Market Performance of Zara - Essay Example

Zara Introduction Zara is one of the leading brands in the retail industry for clothing and apparel. This market has witnessed intense competition among the existing players and also emergence of new players. The pattern of trading is also undertaking a shift due to the use of online medium of transaction for purchase of clothes. In order to evaluate the changes in the retail clothing industry and the position of Zara, an analysis of the external environment has been carried out with the help of five forces as described below. The forces which are favourable for Zara are attractive for their future prospects whereas the forces which are less attractive poses threat to the business of Zara. There other three major external forces that have substantial impact on the business of activities of Zara. These are social factors, technological factors and economic factors. In case of social factors, changing trend of people’s choices and preferences about their clothing and apparels is one of the major issues. The company has to keep high focus on this trend so that they can come up with new designs according to the new trend in the market. In case of technological factor, most important issue to look on is adoption and use of advanced technology i.e. hi-tech machineries and techniques of production and designing of clothes and apparels. In case of economic factor, the volatile economy of every developed and developing market is one of the major issues to look on. This factor has high impact on price of raw materials, operating cost of the company and lastly the price of finished products. External Environment analysis of Zara (Porter’s Five Forces Analysis) Competitive rivalry in the industry The retail market in the clothing industry is highly competitive due to the presence of the Big 4 in the apparel industry, namely Zara, The Gap, Benetton and the H&M. All these companies have adopted the strategy of expanding in the global markets which has been reflected in the tight competition for market share (OaShaughnessy 57). The financial performance of Zara in 2011 denotes that the company has performed exceedingly well as compared to its competitors. The profits of Zara have increased by 12% whereas the profits of Benetton, The Gap, and H&M have changed by only 1%. The competitive success for Zara is an attractive external force for Zara which has been attained due to its responsive marketing, efficient supply chain and human resource management. Threat of new entrants The retail clothing industry is highly competitive with the increasing presence of clothing companies at the regional, national as well as in the global level. The new players are also targeting the apparel industry due to the shift towards the online mode of business. Although there is threat of new entrants, Zara is comfortable in the short term as the company has developed a brand image in the international market. This external force in attractive for Zara in its retail clothing business. The company has been able to mitigate the threat of new entrants through continuous strategies on responsive marketing. Threat of substitutes The threat of substitutes is less attractive for Zara as the advent of technology and design in the apparel industry has brought about the use of linen and fibre products as the substitute of cotton and clothes. The engineering and design of apparel with the use of linen and fibre made use of several sketches and design to produce finished products that are more durable as well as competitive in terms of price. In order to mitigate the threat of the substitute products, Zara has also adapted to the latest changes in the industry and started to produce clothes with appropriate mix of cotton and linen, fabric, etc. This has helped Zara to provide their customers with fashionable clothes in line with the latest trends in the industry. Bargaining power of supplier The expansion of the business of retailing in clothes in the international market for Zara has put pressure on the suppliers. The bargaining power of the suppliers in the retail clothing industry is moderate. Although the retail clothing market is ruled by the Big 4 along with presence of other small apparel companies, the local apparel brands have been affected due to the increasing acceptability of the products of Zara, Benetton, The Gap and H&M. Thus the local manufacturers and the suppliers could only supply materials to them (Coade 56). This has restricted the bargaining power of the local manufacturers and the suppliers. This force is attractive for Zara. Bargaining power of customers The bargaining power of the customer is high in the retail industry for apparels. This is due to the fact that the physical mode of trading of clothes has started to undergo a shift towards e-commerce with the upcoming online mode of advertisements by the companies and the online transaction made for purchasing the clothes. This has allowed the customer to view various brands in the industry and compare them according to their demands to determine which one fits their needs. Thus the customers have ample option to choose clothes for purchase and compare the products of different brands based on quality, price, discounts, etc. Due to the high bargaining power of the customers, this force is lesser attractive for Zara. Porter’s Five Forces Model for Zara From the above analysis of five market forces for Zara, it has found that threat of new entrants is comparatively attractive for Zara than other four forces. The key reasons behind this are high start up capital, huge investment in promotion and long time of presence in market. These three factors are most essential to develop a highly popular brand in the clothing and apparel industry. Therefore, though there are many new firms establishing in this highly profitable market but threat from these kind new entrants are quite low for a big brand like Zara. These new firms need to spend much more time in the market, invest huge amount of money for promotion to develop high brand value and compete with Zara. Again, Zara has already developed huge customer base and has been enjoying the trust of its customer for the brand for long years. Therefore, it is very difficult for a new firm in this market to shift the customer of Zara towards their product because people are more brands conscious and Zara is confident and experienced enough in delivering high degree brand value and prestige to the customers through their products especially where quality and design are concerned. Key Success factors of Zara They key success factors that underline Zara’s success are as follows. They take shorter lead time as compared to its rivals for their concept to reach the market. By applying this strategy they keep their stores fresh and desirable to the consumer. They do extensive market research of the market through taking continuous inputs for their product development process. They also locate their business functions which are in close proximity to their headquarters and they maintain a tight control of the processes. This helps them in coordinating their decision making process and achieve the result quickly. They also make early investment in raw material. They control the production and processing capabilities of their business. It helps them to respond very quickly to the changing trend of the market. They make smaller quantities for each style they produce. They invest substantial money in Market Research agency for doing the consumer surveys for them and providing them with the research reports which are feet on the street which means the report are generated by their own people who can spot the trends. They communicate the same to the people who interprets those trends into styles which the customers will like. Another factor which Zara does well is that it makes the merchandise available at the stores in 15 days after it is designed. Zara’s success has also been affected by the changes in the external environment. They make many more style during the year as compared to their rivals. They also give importance to their Communication and Information Technology which are vital to manage multiple functions across the organisations (Hooper 142). Their basic mantra is to “follow early”. They basically are not the innovators but they follow their style quickly. It is susceptible to change in consumer taste about their fashion. They are also affected by change in economic, political, technological and regulatory changes in the external market. With the rise in globalization and connectivity there has been a profound change in the lifestyles of people. Also changes in country’s regulatory environment and the change in political scenario of a country will impact the profits and revenues of the companies (Iverson 321). Conclusion The investment friendly policies that encourage investment in the developing countries helped them achieve high growth. But with recent euro crisis in 2012-2013 which affected major European countries like Greece, Spain, Italy where Zara is present they get affected by the recession. The tough austerity measures like of US has slowed down the investment across the world. Retailers have to face sluggish economies in the European countries, with rise in labour costs, and high cotton prices. This put pressure on the input cost of Zara and puts strain on their profitability. These events have caused the future development plans of industry in strain. These industries have to come out with innovative solutions to find solutions to these problems. But according to Global Opportunities in Fashion Retail, 2011 the fashion retail industry is estimated at 700 billion Euros and expected to reach 1.1 trillion by 2020. Work Cited Coade, Neil. Managing International Business. Stamford: Cengage Learning EMEA, 1997. Print. Hooper, M. Zara: Rejacketed. London: Bloomsbury Publishing, 2012. Print. Iverson, A. In Fashion: From Runway to Retail, Everything You Need to Know to Break Into the Fashion Industry. New York: Random House LLC, 2010. Print. OaShaughnessy, John. Competitive Marketing: A Strategic Approach. New York: Routledge, 1995. Print. Read More