Marketing of Zara in Action - Case Study Example

EXECUTIVE SUMMARY Zara is a unique business model in the highly volatile, constantly changing fashion industry. Their success lies in their strategy to respond fast to the changing trends and the demands of the customers. They have a presence in over 50 countries of the world and have standardized products across countries except for 10-15% variation. Their cater to the middle income segment and have apparels for men, women and the children apart from complements and home care products. they do not use advertising and their commercials can never be found on billboards or television. They rely on word-of-mouth publicity and strongly believe that their stores are their greatest advertising tool. Thus they concentrate on store layout, their internal customers or their staff and believe that in-store experience adds to the image of the company. They prefer to invest in the business rather than brand. All of these have made Zara a unique and successful multinational chain. Introduction Zara is the fastest growing European apparel retailer whose entire business relies on the effectiveness of supply chain operations. Today Zara has attained the distinction of being a global brand with retail outlets spread from Abu Dhabi to Uruguay. It is the flagship brand of the holding company INDITEX, one of the world’s largest and most admired fashion empires (Dinero, 2004). Due to its unique but effective practices, it is acclaimed as the high fashion/low cost brand for all. Zara has been described as "possibly the most innovative and devastating retailer in the world," by LVMH fashion director Daniel Piette (CNN, 2001). They break all rules of the apparel industry. Zara wanted to conquer the world of fashion using a low-cost approach (Heyden, 2007). In the apparel industry demand is uncertain because it is difficult to foresee the fashion trends in advance for a certain season and product failure rates can be as high as 10 percent (Diaz, 2005). Demand can also be volatile because demand can change suddenly due to a variety of external factors. Zara is able to react to the market trends immediately. It always keeps itself abreast of the change in trends and its product life cycles are shorter. Because it has control over the entire process form the factory to the shop floor, it can react fast to the changing fashion trends and consumer tastes (CNN, 2001). It is able to introduce fast many fashion items at an affordable price. It is able to react quickly to changing demands. While competitors like Gap and H&M take up to nine months to change the product line, or get new lines to their outlets, Zara takes just two to three weeks. Zara is a “lean enterprise” where the margins are low but the profitability is high. This is because the excess stock and unmet demand are avoided by stopping production when the market saturates. They make small batches of a product based on expected demand (Heyden, 2007). Zara has a clear focus on the customer. It strives for perfection and removes any form of waste. It pulls customers into the process by creating a stockout and manages customer flows. This is the reason why Zara always has a fresh look at its stores as it creates a sense of exclusivity. Product range Zara introduces about 12,000 new items per year and maintains an SKU of 300,000 per year which is four times higher than industry average. Their product life cycles are three weeks, twelve times faster than industry average (Diaz, 2005). Zara’s product range is updated constantly. They cater to a broad range of customers – right from infants to the forty plus range. They run three parallel, but operationally distinct product families. Their product range includes mens, womens and childrens good quality, mid-price fashions (Dinero, 2004). They also have other brands like Zara Home (home-ware), Kiddy’s Class (children’s fashion), (Pull & Bear (young men’s and womens casual wear), Massimo Dutti (men’s, women’s and children’s fashions), Bershka (young men’s and women’s fashions; 13-23 age group), Stradivarius (urban fashion for young women) and Oysho (ladies’ and mens lingerie). They did not follow the traditional route of following the fashion trends or hosting fashion shows. Zara also does not offer too many sizes or types or color which greatly reduces the product complexity and allows them to operate with reduced inventories and working capital (Heyden, 2007). They have five to six colors and five to seven sizes (Ferdows, Lewis & Machuca, 2005). They have separate designs, sales and procurement and production-planning staff dedicated to each product line. Although difficult but the information flow through different channels is fast, direct and unencumbered. Size and nature of the market Inditex has six internationalized chains of which Zara is the flagship brand. Zara 507 stores in some 50 countries at the end of 2001 including Spain, which is 40% of the total number of Inditex (Ghemawat & Nueno, 2003). Zara had 488,400 sq, meters of selling area and employed €1050 million. It added 448 stores in 2005 and about 490 stores in 2006. They expect to have a global total of about 2700 to 5000 by 2010 (Tiplady, 2006). Zara’s market comprises of the fashion conscious who are willing to pay the price for exclusivity. While they cater to the younger segment, they have recently introduced apparel for the forty plus and also for children. It has a foreign distribution network in place to expand its presence overseas. In 2003 Zara had six locations in England including one with over 3000 sq. meters on Oxford Street (Wharton, 2003). While it does have outlets in the US but it is not the primary objective or focus. Since Zara thrives on growing and hardly uses advertising, it has not been able to expand in the US because to expand in the US advertising is essential across the length and breadth of the nation. The tastes at different locations are the US differs widely. Zara adapts to trends and differences across markets and they are in regular touch with the store managers who communicate the demands of the customers. Zara is able to respond to the high volatility of the market because of its fast response to the changing trends. Zara uses different modes of entry for entering different markets. Initially they opened company owned stores but in Cyprus they used franchising. Even in Iceland and Poland they used franchising because the markets are smaller, riskier and subject to certain restrictions (Ghemawat & Nueno, 2003). They used joint ventures in larger and stable markets like Germany and Japan. Market segmentation Segmentation as a marketing tool involves dividing the market into homogenous groups (segmentation), selecting one or more segments (targeting), and devising a marketing program for the selected group (Danneels, 1996). According to Goller, Hogg and Kalafatis (2002), market segmentation is a proactive process which involves the application of analytic techniques. A heterogeneous group of customers are segregated into homogeneous groups or segments. Each of these segments requires a different marketing mix to service their needs. Based on different factors, an organization has to take a strategic decision how to market its products or services. The fashion retail market is split into number of segments – luxury, high street and supermarket/out-of-town discounter (Bruce & Daly, 2006). Market segmentation provides an understanding of the consumer characteristics which helps to project the right image of the store. Segmentation further helps to evaluate the market viability and the needs of consumers with differing tastes, life-styles and motivation to be met (Daneels, 1996). Danneels suggests that a store which tries to serve all consumers may end up appealing to none. Targeting implies renouncing a great number of potential consumers and it contradicts the tendency to sell as much as possible. Zara focuses on the young because that is where the fashion lives today (Heyden, 2007). They concentrate on the 16-24 year olds and towards meeting the low cost segment they eliminate creative design. They define a fast response supply chain and optimize the supply process for speed and cost. To keep up with the trends they follow what the customers want and create a demand chain. They create a store experience. They also focused on women between 18 and 34 years of age from households with middle to middle-high income (Ghemawat & Nueno, 2003). Segmenting has to be supported by other factors like positioning, store-layouts, very selective range and quick response times. Along with these, the reputation, the store sales personnel, and the store location also hold importance (Newman & Patel, 2004). The fashion industry today is marked by short life-cycles, high volatility, low predictability and high impulse purchasing (Christopher, Lowson & Peck, 2004). This implies according to Zara, that there could be as many as 20 seasons in a year. Under such circumstances, segmentation of the market becomes difficult. Before entering a market they analyze the taste of the people, the trend, and they adapt the basics of the style to each country. This is the reason why they have been successful in the Far East (Wharton, 2003). In diverse market segments, customers reveal their patronage, states Danneels, in which case the small retailers take a passive approach. They rely on word-of-mouth and footfall to generate business. Zara does not take a passive approach but always tries to innovate. They do not forecast demand as per industry norms over information collected but their stores run their own forecasts based on local, unaggregated data (Diaz, 2005). Segmentation helps to focus on the specific market and its needs. The goal of segmentation is not to have just any customer but to select a homogeneous group of customers and focus on servicing their needs. The organization can then decide on the right marketing mix for the services or product offered. Nevertheless, segmentation on a particular basis has not always been successful. For instance, different attitude leads to different behavior. Knowing the attitudes help advertise in the right market but even if a customer has a brand preference it may not reflect in his behavior, contend Bond and Morris (2003). Hence in order to satisfy the needs of the customers more successfully and to reach them in the most effective and efficient way, service companies benefit by identifying groups of customers with homogenous characteristics and behaviors (Diaz-Martin et al., 2000). In the service sector, customer expectations serve the standard against which the experiences are compared. This helps to evaluate the satisfaction or the quality but knowledge on the nature of expectations and their determinants is limited. Consumer expectations are dynamic and even change for the same customer across different situations. It could even vary for different attributes for a single service. Consumer expectations are made by the implicit and explicit promises made by the organization. Explicit promise include advertising, contracts or promises made through personal selling while implicit promises include price and tangibles with the service. Expectations also depend upon word-of-mouth communication and personal past experiences. Expectations also depend on personal needs and requirements, contend Diaz-Martin et al. Zara recognized that young, urban consumer wanted and was willing to pay premium price for cutting edge fashion. Segmentation to Zara means more opportunities for growth and greater scope for diversifying their offer. Zara has very strategically opened stores in China in 2006 and they did not enter as a luxury brand. They targeted the casual-wear segment, which is expected to grow to 468 billion yuan (about $58 billion) by 2010, with 10% annual growth rates (Fong, 2006). Product positioning Bakewell, Mitchell and Rothwell (2006) contend that clothing for every season is being produced to suit every market and every generation. The emergence of market power concentration is strongly linked to the development of strong retailer brands (Moore, 1995). Retailers have become efficient in the management of their business and they take full advantage of their market strength. They exploit the power and strength of their own brand and use it to reinforce their market positioning. Zara’s fashion clothing keeps in tune with the seasons and responds quickly to customer preferences. To expand its brand it counts on its flexible structure and can adapt to any market (Wharton, 2003). Market positioning strategies are developed by retailers based on product, price and service provision. Store images assist the retailers in determining the positioning strategies (Birtwistle, Clarke & Freathy, 1998). The retailers project an image which matches the targeted customers’ self-image world, which increases customer loyalty. The store image is linked to customer expectations, previous purchase experience and customer perception of the store. Zara demonstrates an understanding of the customer perception of the store attributes and uses this to encourage customer loyalty. They use prime locations and great care in the presentation of the storefronts (Ghemawat & Nueno, 2003). They use this to project their image. In addition, the Zara employees have to wear Zara clothes while at work which serves to enhance the in-store experience of the customers. The uniform that the sales assistants wear varies across different stores in the same city to reflect the different socio-economic differences in the neighborhood in which they are located. Even the uniforms are changed twice a year to suit the season. This link with store image has been used by fashion retailers like Zara to segment the market. The latent class segmentation theory applies when store image is planned. Latent class segmentation differentiates people on the basis of the degree of their perception of brand, price promotion, sales personnel and product line. Segmenting on this basis gives a better cluster solution which is more robust than based on attitudes (Bond & Morris, 2003). Surveys have revealed that price is the least important attribute for consumers which also demonstrate how seriously fashion is taken by these consumers (Newman & Patel, 2004). Based on this concept, Zara, the global leaders in fashion retail have remained focused on the core fashion philosophy - creativity and quality design combined with rapid response to market demands. To find a market segment retailers make an initial offer, observe the market response and then decide on the market mix to be applied to that segment (Danneels). Based on this concept, Zara, now fully established in the teenage and young age segment, wants to introduce larger garments for the older women (Tagliabue, 2005). This would mean the teenagers have to shop where their mom shops, which might not be appealing to them. Zara explains that customers have been buying with them since they were 20 and who are now 45 or 50 and wish to continue buying with them. Zara wants to maintain customer loyalty and is experimenting in catering to this segment. Zara may lose out on the teenage clientele, but they are prepared for this risk as they do not carry heavy inventories and have shorter product life cycle. Source: Ghemawat & Nueno, 2003 The company does a lot of effort to achieve high service levels. Sometimes intentionally stock out position is created so that the customers are driven to buy immediately. The demand is left unsatisfied to influence the purchasing decisions of the customers. Those addicted to the Zara know exactly when fresh stocks would be arriving at the local shop and some even turn up before the opening time on delivery day not to miss out on the fresh arrivals (CNN, 2001). The feeling of scarcity urges the customers to visit more often and it has been found that against an average of 4 visits per year to other stores, customers visit Zara stores 17 times every year (Slashdoc, 2005). They only strive to live up to the expectations of the customer. Zara does not follow the rigid line flow in production but has batch flow which gives its products some customization. Its products have high customization with high quality at low prices (Heyden, 2007). Zara designers create about 40,000 new designs annually out of which about 10,000 are selected for production. They beat the high-fashion houses to the markets and offer the same products at cheaper price by opting for less expensive fabric. Zara’s product positioning again differs across countries. The product positioning affects the store in which they are sold and the overall image of Zara. In Mexico they cater to 14 million inhabitants from the upper and the middle class (Ghemawat & Nueno, 2003). In South America they cater to the high-end rather than the middle segment and they have to emphasize that the products are “made in Europe”. They would not be able to sell if they said it is “made in Spain” as people presume they are made in France and hence attracts customers. Marketing communications mix The four major marketing communications mix according to Kotler are advertising, personal selling, sales promotion and public relations. An organization needs to change the marketing communication mix as the market situation demands. Intensive selling is the most important marketing communications factor (Avlonitis & Papastathopoulou, 2000). Marketing communication efforts should be integrated and this requires that the communication activities fit with the business functions, says Holm (2006). Advertising - Retailers are known to concentrate their money and efforts on building a brand image through advertising campaigns but Zara has never run an advertising campaign. Fashions retailers spend on an average 3.5% of revenue on advertising their products while Zara’s parent company Inditex spends just 0.3 percent (CNN, 2001). Zara’s commercials can never be found on a billboard or on TV. Advertising for them is a pointless distraction. They believe that their shop windows are all the advertising that the company needs. It just meets the marketing needs and is not spending its energy in brand building. It has achieved its current position as a retailer without any advertising or promotion. Since their offers a localized and because they follow the pull model, they do not waste on advertising (Heyden, 2007). They do not need to go in for discount sales like other retailers because they follow the strategy where their product line is always in demand. They use their location, product life cycle and store layout to act as their marketing and advertising tool. They have strategically located premises on the most active streets. They do not leave anything to chance but every small detail is thought out like shop decorations, window dressing and staff. Zara does not resort to much advertising because its business model is based on change (Wharton, 2003). They understand that people like change especially in ordinary brands. They do not believe in investing in the brand because women are loyal only to the luxury brand and hence they would rather invest in business. Their advertising is limited to the start of the sales period at the end of the season. They do not participate in fashion shows; its new items are first displayed at its stores (Ghemawat & Nueno, 2003). Personal selling - The marketing communications theory suggests that it is not enough to listen to the customer, it is essential to understand the customer (Olorunniwo, Hsu & Udo, 2006). While Zara does not invest heavily in direct marketing, their efforts on brand marketing does a great deal in attracting the customers. It helps to keep a loyal customer base. These are essential elements of Zara’s capabilities that build value in the company. The managers at Zara stores use technology like handheld devices to send information regarding customer feedback and ordering needs directly to the designers. This keeps the designers abreast of the latest trends and their product line is altered accordingly (Slashdoc, 2005). They demonstrate that they do not just listen to the customer but take action to fulfill the personal demands and needs of the customers by acting instantly. This is the reason why Zara’s customers visit the stores 17 times a year compared to an average of 3 to 4 visits per year (Ghemawat & Nueno, 2003). Public relations - Negative WOM and publicity can also adversely affect the brand (Grace & O’Cass, 2005). There has to be a two-way communication and all communication efforts should enhance relationships (Gronroos, 2004). Zara’s drawing power reflects the freshness of its offering and it attracts people to its stores by positive WOM publicity (Ghemawat & Nueno, 2003). Sales promotion - Marketing through the internet offers a departure from the traditional marketing environments (Hoffman, Novak & Chatterjee, 2000). It creates a sense of scarcity, which is its greatest strength and works as a promotional measure (Ghemawat & Nueno, 2003). It does not believe in announcing discounts. Zara’s promotional policies are standardized through out. Their basic designs are common from country to country with only 10 to 15% variation. The policy was beneficial because they realized that tastes converged across national boundaries. Thus, even if a product was less successful in one market they could always sell it another market which avoids losses or capital block. Zara is thus a vertically integrated, flexible multinational chain that has captured the market share through an exclusive business model where they are able to remain flexible and adapt to the trends and changes that take place in the fashion industry. Their just-in-time strategy is supported by production in small batches. They have the right combination of the marketing communication mix as they engage in very little advertising. They rely more on the WOM publicity and the in-store experience of the customers to build their image and attract customers. Their strategy to create scarcity works as the best sales promotion strategy as it gives the feel to the customers that if they do not purchase it when they see it, they may never get it again. The personal selling aspect is enhanced by the store managers passing on information to the designers of requirements and in three weeks they are able to cater to the demands of the customers. Their locations, store windows display and the interiors are the best form of advertising they use. Zara is truly a different business model which has confidence in its products, values its segmentation and relies on the product positioning to fetch it high profits despite low margins in a highly volatile market. References: Avlonitis, G. 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