Fashion Retailer Zara - Assignment Example

ZARA FASHION RETAILER CASE STUDY STRATEGIC ASPECTS OF MARKETING Identify and explain the reasons driving the success of Zara Review of Zara The Inditex's group net profit in 2004 rose to Euros 628 million, which is 41 percent increase compared to 2003, with an annual return of 11 percent. The group expanded its shops sales resulting in 54 percent increase in sales being made outside the home market. The total number of shops for the Inditex's eight fashion distribution chains now stands at 2,244 in Europe, America, the Asia-Pacific region, the Middle East and North Africa. Overall, 322 new stores were launched in 2004 with 97 new Zara stores. (Inditex's Annual report, 2004). Looking at the data, it is clear that Zara is on the path of success for many reasons as described below. Keeping up with the fashion Zara designs all its clothes and majority of it is in Spain (about 80 percent). It focuses on shorter response time, which enables it to meet the constantly shifting fashion trends. However such moves do not take months, but this swift process is complete within in 30 days. And with this short time, Zara identifies the trends, design it clothes, supply it to all its stores. In short it means catching up a trend when it is in vogue in the fashion circles, rather than discusses it for months and then ask the overseas producers to work on it. On the contrary, even the smallest retailer takes up Three to four months research, thinking, discussion for any such project, while bigger retailer take up to 9 months to produce to similar result. When the analysts start to forecast the fashion trends, Zara moves ahead for next trend. The trend identification is done through extensive research process in which every one in the organisation is involved (BBC News, 2001). In the manufacturing environment, Zara's product development teams fashion shows and catwalks and exhibition and then translate the latest fashionable ideas into products. Throughout the season, Zara development teams visits universities and clubs to track the customer's preferences and choices and understand the changing consumer's needs. There are also teams in the international arena who also observe the latest fashion trends and report to the head office. Other than that the Zara mangers also help in tracking customer demands through sales analysis, all of this process enables Zara to meet customer's needs and be ahead of its rivals. The research is not traditional research, but it includes email and phone calls from various stores to head office, to which Zara manufacturing machinery responds by designing the proposed item within 2 weeks time. Thus we can see, that it is the lead time and keeping up with the fashion trends which makes Zara the leader of the fashion industry. Low Risk Low Production Normally any proposed item (apparel) among other retailers is made in bulk, which always has the risk being a failure. Zara reduces this risk by producing in lesser quantity, thus instead of going for bulk production, it prefers fewer items. This approach gives Zara's double benefit, such as lesser risk and creating more demand by making artificial scarcity, which means it can charge more and earn extra profit. It is natural with all objects especially fashion products; they become more desirable making them more profitable for the company. Normally it is very rare to find a product in its early launch days, a customer has to request the item, which is taken into notice by the store manager and produced within a shortest period of time. Another benefit of this approach is that if the product does sell well, it can be easily scarped back due to lesser quantity, which is not possible for other retailers or in some cases it is moved to another location, where it is selling well. Leading in Innovation As for other retailers their profits comes through mass sale and bulk production. Zara instead produce more styles (new items) than any other retail store and generates profit through greater number rather than bulk production. For example Zara produces about 12000 items per year, the sooner one item is sold next is on the offer. This innovative technique makes Zara different from other retailers who plan for months and years, yet they come up with few items and limited choice, while Zara offers more choices to consumers to choose from. This also helps in pulling the consumers to visit store more often, as there is always some thing new on offer, compared to its competitors who will sell similar items for months (CNN, 2001). Ownership of Production Big retailers normally produce their clothes in bulks and outsource it to Asian or other third world countries to produce at lower cost, which helps them to earn greater profit. Zara instead do in house production in closely controlled facilities, which gives her more flexibility and oversee the whole process (CNN, 2001). However the cost of such approach is also higher compared to production in third world countries. This retaining control over the entire product manufacturing process is even though expensive; Zara keeps itself close to monitor the whole production process. In this way, the product is not only fresh, but if there are any changes to be made are easy due to in-house production practices. Zara can also update its stores twice a week due to limited production tempting customers to visit stores and buy fresh arrivals frequently (Noticias, 2003). Re-acting Swiftly Zara has model of swift product development and the process starts during selling process. What Zara is able to achieve is to combine its information process, check the changing fashion trend, even before the fashion forecast is done. This rapid change and reactions enables Zara to lead the market or rather move ahead of it months in advance before other retailers can even realize the trends. Zara unique and quick response system is not only composed of human resources, but it also uses information technology extensively allowing it to quickly respond to the needs of customers. Zara ultimate focus is to react quickly and accurately to the market forces achieving higher manufacturing efficiency (Ghemawat, 2003). Short Lead Times Zara can act from identifying a trend to having the requisite clothes in its stores within 30 days. This means that it can respond to a winning fashion movement so much quickly than the competitors, who may take up to an year to respond to the need. As result Zara is selling, while other retailers are still forecasting and preparing for the same segment. This process is achieved by a large design team based in North West Spain working with buyers, merchandisers, technologists, overseeing the process and beavers away throughout the year, identifying the prevalent fashion trends and designing products to match. Consumer and market research is constant undertaken at the quantitative and qualitative level. More importantly, it is the constant stream of phone calls and emails from the all the shops to head office and back again with shop-staff and customer comments, which gives Zara an understanding to such changing needs. Zara's head office staff reacts immediately and produces a needed response in terms of a modification or new style within 2 to 4 weeks. Other organisations, in the same or in similar markets do not have such swift process to accomplish so much in so little time. This competitive advantage and short lead-time is an essential ingredient of Zara's success (Noticias, 2003). 2: Demonstrate the part that marketing concepts play in the process Zara responds to instant changes in the fashion market in a unique way. Its success lies in its flexibility giving it an edge over its rivals as result customers are buying from its 724 global stores. One main advantage Zara has over its competitors is due to its lower advertising costs. Zara advertising investment is only 0.3 percent compared to traditional retails, which normally form about 3 to 4 percent of their annual revenue. This marketing strategy allows Zara's to reduce the cost and invest more in international expansion. Zara does not target to specific age group nor does it divide customers into segments, instead it markets to a broader market with its prestigious and elegant image. Thus by targeting to international market Zara has an edge over its competitors, as it does not need to strip down into class and gender and age group but focus on one large group. Zara broader segment is educated and young, which likes fashion and changing trend; this is what Zara is offering to its global audience. Zara marketing philosophy is simple, target the global audience and it believes, if product can sell well in New York, it can also sell in Milan or London (Craig, 2004) However Zara has built its success through word of mouth, which does not cost any thing. In fact it is the same strategy used by Marks and Spencer until they moved to media recently. The reason for such approach is that normally we believe our friends and colleagues more than advertisements. The advertisement are meant for sales, while in the case of word of mouth marketing it's the development of trust and satisfaction, which a customer has over a company and he/she conveys that feeling further to his friends and colleagues. Even though this kind of marketing takes time and patience, but it is more effective and pulls customers who trust the brand. Once developed, this strategy needs no marketing and customers come on their own. Thus we can say that Zara is not using the traditional marketing methods saving its money, which is diverted in other areas. Zara also depend on shop manager feedback, and they are asked to update the headquarters on the products which are best sellers and which are not selling, this enables the head office to check the popularity of an item. Thus we can say that there are clear lessons to be learnt from Zara marketing success (Marks, 2005) 3:Assess the factors that have to be taken into account by Zara when opening stores abroad. Zara has been able to achieve successful financial status due to its competitive advantage over the traditional retailers in the industry. In order to open an overseas store, it has to maintain it typical ways to large extent .By doing so in overseas market, it will be able to maintain its status and also retain consistency of its image. The most important factor for Zara new store, other than choosing a modern and posh location, will be to have in house productions team to meet the local demand. For example opening a store in Shanghais will be different than opening a store in Milan. Despite becoming highly westernized, it still will carry Chinese influence, which is inevitable. However before any apparel design, it has to research and understood in to explore the consumers needs. Again it also depends, how much is the difference in fashion in such overseas locations. If there are no major difference in fashion trends, ready-made product can be sent from headquarter after sending the proposals. The store has to follow the same vertical integration business, which is the distinctive feature of Zara to create climate of scarcity and opportunity and is only possible by following its in-house production methods (Zara Japan,2006). Zara do not rely on traditional advertisements, in overseas market it has to initially invest some portion of the investment in advertisement to create awareness of its brand and new store. It can also conduct some fashion shows to get some media attention. Being a brand known for its fresh and unique products, it will also need some extra efforts to do these things. Once Zara gets its customers, it no longer needs to rely on traditional advertisements but can easily come back to its word of mouth marketing method to cut the cost. Zara designs all its clothes and launches its products in the shortest possible time. Zara has to follow the similar strategy overseas and need to identify the latest trends in the city and meeting the trend within the 4 weeks time. This would enable her to supply its customers with fresh products and herself ahead of the other retailers. This is not possible, unless the overseas store apply the same techniques of research. In the beginning it has to run extra mile to explore the area ands its trends. The store will also need to understand the cultural norms and habits of the people, even though Zara philosophy is simple, that all city dwellers have similar way of life, yet there are always more or less cultural differences in every geographical location, which if understood helps in marketing a product in more effective way (Ghemawat,2003). 4: Identify and evaluate the reason why such growth by on company could be damaging to the market environment. What measures might be taken to minimize possible harmful effects The emergence of Zara has harmed traditional retail chains enormously. Zara is able to successfully replicate Dell like approach, which means there is no excess left in the inventory and whatever is left in inventory is sold before new stock comes in. Zara updates its stock many times from store to store, moving items from one store to another to make products more sellable, which is not possible for other retailers. Zara success is based on unique factors, which are not easy to replicate. For example its introduction of 12000 thousand items (products) is virtually killing the concept of products selling. The bigger companies who deal in bulks can't simply copy it. It is not possible for other retailers to replicate Zara system and if they do, it would be simply committing suicide. For bigger companies it is always bulk and large quantity, which makes business profitable. If all companies start to sell products per piece, prices will go up and few customers would be able to afford, what Zara is charging. Increased prices mean customers will look for alternative, which is again losing money. The alternative is offering similar products at much lower prices compared to Zara, which can lure price conscious customers. Zara relies on in- house production and is paying 17 to 20 times than other retailers; which makes it products very expensive, targeted at upper urban class, who are willing to pay higher for their choice. This strategy is working due to the reason that Zara is producing apparel in limited amount. The counter strategy can be to introduce more designs (not as much as Zara is doing), but introducing greater number of items in lesser time and charge less. The normal time for a product among traditional retailers is about 9 months, which can be cut down to 3 or 4 months. Other retailers can offer it at lower price and by creating in reasonable number will make it possible. The rival retailers still have advantage of paying 17 to 20 times lesser for their products due to outsourcing, yet retaining the quality, which Zara is not doing. Zara cannot replicate it, the retailers need to rely on smaller manufacturers and make them work on multiple projects to generate greater number of items to counter Zara. The traditional retailers normally target their products according to the age and gender, which again gives them an edge to create different item for different age group with slight variations. (Ghemawat, 2003) Before Zara arrival in the market, the concentration of retail was in fewer hands, whose philosophy of making profits in bulks, Zara is doing the reverse and yet successful. This alternative option was new for retailers, which is perhaps not possible to copy, however it has given birth to a new way of doing business. The traditional retailers have to learn lessons that things are changing in the age of information technology. They have to look for new ways and need to offer more choices to the consumers. The rival retailers have to emphasize more on individualism. The reason for such approach is that modern consumers are shifting towards individual expression. This satisfaction comes from customized products made just for them, rather than wearing copies, which are produced in mass numbers. For retailers the need arises from specialized formats, where producers can meet the customized design and help in creating individuality among its consumers. Diversifying business is also one option, as some retailers have been developing into specialized markets. Marks & Spencer has also into food and furniture business as well. Amazon started business as a bookstore, but it has moved on and now it sells every thing from books to CDs and movies. One drawback in of Zara is its inability to flourish in US market due to difference in American taste from European. Zara is unable to penetrate the American apparel market. This may be due to American tastes that differ from European preferences. More importantly, however, Zara has not been able to develop a strong supply chain strategy in the U.S. like they have in Europe. Their European strategy includes, having a strong production and distribution facility in their home country in order to have short production and lead times. Zara has not invested in distribution facilities in the Americas, which is a threat to their U.S. selling abilities since the U.S. makes up 29 percent of the total apparel market and forming a large chunk for other retailers to explore US market. The problem with traditional retails companies is that they became too big and many of them had monopoly in the market for a long time. The problem with monopoly is that after becoming giant, companies become less agile and flexible and they do not take the threats from new entrants seriously. Holding monopoly means becoming less complacent, unable to respond to competitiveness and do not think of innovation. When Zara entered market, she was not taken seriously and no barriers were enacted against her, in the end she became a threat for the survival for the rival retailers. The traditional retailers need to be more flexible and adoptable to the individual consumers. The rivals also need to introduce different pricing structure, such as offering introductory price, off peak price, reducing checkout waiting times and introducing more products in lesser time, this would enable them to compete with Zara (Craig, 2004). Reference: Zara, a Spanish success story. (2001). Retrieved Apr. 02, 2006, from http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/. BBBC. (2001). Retrieved Apr. 02, 2006, from Zara Retail Success Story Web site: http://news.bbc.co.uk/2/hi/business/1346473.stm. Marks, S. (2005). Revolution on the high st. Evening Standard Craig, A. (2004). Zara: fashion follower, industry leader. Philadelphia University, Inditex's annual report. (2004). Retrieved Apr. 02, 2006, from www.inditex.com Ghemawat, Pankaj (2003). ZARA: Fast Fashion. from http://harvardbusinessonline Spanish chamber of commerce in Australia.(2002), Noticias,. Retrieved April, 2006, from http://www.business.bond.edu.au/mgmt13-308/common%20files/zara.pdf Zara Japan, Success Stories: Ideas for Potential Players. Retrieved April, 2006, from http://66.102.7.104/searchq=cache:H49_zg-cUiIJ:www.jetro.go.jp/en/invest/whyjapan/success_stories/pdf/16_zara.pdf+zara+ Read More