Course:

Section: Group:

Business Communication (BUS 231)

7 5

Case analysis of ZARA: Fast Fashion

Prepared for:
Sheikh Atiq Department of Business Administration East West University

Prepared by:

Md. Sazbir Hossain Id# 2009-2-10-279 Md. Mojammel Haque Id# 2009-2-10-134 Asif Mahmud Id# 2009-2-10-059 Muhammad Mehedi Hasan Id: 2009-3-14-013 Md. Shahin Shah Id: 2009-2-10-059 April 11, 2012

Date:

Table of content

Serial

Name of topic

Page number

Summary

Symptoms

Problems

Alternative Solution

Recommendation

Implementation

Conclusion

Summary:

This case focuses on the Spanish retail giant Inditex and how it is largest retail chain. Zara has been so successful through its simple business model of speed, flexibility, and high fashion. As of 2002, Inditex operated six separate chains: Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. Each chain operates independently and is responsible for its own strategy, product design, sourcing and manufacturing, distribution, image, personnel, and financial results. Zara is the largest, most profitable, and most internationalized of the chains. At the end of 2001, Zara operated 507 stores around the world, posted EBIT of 441 million Euros, and sales of 2,477 million Euros. Currently, H&M is Inditexs major competitor. Zaras success is based on a business system that depends on vertical integration, in-house production, quick response, just in time manufacturing system, one centralized distribution center, and low advertising cost all of which made it so successful as far. Powered by Zaras success, Inditex has expanded into 39 countries, making it one of the most global retailers in the world. And in the future it will expand into more countries and regions as well.

Symptoms:
Distribution Business Model High Cost Diseconomies of Scale

Problems:

Zara realize that it needs to continue to expand internationally, and which territories to enter are somewhat not clear. There was significant local variation in customers attributes and preferences, even within a region or a country. The company had experimented with franchising, joint ventures, and company owned stores. The question facing the company was that what model it should utilize in each country. Fast and recurring introduction of new products in different countries increase costs throughout the season. They have higher research and development costs. Employees must be trained in order to use the new manufacturing techniques; Traditional retailers do not experience higher costs in all of these areas. Zara has not invested in distribution facilities to support their global expansion. Centralized logistics system might be subject to diseconomies of scale as Zara continues to open stores all around the world and ships product from its single distribution center in Europe. All the apparel is shipped from Europe to the States, which incurs a significant transportation cost. Shipments from the warehouse were made twice a week to each store via third-party delivery services, 75% by truck and 25% by air ( dhl) which is costly. Vertical integration, a distinctive feature of Zaras business model strategy creates some weaknesses. It is important to recognize its limitations. Vertical integration often leads to the inability to acquire economies of scale, which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate. Higher costs are then incurred for the Inditex Corporation. By the law of Multi-Fiber Arrangement (MFA), Zara needs to give 7%-9% tariffs in the major markets. In the case of USA it is 12%. In Argentina zara face struggling because of 35% of tariffs and advanced tax payment requirements. Zara spent only 0.3% of its revenue on media advertising, compared with 3%4% for most specialty retailers.

H&M added eight countries to its store network between the mid-1980s and 2001, and The Gap added five, but zara added 24 countries and trying to increase it in short time. If a decision was taken to enter a particular market, customers effectively bore the extra costs of supplying it from Spain. Prices were, 40% higher in Northern European countries than in Spain, 10% higher in other European countries, 70% higher in the Americas, and 100% higher in Japan.

Alternative solution:

Germans peoples are price sensitive, French peoples are focused on quality, French and the Italians were considered more fashion forward than the German and British. Japan is generally traditional. Inditex need to analyze these types of characteristics when the open a shop in other country. They need to conduct micro and macro analysis, macro analysis focused on local macroeconomics variables and future evaluation in terms of tariffs, taxes, legal costs, salaries and properties prices. And micro analysis like information about local demands, channels, available store location and competitors. And based on that they will take decision what model it should utilize in each country. Traditional retailers do not experience in new manufacturing techniques, higher research and development costs. Zara need to maintain low production cost so they can charge competitive price in other countries. Zara need to build a central regional distribution center in America and smaller distribution centers in other countries. And they need to minimize transportation cost. Zara should invest more money on advertising and promotion because that will increase their sell, brand value as well as profit.

Recommendation:

Building new plants and equipment is very expensive and takes a lot of time, Zaras shipments will grow as they continue to expand; renegotiate overseas shipping costs and terms to reduce overall costs can help them. With an existing website in place, Zara can easily add the e-commerce feature to its website. This method can help gauge consumer preferences from country to country. Zara maintains its competitive advantage in Europe through its fundamental concept to maintain design, production, and distribution processes that enable quick response to customer demand. Building a central distribution center in America will help Zara decrease logistics and help maintain Zaras model of fast fashion and economies of scale. Smaller distribution centers should be built in countries. When Zara moves into international markets, it loses some of advantages; it loses some control over costs shipping costs, tariff costs, etc. Zara can overcome this problem by re-configuring its system to a less centralized approach.

Implementation:

To expand globally, Zara should focus on one country at a time. United States should be Zaras current focus on international expansion. Zara should maintain short lead time, quick inventory turnover, leading fashion brand and low advertising cost as its competitive advantage. Regional distribution center, vertical integration, outsourcing, eye-catching window displays are the key elements for Zara to continue to re-invent and innovate themselves to stay fresh in the apparel industry. In the short run, invest in prime locations in major cities and in the long run, Zara should continue invest in prime locations in different cities. Centralize in Europe with feedback from country/region managers allows Zara to maintain European style, at the same time, minimize design cost. In the short run, rely on the distribution center located in Europe. In the long run, build central distribution center .Use suppliers in the Mexico and Caribbean Basin to achieve lower labor cost. Further, Mexico and Caribbean Basins geographic location allows Zara to receive inventory within reasonable lead time. Zara also faces risks to its image and therefore has to be very careful in regards to franchising and joint-ventures. With these models, Zara may have a limited role in operating the retail locations.

Conclusion:
Investing in new stores, in house manufacture, and distribution center increases the risk of low working capital. Expanding into new territories will pose new competitors. Because Zara offers such a wide variety of products (men, women, maternity, children, and baby) almost any apparel retailer can be a threat to them. Although financial and direct competition are major risks facing Zaras expansion, Zaras ability to maintain short lead time, low production cost and fast fashion would mitigate the risk of failure in its efforts of global expansion. If Zara realize their problem and based on that they take action they will become number one apparel industry in the world.