ZARA Name: Raed Aljanobi, Khalid Alotaibi Grace Su
With the rapid growth of the clothing industry, four main companies led the graph with high profits making a great deal of wealth for the owners and investors. The four companies included were; 1 Zara, Gap, Benetton and Hennes and Mauritz(H&M).
Company goals and pricing strategy.
This was a worldwide specialty retailer that dealt with the designing, manufacture and selling of clothing, footwear and accessories for men, children and women. 2 It comprised of six chains which were Zara, Massimo, Dutti, Pull & Bear, Bershka, Stradivarius and Oysho. They were organized as independent business entities. Oysho dealt mainly with lingerie which most of their human resources were gotten from other chains. Dutti has a big fashion variety from sophisticated to sporty for both men and women between the age of 25 to 45. Pull and Bear mainly dealt with casual clothing for both men and women. Bershka had trendy clothing targeting younger females aged 13 to 23 years. 3 Stradivarius offered youthful urban fashion for both men and women between the ages of 15 to 25.
Inditex’s pricing strategy was based on geographic location and target customer financial status. Prices were different but within a small rage of variance.
This was Inditex,s biggest chains with 500 stores in 30 coutries. It has a wide range of clothing since it makes new designs in reference to the consumer desires. 4 It targets men, women and youth from infants to the age of 45.
Zara had designers, sourcing specialists and product development personnel who worked products for the current season. 3 They adopted to trends and differences across markets making them more evolutionary and placing greater dependence on high-frequency information.
Their stores were located in highly visible locations which often included premier shopping streets that meant slightly higher prices to their competitors.
Benetton mainly emphasize on brightly colored knitwear. It was more concerned with the upstream end than the downstream end.
Hennes and Mauritz This is another successful apparel retailer that was viewed as Inditex,s closest competitor. 4 It outsourced all its production .H;M had slightly lower prices than Zara. It employed fewer designers and marketed clothes under numerous labels.
McKinsey consulting company golden rules With numerous attempts made to determine the strategic implications of the ever changing structure of the world’s clothing chain, McKinsey consultants identified five ways for retailers to expand across borders. The five ways included;
1. 3 Choosing a “silver” of value instead of competing across the whole value chain.
Since the production of apparel involves a lot of processes, it is cheaper to carry out the most important ones and outsource the more expensive steps to other companies. For example, in the production stage one may opt to outsource labor-intensive productions like sewing to lower-cost labor services nearby as Zara did. Some may decide to concentrate on production rather than retailing and give licenses to smaller retailers to sell their brands as seen in the case of Benetton.
2. Emphasize partnering.
Trading companies were responsible for cross-border intermediation for exporting countries to importing companies. As many companies could not be responsible for everything, they opted to partner with other companies so as to deliver finished products to the market, for example a textile company may partner with a dying company so as to get colored cloth.
3. 3 Minimize tangible investments.
It is important to minimize investments as more investments lead to lower efficiency of control or increased labor expense.
4. 3 Investing in brands.
Retailing was an important role that ensured final products could reach the consumers. Thus it dictated that companies either license retailer or open up their own retail stores. This ensued branding as reputation was key in selling of products.
5. 2 Arbitrating international factor price differences.
Different markets accounted for different profit margin due to the variance of customers’ attributes and preferences. For example, a study showed that Germans were more price-sensitive, Spaniards were exclusive to purchasing clothing seven times annually and the French focused on quality and variety. This differences are important to consider pricing within a targeted market.
3 Zara’s Business Model.
5 The resulting business system was specifically distinctive in that Zara manufactured its most fashion-sensitive products internally. 6 Zara’s designers repeatedly tracked customer preferences and paced orders with both internal and external suppliers. 7 Zara was able to come up with new designs and have finished products in stores within four to five weeks and at most two weeks or modified or existing goods. This short cycle time work reduced working capital intensity and enabled continuous manufacture of new merchandise. 8 It undertook 35% of designing products and purchasing of material, about 50% of the purchase of finished goods from external suppliers, and 85% of the internal production in the beginning of the season compared to 0-20% in case of traditional retailers.
Zara’s distribution system was centralized. 3 It consisted of an approximately 400,000m2 facility located in Arteixo and other smaller centers in Argentina, Mexico and Brazil. 9 All of Zara’s merchandise passed through the distribution center in Arteixo.
3 Zara’s aim was to provide new assortments of designer-style garments and accessories such as bags, shoes, jewelry, scarves, toiletries and cosmetics, for lower price in complex stores in prime locations so as to attract people who were fashion-conscious.
10 Representative Competitor Zara
Posted Selling Price 100 100
RSP 150 130
Selling price 90 80
Gross margin 90-100 80-100
Advertising 4% of revenue 0.03% of revenue
Advertising-adjusted margin 3%-4% 0.03%-0.1%
11 Zara’s Quick Response.
The short cycle of Zara as discussed above allowed them to have a quick response to the ever changing fashion market and this was critical to its superior performance compared to its competitors.
12 All three product lines had a creative team who among them were designers, product development personnel and sourcing specialists. 3 The creative team worked in harmony on products from the current season by creating constant variation, expanding on successful products and continuing in-season development.
12 Sourcing and manufacture Zara outsourced fabric, finished products and other inputs with the help of purchasing offices in Barcelona and Hong Kong together with the sourcing personnel at the headquarters. 13 About 40% of finished products were manufactured internally. 11 Internal manufacture was the primary responsibility of 20 fully owned factories.
5 Zara’s product merchandising policies emphasized broad, relatively high fashion content, frequently changing product lines, reasonable but not too much physical quality and relatively high fashion content. 3 Product lines were divided into men’s, women’s and children’s and further segmentations of the women’s line which was considered to be the best performer into three sets of delivery based on pricing, fashion content and age target.
3 Zara only spent 0.3% of its revenue on media advertising compared to 3% to 4% for most specialty retailers. This advertisement was mostly done in the beginning and at the end of the season. Despite not investing a lot in the advertising aspect, Zara was a growing popular name due to its merits in service and presentation. 3 Its drawing power reflected the freshness of its offerings, an attractive ambience around them and the creation of scarcity.
Zara’s store operations comprised of both the company’s face to the world and information sources. 13 The stores were located in highly visible locations mainly in premier shopping streets in upscale shopping centers and local markets.
3 Zara actively managed its portfolio of stores. 14 The stores were frequently relocated so as to adjust to the evolution of shopping districts and traffic patterns. 15 It also in large part depended on centralization of store window displays and interior presentations in using the stores to enhance its market image. 13 Store managers received a fixed salary and variable compensation based on the stores performance.
3 Zara’s International Expansion.
16 Zara by 2001 was by far the most internationalized chain of Inditex. 11 It operated 282 stores outside Spain in 32 different countries and had recorded sales of 1,506 million euros. The profit made by the outside chains was not disaggregated geographically but was roughly similar in Europe, the Americas and Spain.
3 Zara would first open a flagships store in a major city and after gaining some experience in the location add more stores in the adjoining areas. Zara had in the past looked for new country markets that were similar to that of Spain.
Zara used joint venture in large, more important markets where direct entry was hindered. This would be an appropriate way to tap into the U.S market. This is mainly because prices would be 70% higher in the market rather than 100% in an Asian market. This is also because U.S is geographically closer meaning less expenses in delivery.