging markets can also prove helpful. China has an emerging middle class and this is why it was important to cater to this new market. Chinese markets made Zara learn how to operate in a flexible manner. This was an important implication for the company because if the company will now expand in any other country, managers will feel confident. The success of Zara in a country like China means that Zara can open stores anywhere in the world. The culture of Zara and that of China were totally opposite to each other yet Zara was able to record great profits. This is evident of the flexibility of the company. Another important implication of Zara’s operations in China is that Zara had to adjust its traditional strategies in the country. In China Zara couldn’t have succeeded if it followed its medium to low pricing strategy. China is the home of cheapest labor of the world and therefore price competition with the local suppliers who are known for making cheap copies of high quality products was impossible. In Europe and America Zara prices its products in the medium to lower range and therefore is able to attract a broad range of clientele. But in china the country couldn’t price its products in a similar way. In China the company priced its products in the upper medium and higher range. By doing so Zara implicitly informed the customers that high quality comes at higher prices. This was an important step in an economy where anything can be made at the lowest possible prices. This was an important change of strategy for the company because Zara is not known for high prices. This was an important implication of Zara’s overseas operations. The policy of zero advertisements was also difficult to follow because Zara was starting operations in a new country altogether. Zara had to advertise on a lower level in order to communicate to the customers that Zara was opening a store in Shanghai. This made the grand opening of the store widely anticipated and record sales were seen on the grand opening. This shows how Zara’s operations were influenced by operating in an overseas environment which was nothing similar to Europe. With the advent of Zara in China the company has to think about many things which were previously not important for the country. Zara is producing its products in China and labor conditions have become an important issue in today’s business world. Ever evolving communication technology can propagate negative publicity like wild fire. It is therefore important for the company now to take care of such issues. Another implication for Zara’s overseas operations is the message that Zara has given by entering Chinese markets and making a name in China. Zara has shown the world that it can operate in low costs developing countries as well. This can give a big boost to future plans of the company as Zara looks to capture markets like China and India. The large population base of these countries attracts fashion retailers but the nature of these markets repels many retailers. Zara has, by being successful in China, shown the world that it is a name that will stay at the top for many years to come. Issues Zara is facing in China One of the issues the company is facing is with the cheap counterfeits that are available in the market. Chinese suppliers are experts of making counterfeit products because of the possibility of high returns. Poverty level in China is high and many people cannot afford high prices. Therefore they go for cheap counterfeits which hurt companies like Zara. It is important to make sure that original quality of Zara and the counterfeit products are clearly differentiable otherwise it will be detrimental for the profits of the company. Another issue Zara is facing in China is in forecasting demand (Jingjing, 1). Although the demand for products is high in the country stores are finding it difficult to give out sale numbers. This can in future cause inventory mismanagement for Zara stores. Any mistake in anticipation of demand can mean that either customers do not find clothes on time or too much inventory is carried out. This is a challenge that can cost company a lot of money and therefore serious though should go into solving this matter immediately. Cultural shock is also something Zara will have to deal with in China. The local festivals might not coincide with the festivals in the western world. Communication between the head office and the local offices is important in order to make timely decisions about garments and design. A company like Zara cannot afford any disruption in its supply chain or else the company will suffer greatly. This is why cultural differences between the Europe and China should be taken into account at all times. Even small details like store design has to be made according to the local culture. For example Chinese society is a highly collectivist society therefore people more often come in groups to shop. This detail should be kept in mind when designing the layout of the store. Recently the company’s image was tarnished by a quality survey in China which indicated that Zara products are of low quality. This made Chinese authorities declare Zara products as blacklisted (Li, 1). This is not good for the reputation of the company because Zara is known for quality products. Also the company is not promising low priced products to Chinese markets. Zara promises high quality products and such quality surveys destroy the reputation of the company. This mainly happens due to the lack of control Zara enjoys on its suppliers. Zara due to its vertical integration controls quality and production of products. The company does not enjoy this control in China. Company is manufacturing in the country but still it has to rely on different suppliers and therefore everything is not done by the company. This affects the quality of Zara products and also ties the hands of the company. This is an important problem that company has to deal with while operating in China. Quality is important and it needs to be taken care of at all costs. Implications of the Issues There are many implications of the issue discussed above. Counterfeit products can destroy the loyal client base of the company as people might switch to cheap copies of Zara products. It is common in China to buy cheap copies of products because of the poverty issues in the country. It can also destroy the exclusive factor that Zara has to offer to customers. A loyal Zara customer would want to feel exclusive and if another person is wearing a similar product that costs less then Zara’s customer would not buy Zara products ever again. Cultural issues can disrupt the operations of the company in China. Zara’s best quality is to create a local brand and if any mistake is made in understanding the culture of the country. Local holidays and festivals have to be understood so that maximum profits can be reaped from customers. Quality is a major issue for the company because this may decrease the sales of the company in the long run. China has an emerging middle class which is fashion oriented. They want quality products and are willing to spend money in return. But quality mismanagement might not be taken in a good way by the market. Also in China people value trust and truthfulness. Bad quality makes Zara look like a liar which is not good for the company. Recommendations Zara should immediately strengthen its terms with its suppliers. The first thing the company needs to do is to uphold its quality. Bad news from China can also tarnish the image of the company in other markets. Zara is a huge name internationally and any bad publicity can hurt the image of the firm. Also competitors can exploit the situation. Therefore issue of quality needs to be tackled first in the shortest possible time frame. Zara should also start to use historical models for forecasting demands so that inventory mismanagement can be avoided. It is true that Zara is still new in the country but the company needs to have right inventory in stores. Forecasting should be done by experts because it can hurt the company if customers are not able to buy products due to shortages. The company should also use original tags of Zara on clothes and accessories so that counterfeits can be distinguished from the original. This will reestablish the sense of exclusivity of Zara customers. People will also understand that Zara products can be identified easily by everyone and this may act as a catalyst for increasing sales. Zara should also think of using China as its production base for other countries. The cheap labor of China should be utilized by Zara only if quality issue is resolved. Quality is important for Zara as it is distinguishable factor. Profits can be made by decreasing manufacturing costs. Conclusion Zara is a well known brand all over the world and has recently entered Chinese markets. The company has developed strategic alliances with partners in China. The positioning of the company in China has given it global competiveness. China has an emerging middle class and therefore it offers regular future products. Also competitors of Zara are moving in China therefore the company has to establish its name in the region. The company is facing quality issues in the country but these issues can be resolved by rethinking terms and conditions with the suppliers. Works Cited Page Consumer spending fuels retail expansion in China. Xinhua, 2009. Web. http://english.people.com.cn/90001/90778/90861/6852902.html French, Paul. In China C&A Isn’t Zara. Gerson Lehrman Group, 2011. Web. https://www.gplus.com/apparel/insight/in-china-ca-isnt-zara-9043 Jingjing, Jiang. Passion for Fashion. China Daily, 2007. Web. http://www.chinadaily.com.cn/bw/2007-03/05/content_819249.htm Li, Quan. Zara back on blacklist after quality check. China Daily, 2011. Web. http://www.chinadaily.com.cn/china/2011-12/08/content_14234239.htm Lopez, Carmen. Internationalization of the Spanish fashion brand Zara. Journal of Fashion Marketing and Management, 13(2), pp. 279-296, 2009 Tiplady, Rachael. Zara: Taking the Lead in Fast-Fashion. Business Week, 2006. Web. http://www.businessweek.com/globalbiz/content/apr2006/gb20060404_167078.htm?chan=innovation_branding_brand+profiles Read More