1. Barriers to entry: HIGH
a. High fixed cost business requires economics of scale for sustained profitability b. High Selling & Administration Expenses which includes advertising, in-store promotions, etc.; up to 3.5% of its revenue, even though for Zara, the company is famous for spending minimum level of advertisements and commercials. However, recently the company announced that it invested €450 million in commercials as well as logistics area (Inditex, Inditex‘s net sales rise 6% to 7.7 billion euros, 2013) c. Concept to store which takes 6 months to a year which refers to long sales cycle. However, in case of Zara, the lead time of clothes first-designed by the designer teams to finished products sold at the store take only about two weeks. d. Brand equity which is valuable to consumers
2. Substitutes: MODERATE
a. Buyer propensity to substitute is high with several competitors to choose from (H&M, Uniqlo, MANGO, and many other fast-fashion brands) b. Low buyer switching costs and easily substitutable where a customer can walk into its neighbouring store instead of Zara c. Zara has gained substantial customer loyalty which has more visits per year than its competitor‘s store d. Copying of styles is quite prevalent in this industry, which can attract the customer who does not mind lower quality but ―similar‖ looking apparel. The example will be counterfeiting of Zara products in Indonesia which is currently trending
3. Buyer Power: MODERATE
a. Trendy fashion wear is appealing to regular consumers and they would not shop lower quality apparel or accessories b. Apparel consumers have lots of choices when it comes to trendy clothing and accessories, but price can be a factor. In the case of Zara, for European, American, and eastern Asian countries, Zara is positioned as the low-end products, however, in emerging markets such as India, China, and Indonesia, Zara is considered as the high-end products.
4. Supplier Power: LOW
a. Contract based cloth production and stitching functions readily available b. Low price of fabric c. Local cooperatives work without contracts or labour unions
5. Rivalry: HIGH
a. High exit barriers due to high fixed and SG&A costs and excess inventory with lots of cash tied up in out-of-fashion inventory b. High advertising expenses; 3.5% of revenue indicative of intense competition .
6.2 SWOT ANALYSIS ON ZARS
1. Increasing Middle Class in Asia. Not only because Asia is a booming continent in which there are populous countries with growing GDP, but also because people in Asian countries have the taste which Zara offers for its clothing. They like to follow the trends that the western culture currently has and adapt those trends in their country. One of those trends is definitely apparel.
2. Opportunity to Build Distribution Centres in Developing Countries to Lower Costs sounds interesting in order to cut costs of distributing the finished products, but there are problems that may occur, such as infrastructure problems in developing countries which might actually hamper the company‘s superefficient supply and value chain..
3. New Designers for better design this is very important since they are based on fast-fashion which they need to change products every 2 weeks. Therefore, excellent team of designers is crucial in this business.
4. Rising Environmental Issues. They are keen to have a good reputation of being an eco-friendly company, they even set their mission regarding this issue, but too bad that sometimes the consumers do not care about the eco-friendly issue, especially consumers in Asian-emerging markets like India, Indonesia, and China. They simply want exclusive and trendy clothes.
5. International Recognition; undoubtedly this factor is the most important for Zara‘s opportunities because it is the key to successful expansion. In case of Zara, it is widely-known across the globe with good reputation in most of the countries. Therefore, it is a winning point for Zara to have such brand image in the eyes of global consumers.
1. Fierce Competition; one of the biggest threats because of new and affordable products from different stores such as H&M, Forever 21, and Uniqlo may harm Zara in terms of consumers loyalty.
2. Possible imitation of goods; there is a risk of Zara‘s products being copied, either by their competitor (the designs) or by irresponsible people that practice counterfeiting. However, since Zara is targeting the middle-upper class, therefore, it is not much of concern. Moreover, Zara‘s consumers are popularly known as loyal consumers to the brand.
3. Dilution of Brand Equity; this is also an important threat because it can decrease in its brand value in customer eyes. Therefore, Zara is implementing their best strategies to increase the brand equity. Probably more significantly to their European consumers through the eco-friendly company campaign which is highly noticed and precedence by European consumers.
1. Global outreach; Inditex, as the head company, expands Zara in a large amount of scale. Currently they have more than 1,700 stores in exactly 86 countries around the world.
2. Strategic Location Zara chooses where to locate their stores carefully because they are aiming for a direct communication strategy to promote their products. They have a unique approach in locating their store in each countries, and even cities. For example in Indonesia, Zara locates their stores in almost every big shopping mall because it has a high traffic everyday and it is the main place for people to go shopping. In France, Zara locates their store in downtown and main streets as the local people usually walk down the street to go shopping.
3. Distribution Strategy in the distribution system, Zara control most of the supply chain and distribution of its products from the headquarters. Zara has their main manufacturing place in three different contingents. 50% of the products are produced in Spain, 26% in the rest of Europe, and the rest 24% percent is outsourced in Asia and Africa. Then the products were transferred to Zara‘s distribution centres located in Spain to be exported to Zara‘s stores around the world. We can see that their distribution strategy is vertically integrated. This requires a high concentration and control form the headquarters in Spain, and that is exactly what Inditex does.
Since the distribution strategy is integrated, combined with their high technology, the products can be distributed globally in just a short amount of time. This is the uniqueness of Zara. They are able to adapt to the latest trend in limited time, using the Hybrid Communication system, then produce those latest trend with available materials to cut production time and cost, and after that the products are immediately transferred to all the stores. We found out that this is strategy has become their strength.
4. Store Image Zara is a trendy yet exclusive fashion store. This is the image of Zara from around the world. A unique concept of fast fashion might become a trendsetter in international fashion industry. A good store image also drives people to consider Zara when they want to purchase fashion items.
5. Fast Changing Collection This factor is one the specialties and uniqueness of Zara. Every 2 weeks Zara published brand new fashion items. This strategy exists to stimulate and refresh consumer‘s curiosity about Zara‘s products. This is also the strategy to strengthen the image of Zara as the designer teams always work to find out what the new designs should be. The aim is to be the trendsetter of fashion business. However, in the apparel industry, it is easy to copy the style of designs.
6. Responsive employees. Employees‘presence is important inside the store to control, rearrange items, and also to give information to the customers. Therefore Zara also concerns about Employees‘responsiveness, especially because they claim to have direct communication as their prominent marketing strategy.
7. Brand Image. We do think that this is the back bone of every player in apparel industry; again, considering the amount of competition in this industry. One of the proofs would be the fact where consumers still buy the product from certain brand even though many claim it uses bad fabrics, or the price is sometimes too high, and so on. Eventually, they would still come back because of the image that they will get when they purchase the product.
1. Limited Stocks. Even though Zara has a fast fashion concept, which is publishing new items in every 2 weeks, but some of the items are limited. So for some items, they might not be available in every store. Even though this is actually intentional, but for consumers, this can be included as a weakness as some customers will not be satisfied if they did not get the items that they want when they want it and where they want it. Customer‘s dissatisfaction quite have an effect for Zara
2. Price. In its country of origin, Zara is categorized as a low-end product. However, Zara is included in a high-end product in Indonesia and in many other countries. This is one of the weaknesses for Zara as the customer will think twice to purchase if price is a big consideration for them. This problem occurs mostly in developing countries, where the GDP per capita is still relatively low.
3. Brand image closely tagged to competitors as mentioned earlier, the problem in apparel industry is that it is very easy to copy each other‘s designs. This weakness is one of the toughest to deal with. Beside Zara, there are a lot of other brands that reach the international market that also build an exclusive image for them self. Therefore sometimes public cannot differentiate product from Zara and their competitors. In other words, it is going to be easy for them to switch from one brand to another.
Moreover, this will affect people‘s judgment that all the brands that in the same level as Zara is actually the same or similar in term of types and products, or in other words, no clear differentiation between those brands. As a player in this industry, Zara needs to obtain consumer loyalty;
4. Lack of Marketing; Zara is lack of marketing such as promotion and advertisement. It is very rare to see Zara logo and advertisement outside the store and in public area. In fact, Zara in different countries also does not have that much of advertisement. They only depend on the strong brand image that they already have. This can be a tough weakness if the competitors keep on increasing their marketing strategy, especially in emerging countries.
6.3 SWOT MATRIX
Brand image closely tagged to competitors
Fast changing collection
Lack of marketing
Increasing middle class in Asia
Open new stores in Asia’s developing countries
Price product at competitive prices in Asian countries
Opportunity to build distribution centre in developing countries to lower costs Build distribution centres in Asia to lower distribution cost for Asian countries Produce a signature collection
Cooperation with new designers
Be the trendsetter
Enhance the current brand image and company’s image
Rising environmental issue
Promote the company’s vision to be an eco-friendly company
Expand in new market and be the first player in the market
Increase spending for marketing activities
Lawsuits related to sweatshops
Produce the new trends with higher turnover
Enhance ZARA’s differentiation through its unique designs
6.4 STRATEGIC RECOMMENDATIONS
1. Opening new large stores in China & India – expand in new market and be the first player in the market 2. Restructure its pricing policy in Asians countries to remain competitive 3. Market penetration efforts include enhancing its online-sales expansion in Europe, America, Australia and South Africa. 4. Enhancing the in-store experience to increase the customers’ loyalty 5. Build distribution centres in Asia to lower distribution cost for Asian countries to lower the distribution cost in Asia 6. Produce a signature collection – be a trendsetter with high turnover 7. Increase spending on marketing activities to be at same level with its competitors