ZARA: Fast Fashion

9 Pages   |   2,429 Words

What is the value proposition that Zara offers to its customers? How does its value proposition differ from that its competitors?

Essentially, Zara positioned itself as a store selling “medium quality fashion clothing at affordable prices”. Zara’s value proposition can be elaborated on four key aspects of fashionable and affordable clothing, variety of style, scarcity, and prime locations.
Primarily, strategy of Zara pertains to the offering of thelatest fashion trends at affordable prices by keeping in touch with new styles that are prevalent. The designers at Zara visited trade fairs and ready to wear fashion shows at numerous locations including but not limited to New York, Paris, Milan, and London. Additionally, they also go through the catalogues of profound luxury brand collections while working with store managers to come up with the initial sketches for the upcoming collection with almost 9 months in advance. Following this, they look for fabrics and subsequent compliments while simultaneously the price pertaining to the product is also being determined.
The aspect of comparison here is relevant to the design team, which took the role of bridging merchandising and back end of the production process, whilst the competitors including Benetton, H&M, organized individual management teams to consider each process.

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Secondly, in terms of variety of style, it should be noted that Zara produces thousands of new styles per year, which demarcates the fact that new trends tend to reach the stores quickly. High frequency information tends to play a pertinent part in this, whereby conversations with store managers, data amalgam from Zara’s IT system, industry publication, internet, TV, and even trend spotters at pertinent locations such as university campuses.
The comparative view depicts the differentiation in that Zara was not run by maestros but rather focused their line on catwalk trends that were rather suitable for the mass market. Other apparel retailers were obsessed with too much creativity thatlacked a practical implementation.
Thirdly, scarcity, which implies that by reducing the quantity manufactured of each style, there is a surge in artificial scarcity, which tends to ensure that the risk of stocking is abated. Hence, for customers that walk in to a Zara store, the fast paced turnover tends to create a sense of buying now or the product will not be available later. The counterparts believed in fulfilling the demand, which made sense in terms of heeding towards a profitable bottom line.
Lastly, the prime locations are another pertinent aspect that implies Zara to open a flag ship store in town centre locations, whereby they tend to observe the market trends and subsequently proliferate in their approach towards adjacent locations.


How specifically do the distinctive features of Zara’s supply chain enable it achieve that value proposition?

The specialty of Zara was the emphasis on controlling the vertical market integration and the automation of its production process. Primarily, internal manufacturing was a responsibility carried by 20 fully owned factories. The automation process was thorough from the specialization in garment type to capital intensive parts of the production process and final inspection and finishing. Vertical integration as mentioned, was initiated in the 1980, subsequently, a just-in-time system was put forth within the factories with the assistance of Toyota. This allows for the quick association with current trends in the fashion world to be made available in Zara stores. However, this greater flexibility came with higher cost component.
The adaptation to trends was more of an evolutionary process, which heavily relied on high frequency information. The implication of demand based production is a relatively lower reliance on inventory through the supply chain, resulting in lower working capital requirement. Also, this vertical integration abated the bullwhip effect, whereby; the fluctuations in final demand were rather short lived due to excessive control of the supply chain.
Additionally, there are essentially size economies incorporated, whereby the focus lies on learning by doing(Ghemawat, 2010). The key concept here is that any imitator such as World Co. of Japan is deterred because Zara itself intends to exploit them. Essentially, World Co. of Japan is the only other retailer which has managed to have comparable cycle times. However, its net margins are stuck at 2% due to SG&A (Selling, general, and administration) expenses, which absorbs almost 40% of revenues.


How does Zara’s customer’s willingness to pay compare to that of its main competitors? What about its costs? Does Zara have a competitive advantage?

While making a comparison of four pertinent players in the apparel industry, it is crucial to understand key aspects of each competitor tersely.
The Gap was founded in 1969, and the rather acclaimed profitability time period was during 1980s and 1990s. Following the globalization trends, 90% of it is outsourced from outside of the US. An attempt at repositioning failed and led to excessive write-downs in 2001.
H&M was founded in 1947 and outsourced all of its production. Lead times were longer than that of Zara, yet better by industry standards. The pricing of H&M was lower than that of Zara and utilized a relatively focused approach, entering one country at a time. Its PE ratio while still high dropped due to a fashion miss.
Benetton was founded in 1965 and outsourced through networks with respect to subcontractors. In other words, it sold franchise licenses to individuals, mostly entrepreneurs. It changed its strategy hitting a saturation point, whereby it initiated the consolidation of production activities into production poles. It moved on to create mega stores rather than selling franchise licenses.
Spain  
Manufactured in Spain 42.24 euro
Cycle Time 6 weeks (30 days)
Labour cost 1.4 euro/hour=
Value Added 2.2 euro
Mark down for Zara 30 %
Mark down for other retailers 30 %
Profit percentage by Zara 40%
Profit percentage by others 25%
Price on average at Zara (WTP) 76.87 euro                (42.24*1.4*1.3)
Price on average at other retailers (WTP) 68.40 euro                   (42.24*1.25*1.3)
Willingness to pay difference 8.47 euro
 
  Gap H&M Benetton Inditex
Revenues 15,559 4,269 2,098 3,250
Operating expenses 4,276 1,615 624 982
One year change in market value of equity -60% 8% -20% 47%
Employees 166,000 22,944 6,672 26,724
Countries of operations 6 14 120 39
Sales in the home country 87% 12% 44% 46%
Stores in the home country 87% 15% 40% 60%
 

The aforementioned key figures depict the relative performance of each player. A careful analysis shows that Inditex has remained rather persistent, which is the key strength of sustaining superior performance. Its market value of equity has been rising with the highest figure, which depicts satisfaction of shareholders remains of paramount importance. However, since a major driver of Inditex is Zara, it would be fair to make the assumption of mirrored performance. The higher operating expenses can be justified through the automation argument which implies the relative cost of maintaining an automated system.
   
ZARA
  • Vertical Integration leading to short lead times
  • Numerous designers research to initiate designs within a few weeks
  • One distribution centre so low inventory cost
  • Fast expansion
  • Emphasis on the look of the stores
H&M
  • Completely outsources with long lead times.
  • Almost 60% fewer designers
  • Distribution centre per country leading to higher cost
  • Slow expansion
  • No emphasis on store outlook
ZARA
  • Mode of expansion:
  • Joint Ventures
  • Franchise system
  • Company owned
 
Benetton
  • One mode of expansion:
  • Licensees
ZARA
  • Vertical Integration leading to short lead times
  • Fast expansion
GAP
  • Production outsourced so longer lead times
  • Slow expansion rate
 
Zara’s competitive advantage is prevalent from the above comparison, whereby its strength of fast production and subsequent distribution emphasises on following latest trends. Additionally, it changes 75% of the display almost every three to four weeks; therefore, the frequency of customer visits rises. Also, Zara makes sure to limit the stock to act on the concept of scarcity and frenzy of shopping spree the moment customer steps in the store. It is important to point out that Zara does not advertise that much, which can be understood key for saving costs with respect to publicity activities.
 

If so, how sustainable is Zara’s competitive advantage relative to the kinds of advantages pursued by other clothing retailers?

To analyse the sustainability of competitive advantage pertaining to Zara, the tetra threat framework can be utilized. It is based on the identification of a few factors: Imitation, substitution, holdup, and slack. A detailed analysis would clarify the perspective(Ghemawat, 2010).
Primarily, Imitation pertains to the identification of superior performance with respect to the act of imitation to extent that the concept of scarcity would diminish posing as a direct threat to the sustainability of additional value(Ghemawat, 2010). In case of Zara, imitation is handled through scale economies. It deals with national scale suppliers, and is completely vertically integrated, which emphasizes the elimination of imitation lags. Additionally, it also builds barriers in terms of upgrading and private information(Ghemawat, 2010). Private information tends to denote the latest trends through catwalks, journals, and trend spotters in universities. Following the utilization of identifying the latest trends, Zara upgrades the initial sketches to contrast with its target market and sells in limited stocks.
Secondly, the substitution threats faced by Zara relate to straddling or defending, whereby, Zara was created with the perspective of medium quality fashion clothing at affordable prices; thus, straddling and defending pertain to the ability of a competitor to adapt a similar business model and imitate Zara while Zara attains the position of defending itself(Ghemawat, 2010). However, the probability is relatively low due to its excessive automation and astounding vertical integration, requires a whole of capital investment especially in case of a start-up. As opposed to other retailers, Zara utilizes the Just in time inventory stocking method that abates the cost while keeping it efficient.
Thirdly, it is rather critical to delineate the essence of suppliers of merchandise and employees(Ghemawat, 2010). Essentially, Zara took care of nearly 35% of product design and raw material purchases, almost 50% of finished products were accessed from external suppliers, and 85% of in-house production. In-house production of other retailers ranged from 0%-20%. Additionally, a 100% owned subsidiary of Inditex, namely Comditel was utilized to purchase the grey fabric and other materials. On the other hand, Zara faced no such problem pertaining to unionization; other peculiar problems were addressed through the management’s accession. However, in case of other retailers tend to access the outsourcing option to its full extent due to lower labour costs but the flip side is the lag between inventory turnovers and long waits for customers to regain access to forgone trends(Ghemawat, 2010).
The value proposition can be elaborated in terms of this table:
  2001
ROA 13.07%
ROA(H&M) 18.70%
ROA(GAP) -0.10%
ROA(Benetton) 5.2%
Leverage(Zara) 1.75
Leverage(GAP) 1.52
Leverage(H&M) 0.32
Leverage (Benetton) 1.27
 
 
With respect to the profitability, H&M remains the leader with Zara following suit at 13.07%. On the other hand, the level of riskiness involved in operations is lowest in H&M, whilst, Zara retains higher riskiness within its operations. However, the value proposition is clarified within this statement pertaining to the affordability factor within the confines of the industry.
Lastly, in terms of responsiveness to slack, it is pertinent to note that due to the automated procedures within Zara, generating information is relatively easier through the Zara IT system, which identifies the trends pertinent to consumer purchasing patterns (Ghemawat, 2010). Additionally, numerous designers are addressed to think in terms of apparel that is easy to wear as opposed to other retailers who tend to imitate without considering any concept of progression.
 

What implications does Zara’s value proposition and business model have on its future growth prospects?

Zara’s business system is essentially a conceptual framework moving from sourcing and manufacturing to distribution to retailing to design to again, sourcing and manufacturing.
In contrast, the value proposition was essentially medium quality fashion clothing at affordable prices, which sparks the question of whether the value proposition is in lines with the business model.
The vertical integration element combined with automated frameworks and just in time inventory methodology creates a perspective of lean production. This concept tends to bring about agility and efficiency within the company operations. It elaborates the prospect of complete control; thus, identifying troubles is relatively easier as compared to outsourcing. Outsourcing is without doubt very efficient, but this advantage is a contingent phenomenon, whereby depending on the economic and political stability of outsourcing the supply may be deterred and so it is relatively vulnerable.
It is fair to state that Zara is ahead of its league in terms of the business model, whereby it fits all aspects of being an outstanding production firm. However, a more diversified approach can allow Zara to decrease its cost further.
 

Five Forces Framework:

Bargaining Power of Buyers

This aspect is relatively low because in the retail industry, the costing is very competitive and marking down of prices is only evident in case of products that are hard to sell. These products are easily identified and are sold by store managers by providing incentives such as selling on discounts. The industry is branded and thus to maintain standards of production, bargaining power of buyer is minimal except for the fact that they may move to other stores of a competitor looking for similar designs or trends.

Bargaining Power of Suppliers

The bargaining power of suppliers is also relatively low, because most of the players in the industry tend to outsource the production overseas. This mostly relates to less developed countries, whereby, the manufacturers tend to be eager to attain foreign contracts, as opposed to exercising bargain. Some brands tend to vertically integrate and maximize in-house production, which also reinforces the fact of abating bargaining power.

Rivalry

Rivalry in the fashion retail industry is moderate. This is because there tends to be sneaking of upcoming designs and trends. Additionally, price wars are seldom evident. Mostly, the rivalry tends to be based on cost reduction through suppliers and customer retention through in store propositions of lower prices than competitors, so on and so forth.

Substitutes

The substitutes in the fashion retail industry are low. Clothing is essentially a need; therefore, a substitute of clothing is a relatively oblivious concept.

Threat of New Entrants

Threat of new entrants is high. This is because with the surging population level, most brands are expanding their operations globally. The profit levels are subsequently magnified, providing an attraction to new entrants. Additionally, since the production can be outsourced, retailing is only a matter of managerial expertise. However, to attain a top-notch position would require a pertinent strategy that must outweigh the operational efficiencies and the strategic acumen of other adversaries.

References

Ghemawat, P. (2010) 'Sustaining superior performance. In Strategy and the Business Landscape', Pearson.

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