ZARA Case Study Ass A ssii g n me men n t Qu Quee st stii o ns
1/14/2018
1. What are the key elements of the Zara business model? How are they different from other retailers? Zara is one of the largest Spanish clothing and accessories retailer based in Arteixo, Galecia, founded in 1975 by Amancio Ortega and Rosalia Mera. Being a flagship retail store of Inditex group, the fashion group also owns several other brands likeStradivarius, Pull and Bear, Bershka, Massimo Dutti and Ulterque. The first store provided the customers with low- priced products, this gained popularity and became successful, that’s how a chain of stores were opened throughout Spain. Zara is a vertically integrated retailer, controlling the design, supply chain, distribution and manufacturing of its products worldwide. It has 6,500 stores across 88 countries. Overview: Concept: Zara basically pays a lot of attention on the designs, process of production and the distribution of its products; it’s the fundamental concept of Zara. It always focus on what the customers want and desire and then works in the direction of making the best possible product available to them to satisfy their needs. Zara thinks that the firms have to be flexible in terms of providing products and delivering services to the customers as the customers are surrounded with lot many options and choices in the market place. Capabilities Capabilities of Zara are required for exploiting the market opportunities to get the profitable results and Zara tries to put control over all its activities like designing, production, manufacturing, strategic partnerships, etc for getting maximum out of its capabilities. Zara always maintains the required flexibility and speed in the designs as well as the production of its products that is how it is able to produce 12000 of new items annually. This defines the capability of Zara that allows it to attain the set objectives and strategies helping Zara to flourish and expand in the market overseas. Value The Value drivers of Zara can be categorized into two- Tangible and Intangible It’s the value proposition of the ZARA which differentiate it from the competitors:
Factors that Zara delivers that is of value to the customers – Women/Men - Zara is delivering value to its customers by providing unique, customized and fashionable clothes as well accessories at affordable prices that have some added value( sentimental value, emotional value, beauty, heritage, etc) to the customer. Designers- Zara is delivering value to its designers by giving them a platform to present their quality creations to the customers.
• Needs that Zara satisfies that helps the customers get a job done or solve a problem Women/ Men –
Zara satisfies the needs of its customers by providing them with large choices of style and fashionable products at affordable prices as well as reasonable quality. -DesignersZara satisfies the designers by making their creation popular in the eyes of the customers. • The key pains and gains that Zara addresses for the customers –
Women/ Men Pains- Expensive and costly designers clothes as well as problem in finding centralised stores. -Women/ Men Gains- Enabling the customers to feel fashionable at affordable prices and facilitating them with centralised store location. Designers Pains- Heavy cost of setting up their own fashion store and to reach customer. -Designers Gains- Providing them with a platform where they can present their collection to large number of customers without incurring heavy cost 2. Should Zara open a major warehouse outside Spain? If yes, where?? Yes, I believe that Zara should open a warehouse outside Spain. The best location based upon their current competitive position for the warehouse is Myanmar. Zara is not just a Spanish or European retailer anymore and its expanding global presence requires a support structure closer to its operations in Asia and the Middle East. Whilst Spain has always been Zara's biggest market, in 2013 China overtook France as the country with the highest number of stores outside Spain (Berield and Baigorri, 2013). Since 2007 Zara has focused its expansion on Asia and their growth rate in Asia has been double that of the rest of the World (Caro, 2011). This looks set to continue with Zara's CEO Pablo Isla stating that India is one of Zara's next top priorities (Caro, 2011). Shipments to Zara's stores in China and Asia travel over 5000 miles - a warehouse in Asia to match the production facilities already in place there would be a lot more effective and efficient than the current operation. Another strong argument for creating a distribution warehouse outside Spain is that Zara is coming under increasing attention and criticism for the price differentiation strategy it employs in different markets. Consumers outside Spain are paying a higher premium for the same garments as Zara's Spanish customers and with the transparency that online shopping and social media now offers consumers there is a question of how long consumers will tolerate this. A 2006 study by Ghemawat and Nueno found that consumers in Japan are paying as high as 131% more than Spanish shoppers. The strongest argument against building a second distribution centre is that centralisation and control of all operations from Arteixo have been key to Zara's success to date. However we feel that Zara and Inditex have always shown themselves to be progressive and eager to adapt technology to improve efficiency and drive sales. There is no doubt that the drive and commitment that pushed Zara to be the No1 fashion retailer in the world will enable them to overcome the challenge of dual distribution centres. Some of the advantages of a distribution centre in Asia are listed below:
Advantages
Explanation
Cheaper Labour
The cost of labour in parts of Myanmar is significantly cheaper than Spain.
Close proximity manufacturers
to
From the case study it is very clear that Zara already manufactures price sensitive goods in Asia. This area is rich in clothes manufacturing and further links could be developed.
Connects to far western countries
A distribution centre in Asia would enable a further expansion in to the far East and Australia.
Reduce the supply lead time to Asia based stores.
Zara’s lead time to supply Asian factories is around 38 to 48 hou rs, a warehouse in Asia helps to reduce this time drastically.
Low cost of living in Myanmar
The Myanmar currency rate compared to euro is very low “1 Euro = 1350 MMK”. This will make construction and development relatively inexpensive
3. What are competitive threats to Zara likely to come from? Will Zara’s strategy scale once the network of stores grows beyond the 2000 mark? Should Zara continue to own most of its stores? Zara at present faces stiff competition from competitors such as Gap, H&M, and Benetton. Moreover, Zara is likely to face threats from other retailers such as Walmart who outsource their labour from countries such as Bangladesh to decrease their overall costs. The clothing an apparel market is a mature with lot of prime players each competing for a bigger market share. In a mature market, one can only compete by being a cost leader. So probably if Zara goes for an asset-lite strategy by outsourcing its operations, it not only will help Zara to diversify its overall risk of of being able to meet the required demand in case of seasonality but will also decrease the cost of production adding value to its shareholders. Will Zara’s strategy scale once the network of stores grows beyond the 2000 mark - Yes !
At present Zara has a decentralized organization structure which gives enough autonomy to its employees to take decisions. As the size of the organization will grow, it will be mandatory for Zara to change its organization structure from a decentralized organization structure to a more centralized or matrix organization structure which is a hybrid of both centralized and decentralized organisation structure to have a better control over the organization. Apart from this, Zara would have to expand their clothing line as per the region in which they operate as each region will be having a different taste and trend. Should Zara continue to own most of its stores?
Zara can start its own franchise that will help expand local business through the efforts of future franchisee. This will help them grow globally and at the same time minimize their efforts of handling a big organization.
4. Why do you think Zara has not been copied by many other retailers? The business model of Zara is unique in comparison to other retailers and is as a result is not easy to be copied. Following are the reasons for the success of Zara – a) Zara has stores only in prime locations and retail parts of cities. b) Store managers are giving the independence to decide what type of clothes should be kept in the store and how much quantity should be k ept in their individual stores. c) The design and outlook of the Zara stores is changed every 3-4 weeks and therefore is difficult to imitate. d) Less number of clothes are stocked in a store. As a result, when the design goes out of fashion, the clothes are also removed easily from the store shelf. Since less number of clothes are present, there is less or no left over when a design goes out of fashion e) Clothes for Zara are manufactured in Europe based on feedback provided by store manager which depends of the location of the store. As a result, each store stocks items which will definitely sell. Other retailers get their clothes manufactured from China and other Asian markets. Since they get it made from Asian countries, the clothes are manufactured on a mass scale. By the time the shipment reaches Europe, the design it either outdated or the retailers are unable to sell the large number of clothes leading to abundance. f) Since Zara products are present in limited stock, customers try to get them as soon as they are available in stores so as to represent exclusivity. g) Excess clothes available with retailers have to be either sold as a part of sale or discarded which means losses. 5. Using information from the internet GM (Revenue-COGS) vs Turns vs SG&A, compare INDITEX to publically traded apparel retailers on these matrix. How about today?
In both the metrics Zara is doing extremely good compared to the competition with high GM and low SG&A expenses. Currently they are operating at a fairly high return on investment and ROCA that ranges around 10% and that looks good for an apparel retailing business operating globally.
