Zara's Supply Chain Methods - Case Study Example

ZARA AND THEIR REACTIVE SUPPLY CHAIN METHODS INTRODUCTION Inditex, the Spanish group behind clothes chain Zara, overtook Gap, its American competitor in August 2008. The clothing company saw itself leapfrog Gap, the preppy US giant, to become the world's largest fashion retailer. The sales of Inditex, the parent company of Zara, the phenomenally successful fashion chain, over its first quarter were 2.22bn (1.7bn). Over the corresponding period Gap - for years the dominant force in global fashion retailing - saw sales of 2.17bn. AIM AND OBJECTIVES OF THE ASSIGNMENT The objective of this case study or assignment is to identify and explore the unique selling proposition of the Spanish apparel retailer Zara, which is one of the most profitable garment retailers in the world. The USP can be identified using the business model of Zara and by understanding its competitive edge over other players in the market. The case also aims at developing a strategic analysis of the market conditions, communication, branding and the competition faced by Zara. MARKET COMMUNICATION AND BRANDING Zara does not advertise as much as its competitors. Its average advertising spend is 0.3% while 3-4% is the standard industry spend. This gives them a strategic cost advantage against their competitors. This also makes their expansion strategies more economical. The main alternative to advertising used by Zara is its store layouts and displays. Zara has a team of around 200 people exclusively working on acquiring global prime real-estate locations. They are also responsible for frequent refurbishing of the stores and creative window displaying. There is a testing facility in their headquarters where different layouts are tested and the best is selected for various stores at different locations. The peculiar business model of Zara helps them in reducing their advertising store by giving them alternative options to attract customers. This is by influencing the buying behaviors of customers. Zara updates its collection twice every week. So a usual customer of Zara knows that new styles will be awaiting them every week, making them want to pay another visit very soon. Also, if a customer does not find anything interesting to buy, he knows that he will get more choices in the coming week. New styles in Zara are added very frequently, but are not replenished. This creates a scarcity and the customers of Zara pay frequent visits to the stores so that they don't miss out on certain styles. Zara, because of its unique branding has got itself a cult image through the years. Each Zara store is redesigned every 5 years to keep up with the current fashion. Zara targets a broad range of customers and do not define their target market by age and lifestyle like traditional retailers. They target people of all age group who are educated and are sensitive to fashion and react to changes in fashion. As fashion is more globalized in recent times, Zara offers standardized fashion wear. Also, their pricing strategy is different. Outside of Spain, and particularly in the UK, it is based on more premium prices. Partly to compensate for higher distribution and rental costs, prices can be up to 40 per cent higher. Zara's positioning as an aspiration brand in the UK has the added benefit of giving the perception of clear water between itself and mass-market fast-fashion rivals such as New Look or H&M. STRATEGIC ANALYSIS USING ANSOFF'S MATRIX Market Penetration Strategy Through its unique business model, Zara encourages its existing customers to buy more. Every new style reaches the store shelves from design table in about two weeks. This fast-fashion methodology helps in remaining updated to the latest trends and makes the customers visit the stores more often. This quick inventory turnover is due to its vertically integrated supply chain and its total control over its system. Market Development Strategy Zara identifies potential segments in the market as a first step in their market development. By giving equal importance to all such segments, Zara is able to attract customers belonging to all age groups and different backgrounds. Zara also focuses more on developed fashion markets. For example, it has more shops in Belgium, Portugal, and France compared with China and Thailand. Product Development Strategy The relentless introduction of new products in small quantities at fast speed and at affordable prices seems to be the answer to the large scale customization requirements of the target customers. ZARA also has super business teams which constantly monitor external developments - consumers on catwalks, at airports, shopping areas, sport events, movies and other events. It seems that ZARA has some 200 of such teams traveling the world with the aim of discovering new fashion behavior and trends. This helps explain why ZARA's team, which consists of passionate and able designers, experienced market specialists and procurement and production planners, is able to annually create approximately 40,000 new designs from which about 20, 000 are so quickly selected for and put into production. Diversification Strategy Diversification growth makes sense when good opportunities can be found outside the present business. A good opportunity is one in which the industry is highly attractive and the company has the mix of business strengths to be successful. ZARA could seek new products that have technological or marketing synergies with existing product line, even though the new products themselves may appeal to a different group of customers. The constant flow of updated data using information technology mitigates the so-called bullwhip effect-the tendency of supply chains (and all open-loop information systems) to amplify small disturbances. In this way, ZARA avoids costly overproduction and the subsequent sales and discounting prevalent in the industry. LEAGUE TABLE FOR THE FASHION INDUSTRY - EUROPE *RANKING PLAYERS Turnover (Billion Euro) 2008 1 Marks & Spencer 12 2 Inditex(Zara) 8.2 3 H & M 7.4 4 C & A 6.1 5 Next 4.1 6 Debenhams 3.3 7 Arcadia 2.5 8 Vivarte 2.7 9 Esprit 3.1 10 Peek&Cloppenburg 1.7 (2007) 11 Benetton 1.7 12 Cortefiel 1.1 13 Etam 1.0 14 House of Fraser 1.0 15 Charles Vgele 0.9 16 Mexx 0.9 17 Varner 0.8 (2007) MARKET SIZE AND TRENDS OF FASHION RETAIL IN EUROPE Fashion retail is a mature market in Europe. The factors that affect the industry in the last five years are low growth and price deflation which account for over 75% of all European Union(EU27) clothing expenditure. Clothing retailers of Europe are looking for new markets in order to maintain growth. The highest growth rates are seen in the newest EU27 countries. Poland is now the 11th largest clothing market in Europe. The two most populous countries, Poland and Romania are now attracting international clothing retailers as the trading is less complex and their economies are expanding. Low growth and price deflation in mature markets, which account for over 75% of all EU clothing expenditure, has impacted growth in the EUR299bn EU27 clothing market over the past five years. Clothing retailers are looking for new markets in order to maintain growth. Highest growth rates are in the newest EU27 countries, and Poland is now the 11th largest clothing market in Europe. It and Romania, as the two most populous countries, are attracting international clothing operators as well as regional ones now that trading is less complex and their economies expanding. UK The 8.6bn value sector showed 8.9% growth in 2007 compared with total clothing market growth of 3.8%. However it is losing momentum as it matures and consolidates. This is the slowest rate of growth for a decade. For consumers value is now widely available in the clothing market. If we include value price points available through midmarket retailers the value segment is 50.0% larger, which makes it far harder for value retailers to differentiate on price alone. For a typical UK consumer, clothing is a disposable rather than an investment. Though quality plays an important role, fashion is regarded as the buying determinant for most UK customers. Formal clothing, in UK, is seen as a symbol of class and success. But recently casual wear has gained momentum as companies made a flexible dress code as a part of globalization. Moreover, in social events such as business meetings, conferences, restaurants or parties, the 'smart casual' dress code is typically the norm. There is also a growing emphasis on purchasing clothing and footwear for evening and sports, as lifestyles changed. ITALY Italy overtook Germany as the largest clothing market in 2007, and also has the highest spend per head at EUR974 per annum. However even the highly style conscious Italians are being seduced by 'moda low-cost' - value and discount retailers - as their disposable income shrinks due to economic conditions. Italians like branded and good quality clothes. Traditionally Italians like to dress well and spend money on clothing and footwear. Style, fashion and quality are important components of the purchasing decision, especially in the northern part of the country. This partly derives from the long-standing Italian tradition when it comes to producing fashionable products, like clothes and footwear. ZARA AND THEIR REACTIVE SUPPLY CHAIN METHODS Zara gives store managers significant autonomy in both determining the products to display in their stores and which to place on sale, and relaying market research and store trends back to their headquarters in La Corua. Earlier in 2008, chief executive of Inditex updated the retailer's processes to get new fashions into its stores even faster after other groups caught up. Store managers now have handheld computers to show them how garments rank by sales in real time. This allows them to order replenishments quicker than previously. At headquarters there are teams of commercials who take this information into account to design and effectively plan and produce all of Zara's products. Zara maintains a design team of 200 people, all of which produce approximately 22,000 new styles per year for Zara. CONCLUSION As discussed in the case, Zara is very close to becoming the number one in the apparel market in the world. The best way for Zara to maintain their sustainable growth is to seek new opportunities in the apparel market. The most important advantage of the vertically integrated supply chain is its cost advantage over its competitors. Also as Zara has close control over its entire system; it knows exactly how much cash it should make every week in order to achieve profits. With changing consumer behaviors due to globalization, world super economies like US suffering due to recession, Zara has an excellent opportunity to be the trendiest low priced fashion retailer in the world. REFERENCES 1. Zara's Supply Chain Practices 2. Swati.S(2008). Zara's Supply Chain Management Practices. Case Folio. ICFAI University Press Publications, July 2008. 3. Zara and its reactive supply chain model by Devangshu Dutta. 4. Cool Fashion Now, not later 5. "Zara's Business Model, Information and Communication Technologies, and Competitive Analysis." 123HelpMe.com. 07 May 2009 6. Official website of Inditex. 7. Zara is now bigger than Gap 8. Read More