Analysis of Zara’s Competitive Advantage

Part 1: Introduction

Zara’s story begins in the Spanish coastal city of Arteixo in 1975. Being the crown jewel in the array of brands part of Inditex Corporation (Industrias de Diseño Textil), Zara nurtures a highly intimate relationship with its customers where Zara’s designers respond instinctively to their changing needs, reacting to the latest trends and constant feedback received across its collections. To further enhance the quality of customer service, Zara stores include a stunning combination of technology, using cutting-edge systems to track the location of garments instantly and make those most in demand rapidly available to customers.

Today, there is hardly a developed country without a Zara store. Targeting consumers who are young, price-conscious, and highly sensitive to the latest fashion trends, Zara has 2,251 stores strategically located in leading cities across 96 countries. Inditex is the world’s largest fashion group with more than 170,000 employees. Inditex’s revenue from Zara was 31.1 billion USD in 2017.

I picked Zara as my topic for this report for a myriad of reasons.

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Not only am I a devoted follower and customer of the fashion brand, but I was also interested in the unique way Zara developed its business model, and how Zara implemented technology in the archaic sales techniques of the fashion industry.

Part 2: IT Strategy

The secret of Zara’s pioneering IT strategy lies in the rapid and extensive data collection that all Zara stores feed into. Using a variety of technological systems, Zara sales associates, designers, and consumers compile a vast wealth of input used to output the next trendy collection.

All Zara sales associates are equipped with PDAs (Personal Digital Assistant) and are trained to investigate customer insight on clothes in store. These insights are sent back to the pool of data and are used to configure the next collection. Data is also gathered through the stores’ custom POS (point-of-sale) system. This is a transaction processing system that captures customer’s purchases. Although every retailer has a POS system, Zara reinforces their system with Radio Frequency Identification Technology (RFID). RFID tracks the locations of garments throughout the store, making special notes on whether an item that has made it to the fitting room has also been sold. Items such as these are given a special weight that illustrates the popularity of the piece versus Zara’s other designs.

Another way Zara maintains its competitive advantage is by keeping most of their production in-house on order to cultivate a rapid supply chain. Often called the Dell of the fashion industry, Zara only buys undyed and uncut cloth in order to decrease or increase production based on demand. Demand based production means there is very little inventory in Zara’s supply chain, which results in much lower working capital requirements.

Part 3: Competitive Analysis

The biggest competitors of Zara include H&M, Benton and Gap. In terms of being the most fashionable and consumer feedback, Zara trumps Benton and Gap by a sizeable margin, yet H&M remains to be a formidable competitor. The only thing keeping Zara in the fast fashion lead is their outstandingly responsive supply chain model. Because of Zara’s tendency to create an artificial scarcity with their products, Zara collects 80 percent of the ticket price and Inditex’s net margin goes up to 10.4 percent, versus H&M’s net margin of 9.5 percent.

The fast fashion industry is rapidly growing due to the increasing fiscal crisis affecting the world. More and more competitors such as Forever 21, Garage, and ASOS are entering the industry, supplying consumers with economical fashion and quick trend turnover. The potential for new entrants is high, yet Zara preserves its edge in the industry through the high quality of their goods.

The supplier power in the fast fashion industry is quite weak, given the low wage boundaries in East Asia. Moreover, the monotony of supplies further diminishes supplier power as they grow strongly dependent on the apparel industry for operation. Nevertheless, the bargaining power of suppliers in substantial, as the switching costs of suppliers is moderately high. Zara eclipses these struggles by keeping production in-house.

Given the freedom of consumerism in the fashion industry, the power of customers is tremendous. Consumers are free to jump from brand to brand without the worries of switching costs, and have the pick of the litter when it comes to cut, style, and material quality. By reducing advertising costs to virtually nothing through their word-of-mouth strategy, Zara spends a majority of the budget on research and development, making sure they continue to capture consumer interest.

When it comes to the quality and style of Zara products, not many retailers can come close at the same price point. The only retailer who can marginally compete with Zara’s standard of quality and affordability is H&M. Again, the only factor keeping Zara ahead is it’s swift supply chain.

Part 4: Suggestions

Zara owes much of its success to its rapid supply chain and technology use. However Zara spends most of its budget in the upkeep of this network, and as a result Zara doesn’t have a solid promotional strategy.

Relying mostly on word-of-mouth and location utility as its advertising strategy, Zara lacks intensity in the marketing sector of its business model. My suggestion to Zara would be to increase marketing strategies, whether through social media advertisements (paid promotions) or more traditional forms of advertising such as print media, so that it can protect its advantage and continue to dominate the fast fashion industry. The reason that retailers like H&M get remotely close to Zara’s net margins is because they run aggressive marketing campaigns. As mentioned before, given the freedom of consumerism in the fashion industry, nothing is stopping consumers from switching to H&M for particular trend pieces except for brand loyalty. By pursuing a more detailed advertising campaign, Zara could continue to grow brand loyalty and increase consumer turnover rate.

Part 5: Conclusion

Zara is one of the largest fashion retailers in the world due to its unique business model. By combining IT strategies and technology systems like RFID, POS, and PDA, Zara amasses a massive pool of data utilized to conceive new and exciting fashion pieces for young, economic and fashion savvy consumers globally.