Zara: Fast Fashion

Group 5: Amit Kumar Gopi Krishna Akshay Jadhao Sonia Kumari Somesh Srivastava Amit Sinha

Agenda
Introduction and Global Apparel Chain Inditex Key International Competitors Zara s Business System Zara s International Expansion Recommendations

Global Apparel Chain

Characterized as a buyer-driven global chain Derived profits from unique combinations across the supply chain Apparel production was very fragmented
Comprising of as many as firms hundreds of firms spread across dozens of countries Retailers played dominant role in shaping imports of fabric from developing countries In 2000, retail spending on clothing reached 900 billion euros worldwide Europe accounted for 34%, US 29%, Asia 23%

Key International Competitors

The Gap H&M Benetton

Zara Production managed by Zara Stores owned by Zara itself

The Gap 90% Production Outsourced Store & DCs managed by Gap

H&M 100% production outsourced, 50% to European Owns DCs and stores

Benetton Outsourced labor intensive and scale insensitive activities Heavy investment in production Licensee ran stores

The Gap
San Francisco based store Outstanding growth from 1969 to 1990 T-shirt, Jeans as well as Smart Casual work clothes Internationalized but U.S. centric Facing location, SCM and pricing problems in other country Lack of clear fashion positioning across 3 store chains Banana Republic, The gap & Old Navy Repositioning as a fashion driven brand failed leading to loss

Hennes and Mauritz (H&M)

Established in 1947 in Sweden Considered as closest competitor Longer lead times than Zara 100% production outsourced, 50% to European suppliers, Owns DCs and stores More focused internationalization with more success rate emphasis on Northern Europe Numerous labels, different consumer segments but single format Lower prices than Zara Focus on marketing also employed few designers

Benetton
Italian company established in 1965 Emphasized on Brightly colored Knitwear Famous for controversial ads and as a network organization Outsourced labor intensive and scale insensitive activities to suppliers heavily invested in other activities Strategy embarked on narrowing product lines further consolidating the key production activities by grouping them into production poles in different regions and expanding and focus on existing stores Opening Megastores in big cities with formation of small store network

Inditex
Global specialty retailer involved in designing, manufacturing, selling apparel, footwear and accessories for woman, man and children Six separate chains organized as separate business units
Retail Chain Zara Massimo Dutti Bershka Pull and Bear Stradivarius Oysho Specialty & positioning Medium quality fashion clothing at affordable prices Fashion variety from sophisticated to sporty Trendy clothing for 12-23 age group, hotshot fashion stores Casual Clothing at affordable prices 14-28 age group Youthful urban fashion 15-25 age group Latest trends in lingerie

Inditex
Headquartered in Galicia, Spain President : Amancio Ortega Gaona Inditex leveraged sophisticated local demand, week base upstream in textiles and presence of specialized training institutes and corner of Europe location Competition from Italian Retailers
Spain lacked in tread-to-apparel vertical chain, quality of fabrics (wool suiting), international fashion image Slower to move overseas than Italian counter parts

Zara: Unique Business System

At the end of 2001, operated 507 stores 488,400 square meters of selling area Zara manufactured its most fashion-sensitive products internally (11,000 SKUs) Direct product shipment to stores eliminating warehousing and inventory issues Vertical integration helped reduce the bullwhip effect Extremely quick response system Designers continuously tracks customers preferences Fast fashion follower rather than manufacturing efficiencies

Vertical integration
Economies of scale vs Economies of speed
From design to goods in store within four weeks (entirely new designs) Modifications within two weeks

Prediction vs responsiveness
Most time critical items manufactured in-house Less time critical items outsource

Production and Positioning Strategy

Zara s Value Chain

Zara vs. Traditional Companies

Zara Business Model: Key Takeaways

Integration upstream to create competitive advantages downstream Relation between distribution and product development Evolutionary product development and sourcing IT plays crucial role in enabling sourcing, manufacturing, and marketing Product development and distribution instead of promotion helps in brand development Selling state-of-the-art fashion though being a fashion follower

International Expansion
Zara s international expansion began in 1988 By the end of 2001, it has 1284 stores among which 769 operated in Spain and rest in other countries Chains are in 60:40 ratio and sales was in 40:60 The pattern of expansion can be described as an Oil Stain
Economies of scale Increased customers awareness & Avoid local warehouse costs

Market Selection
Macro analysis
Tariffs, taxes, legal costs, salaries, and property prices/rents

Micro analysis
Local demand Channels Available store locations Competitors

Market Entry
Three different modes
Company owned stores

Operated 231 such stores in 18 countries High growth prospects and low business risk

Franchises

31 such stores in 12 countries Small, risky, or subject to cultural differences

Joint Ventures

20 such stores were operated in large and more important markets like Germany and Japan 50:50 interests, put and call options

Marketing
Pricing is market-based
 Customers bore the extra costs of supplying from Spain

Higher prices and narrowed target market Difference in positioning Product offerings Standardized strategy

Growth Options
Italy was considered to be significant
Opened the largest Zara store in joint venture with Percassi High spending Frequent visits Fashion forward Plans to increase growth in second region by investing in distribution and production

Recommendations Growth strategies -Market development strategy

Create an index of various market based on their potential Index = Volumes * profit margin - Cost

Macro analysis Tariffs, taxes, legal costs, salaries and property rents Microanalysis Local demand, channels, available store locations and competition Chain acquisition Location of the retail outlets Size Breadth of presence in cities Geographical reach in a country

Growth strategy - Market penetration strategy

Change the location of the existing outlets to the best locations in the city it is financially feasible Target the group of individuals in a locality which are fashion pioneers Teenage groups in Japan are at the fore front of fashion

Margin maintenance
Evolve towards decentralized distribution system Procurement and manufacturing to be migrated to low cost centers Evolve into a matrix structure of the organization Improve the sharing of the resources and information between different business units