Zara

ZARA
ASSIGNMENT
INTERNATIONAL BUSINESS ANALYSIS

SUBMITTED BY : NELUM SHEHZADE

1.Explain how Zara utilizes its design strategy and how it

helps its business model.

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Zara produces up to 11,000 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. Partial vertical integration, with owned factories;
owned factory production is reserved 85% for in-season
production.

The designers worked in large open spaces at Zara’s

headquarters, with one design center for each of the women’s,
men’s and children’s lines. Designers often prepared sketches by
hand but eventually worked on a CAD system to illustrate the
design and associated specifications. The store specialists worked
in the same rooms, reviewing daily detailed printouts of store
sales and speaking to store managers by phone to gather
informal feedback. Patterns once finalized could be made
available to the computers that would guide the cutting tools.
Based on samples, the initial collection for the season is finalized
and shown within Zara.

The company uses a vertical integration system (devised by

Inditex) to fulfil 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.

In fact, the turnaround time for bringing a design concept to the

shelves at Zara can be as short as 15 days.

All Zara stores receive new product twice a week. This compares
favourably with many of the chain's competitors, which usually
receive new styles just once or twice each season. The fact that
new stock arrives so frequently has several benefits. Most

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importantly, it encourages customers to come back regularly and,
because styles are only available for a limited period, it promotes
a sense of exclusivity.

Small batch production creates a scarcity premium and

encourages impulse purchase.

The process starts with an order from the store manager. Because
of the logistics system, the time between receiving the order at
the distribution centre and delivering the goods instore is, on
average, 24 hours for Europe and 48 hours for the remaining
stores.

Inditex's roots as a manufacturing company served as a great

asset in devising the efficient fulfilment model it uses today. From
1975 onwards its factories manufactured specifically for its stores.
The advantage of having started the supply chain process from
inside the company meant customer service was always at the
forefront.

2.How does its pricing structure impact the marketing and

business strategy?

Zara’s business model makes it more profitable then any other

retailer. We already know from marketing that the retailer gets
almost half the price of the commodity sold. So by playing both
the role of the manufacturer and the role of the retailer, Zara is
definitely much more profitable than the average retailer with
similar posted prices.

Zara’s pricing strategy is to set price equal to cost plus a target

margin. “Zara prices are based on comparables within the target
market, subject to covering costs plus a target margin.”

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Zara sources fabric, other inputs, and finished products from
external suppliers. It has purchasing offices in Barcelona and
Hong Kong. This gives Zara a competitive advantage towards the
costs of goods sold, as it can purchase from both Europe and
Asia according to prices.

Inditex fully owns Comditel that managed dyeing, patterning and

finishing of grey fabric of Inditex’s chains, and supplied finished
fabric to external as well as in-house manufacturers. This gave
Zara further competitive advantage, in terms of both cost and
control. Inditex also fully owned 20 factories for internal
manufacture. These factories apply just-in-time production (JIT).
Again, this gave Zara further competitive advantage, in terms of
both cost and control.

Zara has a low price strategy because they can use a lower cost
structure than their competitors. The quality of the products is
unique and they can cut costs so offer a lower price. So we can
speak of a cost leadership strategy, low cost what gives low
prices.

3.Explain how its distribution and inventory system helps

provide competitive advantage.

Zara’s competitive advantage mainly revolves around the high

turnover of its products, low level of inventory, efficient
distribution system, and commitment of its employees as well as
meeting the consumer demands relating to fashionable clothes.

Zara’s high tech distribution system makes sure that no style sits
around for long. The garments are quickly cleared through the
distribution center and shipped to stores arriving within 48 hours.
The distribution center is centrally located among fourteen
manufacturing plants. Garments moved along two hundred and

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eleven kilometers of track from the cluster of factories located
there to the distribution center. Hanging garments were arranged
on coded bars that sorted automatically by style within the
distribution center; stock-picking of hanging garments was done
manually. Folded garments were sorted on a carousel, with each
garment dropped down a chute toward a box for its destination
store based on its bar code. About 2.5 million garments could
move through the distribution center each week. Zara’s
merchandise does not waste time waiting for human sorting.

Zara air expresses goods from its single distribution center in

Spain, usually in small quantities. In Zara’s strategy, however, the
speedy shipments are part of the core strategy. Zara also ships
frequently, allowing lower inventories while serving its
multinational market from a single distribution center in Spain.

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.

No inventory was held centrally, and there was almost no

inventory at the stores that was not on the selling floor .Final
allocations of inventory were made centrally, taking into account
current store sales and inventory information, and sometimes
included new items not requested by the store manager. Stores
received new inventory several times a week.

Items that were not sold could be returned for possible

reallocation to other stores or for outlet sale. Sale periods were

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heavily regulated in Europe; only items previously in stock could
be marked down. In general, Zara tried to minimize the volume of
merchandise moved at end-of-season sale prices, since under
their system there was no need for a large inventory clearance.
Zara experienced 15-20% markdown sale of season volume,
compared to 30-40% for much of the industry.

Efficient distribution and inventory systems helps Zara minimize

costs and speedy deliveries to the stores across all over the world
thus attaining competitive advantage.

4.The lack of advertising may play a role in Zara’s

branding effort, how would you defend their approach?

At Zara’s management do not believe on a lot of advertising as a

marketing tool yet Zara is leading brand of Europe. Zara
management decided that they would no longer talk about itself
(through mass marketing campaigns), but would instead let the
customer talk about it and so increase brand awareness through
word of mouth. It has been pretty well received and is growing
internationally. The focus of Zara’s management for its branding
efforts is on following points:

Zara's five-point marketing approach to reach its

customers

1: Store location: The company always tries to find the perfect

location and ensure its brand is visible to as many people as
possible.

2: Store window: The first meeting point with the customer and
the place where Zara advertises the next season's look.

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3: Interior design and store image: Has to be right every time.

Zara renews this image every six to eight months in all of its
stores.

4: Goods display: A dedicated team of co-ordinators display the

collections by showing off the best trends, fabrics and colours.

5: Customer service: Something Zara believes it's excellent at.

The aim is to have as much personal contact with the customer as
possible.

Zara’s biggest marketing tool is “Word of mouth”, this helps

Zara personalize the services and penetrating into the masses
with its unique yet affordable pricing.

5.What is the rationale of making a combined tag for

European countries?

During its long expansion through 2001, Zara printed price tags
for multiple jurisdictions showing on the single tag all of its
different prices by country.

The rationale of making a combined tag for European countries

was:

1. This simplified the pricing and tagging procedure.

2. Saving time and resources.

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3. This system permitted goods to be moved from store to store
without retagging.

4. Unified tagging permitted goods to be trans-shipped

between one country to another without retagging.

However at the beginning of 2002 Zara switched to a system of

local price marking in the stores, using a device that read the bar
code and printed the appropriate local price.