Background:
Being in a professional study course like MBA it is significant to study the issues that are generally being faced by big organizations. The course of MBA often leads to situations where the pursuer is generally being offered to work for global organizations where he/she might land up in certain situations that need the person to use proper skill and knowledge to deal with. This report would be taking into account the case of Zara and the issues it faces in the market that has the ability in jeopardizing its operational process. There are several threats to the success of Zara, a Spanish company that has been dealing with the clothes. It has been contributing around 68 per cent of the sales of Inditex. In the period ranging from 2000-2006, the company had been developing its sales with 30 per cent every year. The company had been much forward from its competitors like Mango and H&M. Zara’s success has been on the business system that is being based on the attainment of quick retort to the market demand without taking much sculpt on fast moving segment of trend clothing (Fernie and Grant 2015).
Business Problem:
Zara has been an organization that has been facing a lot of issues in recent times. The vertically integrated form of Zara is considered to be an issue in the success of the company in the long run. Expansion of the operations in various regions like Asia and Europe needs addressing of diverse trends in fashion within a particular time. It would not be simple for Zara to cart fresh apparel from one region and put it in another.
Zara might find it problematic in managing the vertically integrated sculpt for its operations in large scale with the local retailers having the ability to follow the steps of Zara, copying their success and emerging as big intimidation to its accomplishment. Beating local retailers in the local market is difficult. For instance, Italy’s 61 per cent local apparel market is owned by independent stores, 44 per cent in Spain and around 20 per cent in other three key markets of Europe. Cheap labor makes it more difficult from Zara to sustain with its production in Spain. Along with change in time, advertisement is becoming way more significant in business, reflecting directly to sales. The in-store commercial model of Zara might not work for them while moving forward.
Aims and Objectives:
The main aim of this research study is to investigate on the issues faced by Zara in the market and the ways it would be able to overcome the challenges in the market. This research would analyze the issues and come up with probable solutions and recommendations for Zara to establish itself as the market leader.
The main objectives of this research study are:
Zara is considered to be an organization that is best known for the superior quality products since the staring of 2007. It has even been competent to deal with industry giants like the Gap and H&M. Zara is a Spanish company that has been dealing with clothes. It leads to around 68 per cent of the Inditex sales. Starting from the year 2000 till 2006, the company had been developing its sales with around 30 per cent each year, having 11 per cent net margin along with 29 per cent return on the equity. This was certainly more than what companies like Gap and Mango managed to attained within that period. Zara’s success has been mainly due to the business system that aims in attaining a speedy retort to the products’ demand, the production design cycle of the company along with the distribution being fast. Zara has been able to tap their customers with the power of fashion. They have been capable in bringing fresh products in the cloth shops, magnetizing the customers in visiting their shops to buy those new ones. Consumers’ notion about Zara has been if they are not purchasing certain products today, those same products would go missing tomorrow as Zara would be selling it off on that very day only. Zara’s parent company, Inditex has been able to generate a business model that suits best within this apparel industry and over the period of last few years has frequently distributed growth figures that are double digit. The main strategy of Zara has been to provide cutting edge fashion at reasonable rates by subsequent fashion and recognizing style that are considered “hot”, getting those latest trends into the stores. This company has been manufacturing approximately 12,000 styles per year as compared to 3000 by the retails on an average. A Zara customer generally visits its store 17 times as compared to other retail stores averaging 3 times. It plays brilliantly the strategy of lessening the quantity manufactured for each style, generating artificial scarcity, lowering the risk of having to stock the things it cannot sell. The company ahs also been spending much less on advertising (0.3 per cent of revenue) as compared to the conventional retailers (4-5 %). They reach to their target market through positioning their stores in locations that are prime town centres.
Target Customers:
The target market of Zara has been the young segment that is price-conscious and highly receptive to the latest trends in the fashion industry. Their main advantage over the conventional retailers has been the fact that they do not classify their targets through segmentation of their ages and lifestyles, providing them a much bigger market. The company has been segmenting their product line by men’s (25 per cent), women’s (65 per cent) and the prompt growing department for children (15 per cent).
Market Position:
Zara uses the strategy of usage-based positioning in highlighting its customer-centric advancement in satisfying the changing whim requirements of the customers across the globe. Zara knows that the customers crave the fresh and upgraded inclination, targeting its customers accordingly that is being based on the extensive designs (Kim 2013). Zara’s main objective has been to democratize fashion. Zara has been opening its stores in high profile locations for setting the brand image as being stylish, high fashion and reachable.
Zara’s Market Share:
Zara has around 2200 stores around 93 countries and has been the flagship brand of the Inditex Group. In the year 2015, Zara added around 65 stores along with 50 Zara Home locations. Spain has been the principal market for Zara with 430 stores, followed by China with 193 stores along with France at 129. Zara has opened around 78 stores in 2017 January, launching online sales in Malaysia, Vietnam, India and Singapore.
Zara has been transporting sales growth that its rivals can only dream about. In 2017 January, the sales of the same store rose by 10 per cent, considered to the fastest in 14 years. Its key rivals are under pressure in generating growth on the same grounds. However, the gross margin, the distinction between the rate at which Inditex purchases and sells the goods, descended to less than 55 per cent in the fourth quarter, stated to be the lowest in almost eight years. Life has started being tough for this champion brand, though experts have stated that the situation is going to get tougher for the less stylish rivals. Inditex, the parent company has been blaming the retrenchment on undesirable movements of currency. Without this factor, the gross margin would have augmented in 2016; the margin needs to be stable this year, as per the company. Net profits chopped down to 7.3 per cent to 406m euros ($550 million) in the three months leading to April, from approximately 438 million euros a year before.
Pricing Problem:
Zara has been going global, and the prices of its clothing are varying from country to country. The global expansion of Zara has been encountering certain problems, notably in the United States. Two of the key issues of Zara are sizing and pricing. Zara products’ price alters radically on location that affects both the sales factor and the discernment of the confined market. For instance, certain item’s prices in Zara Spain are stated to be less expensive than the similar sort of items sold in Zara Russia. In its website, listed country-wise there is detailed price disparity in the Zara stores. Spanish customers have been getting Zara products at much cheaper price than the countries where the Zara products are nearly high. There is no uniformity in its pricing.
In an article published by Who What Wear illustrated the price fluctuation of Zara in different countries, stating where one should never buy the Zara products. The article accomplished that the results exposed shopping in the home country of Zara has by far the most reasonable, while Japan is most expensive when it comes in buying Zara branded products (Cheung 2016). Zara has been stating that prices are generally being set in independent manner. Prices differ for the fact that they cover cost of certain things like taxes and transportation. Perceptions have a superior impact on sale with cost of clothing generally being higher in United States than in Europe. Price is a factor that has been making a bigger difference to people in their discernment and habits of purchasing. The qualities of the Zara items in US are same to that in Europe, though people do not like paying much.
Sizing Problem:
In case of sizing, Zara’s expansion into the United States has been a major issue. Elle magazine once enquired whether Zara has an issue with their sizing. The answer to that has been yes. Zara has long been struggling in America. It has been selling trendy cuts and slim fits in America, though the smaller cities within US prefer classic and roomier clothes. Zara does not provide ‘vanity sizing’, facilitating customers in fitting themselves into 6 who generally wears a 8 or 10. The major fact is that flattering of customers helps in boost of sales. Unfortunately, Zara did not understand this, especially in US where women have the tendency to be larger than petite women in cities like Paris (Nenni, Giustiniano and Pirolo 2013). However, as Elle observed, for Zara to make any sort of impression in the US, they would need to espouse to flattering yet unrealistic structure.
Decline in Profitability:
Spanish global giant, Inditex, the undisputed owner of the fashion brand Zara encountered a rare fall in its quarterly profits during its operations in late 2014. The group experienced first real slump in its profit since 2009. As per Choi et al. (2014), the gross profit margin of Zara lessened to 57 per cent from 57.8 per cent in the 12 months through the period starting from January. It missed on the Spanish retailer’s purpose in keeping the gauge within the .5 percentage points of the preceding year. The share prices fell by 2.7 per cent, the most witnessed since December 2016, though the losses have been pared after Zara’s CEO Pablo Isla stated that at the present exchange rate, profitability would not be going down (Kim, Lee and Lee 2016). Inditex was quick to opine that the decline in the margin of gross profit last year was mainly due to the swings in the currency. Foreign exchange exposed 3 percentage points off the growth in sales. Weaker currencies in China, Russia along with Mexico have been lessening the sales value in the markets when being decoded into euros.
Research Question:
Conceptual Framework:
Figure 1: Conceptual Framework
Source: ((McLaren et al. 2016))
The conceptual framework for this research study would be dealing with the different issues of Zara and their level of efficiency in the market. This research study will take in their performance and evaluate the ways they have been going about their business. It will focus on the resource based theory and look for probable strength, weakness and opportunities that the company needs to focus on.
Resource Based View (RBV) of Zara:
Under this perception of the resource based view, a firm proficiency and resources are the ways of enabling a firm in gaining competitive advantage. This outlook is usually useful in evaluating the case of Zara and the ways the firm attains competitive advantage within the fashion industry. In performing the analysis, the VRIO structure would be put into use. The resources that are being made available to Zara will be evaluated, and the actions taken by Zara in gaining these resources for enabling the firm in achieving competitive advantage.
Resources and Competency of Zara:
Both the available resources to a firm and its competency level can throw in to the firm’s competitive advantage. The resources that are available to Zara take in the facts that Zara has been the home for 3000 designers, striving hard every single day in incorporating a good brand image for the company along with enhancing their global existence. This company boasts of a value chain that is lithe, supple and efficiency (McLaren et al. 2016). The overarching strategy of Zara has been attaining growth through the process of diversification along with vertical incorporation. The organization has owned its supply chain, competing in the market, factually exemplifying the ‘fast fashion’ idea. Zara has been adopting dispersed system of manufacturing in coping with the various needs from the diversified countries in its international supply chain (Turker and Altuntas 2014). Zara mainly comprises of a supply chain that is buyer-driven that is characterized by the system of made-to-order.
Zara’s competency takes into consideration the factors of being able to distribute pleasant fast fashion products that are of good worth being made available at moderately low price. Zara has always been able to introduce new and fresh designs to the marketplace at a rapid pace for attracting customers’ everytime. Their designers and the management have great insights on the preferences in the market along with the trends and the changes.
The resources that are being made available for Zara are not something that was initially being directly availed for the firm; Zara had been spending bigger efforts in building of such resources. Some of such efforts include being effectively customer oriented along with understanding and attending the needs of the customers. Its managers are given the responsibility of tracking down the changes in the market and making proper decisions related to their marketing and selling strategies. The management of Zara has been regularly developing its products and the flows of the operations. According to Kim, Lee and Lee (2016), Zara have continued to construct those products demanding superior technology along with quality, outsourcing the simpler products from the countries that are developing. Zara needs to proactively handle and allocate information with its suppliers for better results.
VRIO Framework:
VRIO framework can be made use in analyzing the resources or capability of Zara; if they are being capable to supply to the sustainable competitive improvement. The fashion industry is stated to be immensely competitive, subject to hastily evolving the trends within the fashion. Formed on the VRIO framework along with the evaluation of the competitive advantage, it can be stated that Inditex has competitive advantage. Zara’s business model depicts a strong vertical integration along with an organized supply chain. Unlike their competitors like Mango, Benetton in Europe and H&M, Zara has been able to fragment the model of decision-making (Cheung 2016).
Evaluation of VRIO Framework:
a. Value:
Inditex has been an amalgamation of the resources; the most precious is the vertical integration. Zara does not rely on third parties, managing the designs, distribution and warehousing along with logistics itself. Doing these they have been far more flexible than their competitors along with being faster than competitors. Vertical integration has been also reducing operating costs, having conceived an organizational structure and values respected by the employees (McLaren et al. 2016). Zara is an organization that cautiously follows the change in the taste of the consumers due to its flexibility.
b. Rareness:
Most of Zara’s competitors have been outsourcing the production, focusing mainly on retailing and distribution. The main reason being the industry is labor-intensive. Inditex, Zara’s parent company does this in opposite manner. Its main emphasis is on the capital-intensive industry. Zara has the capability of manufacturing fresh items and delivering them to the stores in fewer than three weeks time than the average of six weeks required for the luxury brands.
c. Imitability:
In the present scenario, imitating almost everything is possible. The main question lies in the fact the time required to imitate a product. Zara’s competitors could copy the business model of Zara, but only in the long run. It might take the others years in establishing the model of vertical integration with that sort of a supply chain and even more in creating an organizational structure that Zara has. The competitors might need to incur massive cost for copying the model which is repeatedly impracticable. Zara continuously make small adjustments, making their progression rapid.
d. Organization:
Going through Zara’s annual reports one can continuously witness augmented profits and sales. The top managements are the one that requires its due credit along with other individuals that are being engaged in Inditex’s every process. Everyone who is related with Inditex contributes towards their success. There strength lies in the fact that proper coordination among all the people despite of the autonomy in their decision making process.
Strengths: Unique Designs
Zara’s best advantage lies in the fact of its unique designs. It comprises of overabundance of designers understanding the Zara brand and the customers psyche. Zara clothes are rich in quality, having excellent finishing, and coming in different varieties.
Excellent Supply Chain:
It is well known that Zara’s design concepts takes just two weeks to get delivered in real whereas its competitors takes around 6 weeks, repeatedly making Zara the trendiest store that has the most recent fashion. Zara, on an average designs around 450 million items, naturally pushing the customers in visiting their stores.
Low cost and higher profits:
Zara’s advantage in design along with physical evidence in stores helps Zara immensely; it does not need to advertise its products also. Zara has been relying on its trendy image in magnetizing the customers to its stores, a reason for which Zara has low operational cost and high margins at the same time (Cook et al. 2017). Its earnings mostly get spend in backward integration and supply chain instead of spending the same on advertising.
Weakness: Low Safety Stock
One of the regrets that the Zara store generally has is that their fast moving stocks generally do not have safety buffer. Low inventory of Zara helps keep its customers attracted in visiting the stores for checking out on the latest collections. A design would not be able to reach its potential even if that is a hit with its customers as lack of safety stock or buffer would not allow that.
Lack of advertising:
It might lead to a cost advantage position for Zara, but lack of advertising is stated to be weaknesses as the brand can double its profit and turnover through advertising of its collection. Advertising would help in pulling customers generating lot of word of mouth advertising.
Backing flagship designs:
One of the key traits of the top brands is that some of their designs are flagship of their stores. This is something that Zara lacks, so there should be existence of some designs which should always be sold from the stores of Zara, bringing in greater demand for such designs.
Online E-Commerce:
Zara can absolutely take advantage of the trend of online buying, availing its clothes not only in the won stores of Zara but also on the e-commerce stores, bringing in a hike in sale.
Competition:
In the fashion industry, Zara is not the only one known for its modish design. H&M, Mango and Vero moda are also being loved for their designs. The advantage that Zara has over them is the fact that the other brands are costly as compared to Zara whereas Zara provides fresh designs at affordable rates. However, this sort of competition might lead to diffusion in the segment of semi-premium, affecting the profit margin.
Reach:
Zara requires augmenting its reach enormously. It has been operating extensively through the own stores, not having any of those shop in shop stores or smaller displays, atleast in the region of Asia (Linden 2016). That is where competition gets incredible. These sort of volumes are missing out in Zara with the only answer to this is it possible reach.
Research Outline:
The SWOT analysis of Zara would account for most of the research questions that have been identified by the researcher while doing this research study. In understanding the weakness and threats that Zara has, it is important to conduct a SWOT analysis. The threat and weakness that Zara has needs to be analyzed to come up with probable solutions on the ways it can better its business operations. Zara has been working tirelessly on bringing in innovative designs and low pricing strategies to lower its price for the customers to visit their stores regularly. It is evident from the fact that a Zara fan would be visiting a Zara store seven times, much more than the customers do in other local retail stores.
The recommendations would mainly be based on the studying of the present strategies of Zara and evaluating its current market performance and the competitive advantage it has over its competitors. The research question 2 might take in the Resource based theory in understanding the level of competency it has within the market. Zara has been working towards the betterment of its issues so that people find it more attractive in buying clothes and other stuff from this particular brand (Axelsson and Jahan 2015). It is about building an association, a strong bond with the customers so that they do not shift their base, as there lies enough options for the customers.
This research study should be able to take into account both the qualitative and the quantitative factors for proper understanding of Zara’s issues and the way the company has been strategizing itself to deal with the issues and come up on top. In case of the qualitative data, the researcher might go for individual interviews of Zara employees along with group discussions among them on what they think Zara needs to do (Lee, Seifert and Cherrier 2017). For the quantitative data part, the researcher might use to quantify the attitudes, behaviors and the opinions through mobile surveys, online surveys and face-to-face interviews. The researcher needs to follow ethical sources for the research study and secrecy should be maintained by the researcher in every sense.
Reference:
Axelsson, E. and Jahan, N., 2015. Consumer attitude towards Corporate Social Responsibility within the fast fashion industry.
Benjamin, C.T., 2016. Defining a Fashion Industry Value Stream in a Small Island Developing State. International Journal of Supply Chain Management, 5(1), pp.68-74.
Cheung, L.H., 2016. A study of Spanish entrepreneurship in fashion industry: the case of ZARA.
Choi, T.M., Hui, C.L., Liu, N., Ng, S.F. and Yu, Y., 2014. Fast fashion sales forecasting with limited data and time. Decision Support Systems, 59, pp.84-92.
Cook, S.C., Cook, S.C., Yurchisin, J. and Yurchisin, J., 2017. Fast fashion environments: consumer’s heaven or retailer’s nightmare?. International Journal of Retail & Distribution Management, 45(2), pp.143-157.
Fernie, J. and Grant, D.B., 2015. Fashion Logistics. Kogan Page.
Kim, B., 2013. Competitive priorities and supply chain strategy in the fashion industry. Qualitative Market Research: An International Journal, 16(2), pp.214-242.
Kim, S.J., Lee, J.Y. and Lee, K.H., 2016. Global Pricing Strategy of the SPA Brand: Comparison with GDP and Big Mac Index. Fashion & Textile Research Journal, 18(3), pp.301-316.
Lee, M.S., Seifert, M. and Cherrier, H., 2017. Anti-consumption and Governance in the Global Fashion Industry: Transparency is Key. In Governing Corporate Social Responsibility in the Apparel Industry after Rana Plaza (pp. 147-174). Palgrave Macmillan US.
Linden, A.R., 2016. An Analysis of the Fast Fashion Industry.
Macchion, L., Moretto, A., Caniato, F., Caridi, M., Danese, P. and Vinelli, A., 2015. Production and supply network strategies within the fashion industry. International Journal of Production Economics, 163, pp.173-188.
McLaren, A., Goworek, H., Cooper, T., Oxborrow, L. and Hill, H., 2016. The effect of consumer attitudes on design for product longevity: The case of the fashion industry.
Nenni, M.E., Giustiniano, L. and Pirolo, L., 2013. Demand forecasting in the fashion industry: a review. International Journal of Engineering Business Management, 5, p.37.
Turker, D. and Altuntas, C., 2014. Sustainable supply chain management in the fast fashion industry: An analysis of corporate reports. European Management Journal, 32(5), pp.837-849.
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