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Midterm Exam of Marketing Management

Dec 1, 2009

Zara, the Supernovae in the Clothing Industry

Dec 1, 2009 Zara, the Supernovae in the Clothing Industry SPANISH fashion chain Zara has overtaken

SPANISH fashion chain Zara has overtaken Gap to become the world's largest clothing retailer. The news comes as a result of the label's recent global expansion - it now boasts nearly 1,500 stores across 70 countries - and a reported 15 percent increase in sales, totaling $14.5B in the first quarter of its financial year compared to the US retailer's sales of $14B in 2008.

This is the first time that the Spanish label has overtaken American retailer Gap, which has reportedly suffered from a drop in consumer spending in the US.

According to Interbrands survey, Zara achieved 62nd place this year, a jump of just two places from last year but representing a 15pc increase in its brand value. Interbrand takes many factors into account when ranking the 100 companies on the list, including revenue attributable to the brand (derived from analysts' reports and company information) and the brand's ability to sustain future revenue.

Zara's brand value stands at $5,955m according to Interbrand. Not surprisingly, the company is very pleased with this result. "We are very proud," says Jesus Echevarria, chief communications officer with Inditex (Zara's parent company).

Echevarria's satisfaction is compounded by the fact that the company adopts a somewhat unusual marketing approach. "Our marketing strategy tends to be humble. We don't use a mass-market approach or big campaigns. Instead, we focus on the customer and the store label." It is very much a "word-of-mouth market", as Echevarria puts it. Five key elements - store location, store window, interior design and store image, goods display and customer service form the cornerstone of Zara's marketing strategy and this is unified across all markets.

The Story of the World’s Largest Clothing Retailer

Zara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruña, Spain; a city which eventually became the central headquarters for Zara’s global operations. Since then they have expanded operations into more than 70 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. Zara was described by Louis Vuitton fashion director Daniel Piette as "possibly the most innovative and devastating retailer in the world." Zara has also been described as a "Spanish success story" by CNN.

In order to realized these results Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape up Zara’s current business model.

Zara’s Marketing Strategy

Zara’s marketing strategy focuses on product variety, speed-to-market, and store location. It is also notable for what it excludes. Zara does not advertise in the traditional sense. If you want to find out what’s currently available at the Zara stores you have two options: go to the web site or go to the store. Zara puts 11,000 different items on the store shelves in a single year. It can take a new style from concept to store shelf in 10-14 days as in such an industry

where nine months is the norm. In its primary European markets, Zara locates its stores close together. Visitors comment that Zara in Madrid is like Starbucks in a major U.S. cityyou see another store on every street corner.

Zara’s Toronto store is located just north of the center of downtown in a major shopping district dense with malls and lined with stand-alone stores and giant office buildings. The potential for intense competition is clear.

These office buildings are full of the people we want as customers. We want them to stop in at lunch or after work. We want to see them often, so we have to change what we have on the shelves,” said Zara’s Toronto store manager. “They could shop in a lot of other stores, so we have to make it worth their time to come here.”

so we have to make it worth their time to come here .” This also helps

This also helps explain why the company does not advertise. If a Zara customer wants to know what Zara has, he or she must go to the store. The stock changes often, with most items staying on the shelf for only a month, so the customer often finds something new and appealing. By the same token, if the customer finds nothing to buy this visit, the store’s regular customers know that tomorrow or next weeksometime soonnew goods will be on Zara’s shelves. That makes it worth another visit.

Zara relies heavily on store employees for market information. If a customer looks at a sweater and comments, “That would look really nice with a cowl collar,” an employee can relay that information to Spain where managers decide whether or not to produce the suggested item. If they decide to make it, they can put it on the shelf in Toronto in two weeks or less, partly because they ship by air. Ocean shipping would add at least another ten days to the time it

takes to get the product in front of the customer, undermining the speed-to-market and product variety strategy.

The Role of Logistics

Putting the variety of goods on the shelves in Toronto and other North American stores requires an unusual, though not unique, logistics strategy for the fashion industry. Zara air expresses goods from its single distribution center in Spain, usually in small quantities. In the 1970’s, The Limited used a similar strategy to support its test marketing, air expressing small quantities of new styles from Asia to U.S. stores. In Zara’s strategy, however, the speedy shipments are part of the core strategy, not just test marketing. Zara also ships frequently, allowing lower inventories while serving its multinational market from a single distribution center in Spain.

We receive shipments on Tuesday and Saturday, which means that we have different items in the store at least twice a week. While each shipment replenishes items that sell well, each also includes new items. That’s why our customers come in often,” the Toronto store manager said. “We might get ten of one item and five of another. We’re constantly testing.”

The density of Zara’s store locations in Europe helps achieve logistics efficiencies. They can fill trucks for frequent shipment in markets close to production and ship larger quantities by air to more distant stores. Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. This contrasts radically to most large fashion manufacturers, which rely on low cost manufacturing in Asia and South America, but then pay higher inventory costs and move goods to market more slowly.

The air express strategy also allows Zara to maintain a multinational market presence with only one distribution center. They trade higher transportation costs for lower warehousing and inventory costs. Add to this the idea that fast transportation supports the product-innovation strategy that is the heart of Zara’s marketing, and the importance of logistics in Zara’s marketing strategy is clear.

Competitive Advantage

Fundamental to Zara’s success is their commitment to rapid response in customer trends in fashion, producing clothing often and with short life spans (10 wears). Their commitment to this goal and the capabilities that they have developed to achieve it, have provided significant competitive advantage to

Zara especially in the areas of vertical integration, strategic partnerships and cost of production, marketing focus, and information technology. The efficiencies and processes developed in these four functions differ significantly from their competitors and stand out in providing additional value and profitability to Zara.

out in providing additional value and profitability to Zara.  Vertical Integration Zara produces up to

Vertical Integration

Zara produces up to 30,000 different articles each year. The company employs 200 designers who work in collaboration with each other based on feedback taken directly from in-store customers.

The company uses a vertical integration system to fulfill demand for its wares. This business model covers all phases of the fashion process: design; manufacture; logistics; and distribution to its own managed stores. The key is the ability to adapt product to customer demand in the shortest time possible, offering a significant advantage over competitors.

There is a much-quoted story that when Madonna played a series of concerts in Spain in 2005, teenagers attending the final performance were able to wear a Zara version of the outfit she had worn at the first show. In fact, the turnaround time for bringing a design concept to the shelves at Zara can be as short as 15 days.

Zara’s unique approach to product development is instrumental to their success. 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 Coruña. 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.

The process of obtaining market information and relaying it to design and production teams expedites product development by shortening the throughput time of a product to 2-3 weeks from design to distribution. This process is very different from its competitors. Many competitors rely on a small elite design team that plans both design and production needs well in advance. Stores have little autonomy in deciding which products to display or put on sale because Headquarters plans accordingly and ships quantities as forecasted. Zara’s speed to market in product development exceeds the capabilities of its competitors. This in itself provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices. Zara’s product development capabilities are essential to Zara’s business strategy and future success.

Strategic Partnerships and Cost of Production

In comparison to competitors, Zara’s business strategy, in regards to strategic partnerships and cost of production, provide for a strategic competitive advantage. Zara, unlike its competitors such as Gap, Benetton, and H&M, does not use Asian outsourcing. 80% of Zara’s materials are manufactured in Europe, with 50% made in Zara controlled facilities in the Galicia region of Spain near headquarters. Most of Zara’s competitors have 100% outsourcing to cheap Asian countries. Though the cost of production in Spain is 17-20% more expensive than Asia, Zara does have a competitive advantage over its competitors in regards to operations. The local strategic partnerships that Zara maintains with manufacturers in Europe allow for a product throughput time of 2-3 weeks from conception to distribution. To make this happen, the company designs and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior. It also decreases costs of holding inventory. Zara’s competitors, through outsourcing to Asian countries such as China, sacrifice the benefits of proximity for low labor and production costs. Though there is a cost advantage in their approach in regards to labor, the lack of flexibility in

changing orders based on current trends hinders their operational efficiencies. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores. This proximity effect and the flexibility that it gives Zara is fundamental to their basic concept to respond quickly to shifts in consumer demand and has provided them with a competitive edge in comparison to their peers.

Marketing Focus

edge in comparison to their peers.  Marketing Focus Zara’s unique approach to advertising and marketing

Zara’s unique approach to advertising and marketing is an additional factor within their business model that adds to their success. Zara spends 0.3% of total revenues on advertising and marketing. This is significantly less than their competitors who on average spend 3-4% of their total revenues on similar expenditures. Hence, Zara maintains a cost advantage to their competitors in marketing activities. In order to effectively complete with their peers Zara uses location, store layout, and product life cycles to act as their marketing tool to consumers. For instance, Zara strategically locates all of their stores in prime retail districts for visibility marketing. Additionally, because of the product development cycles mentioned earlier, customers are trained to visit Zara stores often because new items are presented weekly and are often not restocked. This feeling of scarcity encourages customers to come to the stores and buy frequently. Lastly, in order to keep the stores looking

fresh and trendy; Zara invests heavily in their store layouts. They have a testing facility nearby their headquarters in Spain where different types of store layouts are tested. Each Zara store is remodeled every 5 years in order to keep up with current trends. Zara does not invest heavily in direct marketing, though their efforts in image/brand marketing do a great deal to attract a loyal customer base. Their cost advantage and ability to maintain brand recognition and customer loyalty are essential elements of Zara’s capabilities that build value in the company.

Information Technologies

Zara’s information and communication protocols are significantly different from its competitors. Zara spends less than 0.5% of total revenue on IT and IT employees account for only 0.5% of Zara’s total workforce. This differs from their competitors who spend on average 2% of total revenue on IT expenditures and have 2.5% of their total workforce devoted to IT. Zara utilizes human intelligence (from store managers and market research) and information technology (such as their PDA devices) in order to have a hybrid model for information flow from stores to headquarters. For example, managers at Zara stores use handheld devices to send standardized information regarding customer feedback and ordering needs directly to in-house designers. This not only keeps Zara's designers informed of fast-changing customer trends and demand, but also provides the company with insight on less-desirable merchandise. Unlike Zara’s hybrid model (which incorporates human intelligence and IT applications), competitors rely almost completely on information technology. Zara’s unique approach of human intelligence assisted IT solutions results in well-managed inventories, linkages between demand and supply, and reduced costs from obsolete merchandise.

Zara’s concept, capabilities, and value drivers, as demonstrated through their business model, have proven to be extremely successful. In the event of future global expansion, Zaras future success and sustainability will be drawn into question. It will need to adapt its business capabilities and marketing strategy in order to tune in to global operations.

Questions: 1. Describe how Zara is creating values for its customers as well as well

Questions:

1. Describe how Zara is creating values for its customers as well as well as for itself?

2. Based on the factors of Consumer Buyers Behaviors, please illustrate the marketing efforts made by Zara. And how did they work for Zara to achieve its objectives?

3. According to your marketing segmentation analysis, which segments is Zara targeting at? Describe these market segments with relevant supporting points.

4. Using marketing mix to explain explicitly how Zara has become a fast-fashion brand and leading position in clothing and fashion industries?

5. If you were the head of marketing to Zara, what marketing efforts will you utilize to ensure its growth rate? Hint: products, services or brands.