Zara Case Memo

Q1. What are Zara’s competitive advantages and what are they based on?

The crux of Zara’s competitive advantage is making cutting-edge fashion available to the
customers with great speed and flexibility through the fast-fashion operations model. Let’s
deep dive into the competitive factors which help Zara achieve this goal and fight
competition effectively.

a) Keeping up with fashion trends – Zara’s distribution and supply chain enabled it to
convert latest fashion trends into clothes onto the shelves of its stores within 15 days. The
stores renewed collection twice a week and had a team of trend-spotters who travelled
around the world to catch onto the latest trends and interests of consumers. 80% of the
products were manufactured in Europe which allowed the fashion brand to manufacture a
new line of clothes in three weeks which was way below the industry average of 9
months. Maintaining the fashion freshness of the stock in the stores resulted in frequent visits
to the store by the customer causing a considerable increase in footfall which further
converted to revenue due to purchases.

b) Zero Inventory policy – This was the guiding principle for the operations as Zara, each
season Zara planned only 50% of the collection of its forecast requirements and left the
other 50% to be created based on demands of the season. Zara believed that a product
should not lie the shelf of a store for more than a month, this was a highly consumer centric
policy as trends drives the fashion industry. Zara’s key competitors like H&M produced
products six to eight months in advance which clearly didn’t give them the room to keep
up with the trends for the consumers. The new products were made in limited quantities and
tested them before adding more inventory, this method helped to keep the failure rate at 1%
as compared to the industry average of 10%.

c) Design team and their operations – Zara had a design team of 200 people which was
much bigger than its competitors, enabling it to create 11,000 different items every year.
Zara’s designers had direct access to the real-time information and database of various
stores which helped them create relevant designs quickly. Producing half of the
merchandise in-house also gave an edge to Zara since it had greater control on the
manufacturing process.

d) Pricing Strategy – Zara’s prices differed based on countries based on the operations
costs, trends in place and demands by the consumers of the location. This strategy helped
Zara towards an effective pricing strategy.

e) Merchandising plans – The merchandising plans were created centrally, and the store
managers were expected to only implement them. Unlike, the competitors Zara didn’t
publish a catalogue for its managers to select stock, Zara planned which stock will go in
which store based on careful performance analysis of a particular product line.

Q2. How is Zara built within the organization?

Operations and Supply Chain as a fast-fashion retail brand – Zara operations core
principle lied in objective to create saleable items rather than accumulating inventories. Zara
leveraged technology to create an assemble line which manufactured and distributed
products at high speed. Zara produced 50% of its merchandise in-house and had a
multifunctional team in place to monitor just-in-time processes at the factories. Factories
were located near the distribution centres which sent out 1.8 million garments every week.

Culture – Zara culture is acknowledged as strong and distinctive; the management focuses
on the importance of paying attention to small things and being able to learn from
mistakes while taking criticism positively. There was no formal evaluation period, but
rather ongoing informal feedback was encouraged, and a significant portion of the salaries
depended on performance. Formal qualifications were not given primary importance in job
specifications.

Marketing Focus – Zara had a no advertising policy apart from its six-monthly sale,
marketing department at Zara defines the content and size of each production run and
would consider the fashion image being sought for the store even if it requires to cancel a
hot-selling item.

Running the stores – Easy communication was the base of running thousands of Zara’s
retail stores around the world. The stores were spacious to create an environment of low
chaos and limited product depth was presented. Zara allowed the customers to return a
product to any store and get the credit based on the price mentioned on the tag.

Q3. Compare Zara’s performance vs its major international competitors?

Zara had a wide range of competitors, including H&M, GAP, Benetton, C&A, Promod,
based on the different kinds of market it operated in. The performances differed widely due to
the prevalence of different strategies in the marketplace. Zara was considered a leader in the
industry, but its revenues were far behind its competitors.

However, if we compare the two major performance indicators, viz., operating margin
and inventory turn (2000) of Zara and its two major competitors we notice that Zara has a
(Operating Margin, Inventory Turnover) of (14.7, 10.67) as opposed to (10.6, 7.18) and (12.3,
6.84) for GAP and H&M respectively. This means that Zara makes 14.7% of profit on every
dollar in sales which is higher than its competitors. Zara manages to secure a better operating
margin because of low failure rate in manufacturing, policy of maintaining limited stock
and low expenditure on advertising campaigns. The cycle of keeping up with the latest
trends of the market by maintaining a fast-moving stock helped Zara achieve a higher
inventory turnover as compared to the major competitors.

Thus, though Zara’s revenue isn’t as high as its competitors but it is performing better and
these indicators allude towards a positive growth for the company.
Q4. How should Zara continue the international expansion?

Zara had started its expansion into the international markets with the first store in Portugal
in 1988, after which they entered the US market in 1989. By the year 2001, Zara had
expanded the operations in more than 30 countries and 52% of the revenue started coming
from the foreign markets indicating the immense growth that can be brought to the
business by foreign expansion.

Zara should continue with its policy of opening a single store in a market, monitor its
performance and analyse if it’s a suitable market for its growth before opening more stores.
This strategy has worked well for Zara and helps in keeping large number of losses at bay.

As it continues to grow, Zara should consider opening distribution centres in the foreign
markets which are doing well in terms of business so that costs can be save and better
operational efficiency can be achieved.

Zara should also conduct research to make a list of potential new markets to analyse
growth opportunities for business expansion. However, Zara should be careful in determining
whether it will be able to fulfil the fashion needs of the new market by creating an
appropriate apparel line for them and only then decide to enter it.

Q5. What are other challenges faced by Zara and how should they be addressed?

Challenge 1 – The fast-fashion model of Zara is an unsustainable way of retailing because

Zara comes out with 10,000 different products every year to keep up with the trends and
fashion demands and no matter how much Zara tries wastage of stock is unavoidable which
is extremely harmful for our planet in the long run.
Solution – Zara can create ties with thrift stores of the world and transport their stock to
them so that the sustainable fashion enthusiasts can consume them. Zara can also collaborate
with firms which upcycle clothes or start a line of its own to utilize the discarded clothes to
make something new and unique.

Challenge 2 – Zara has to maintain a balance amongst 10,000 varied products from
fashion demands of different markets, managing all the different attributes related to making
clothes.
Solution – Zara should appoint separate designing teams at different locations and grant
them the autonomy to make decisions based on the local market trends. This will reduce
the complexity in the process and streamline the functioning of the company.

Challenge 3 – Zara’s expansion strategy doesn’t work in all the markets, for instance the
Argentina expansion failed because customers were hurt by recession and didn’t find the
prices low due to added import duties.
Solution – Zara should carefully examine the economic as well as regulatory factors of a
market before entering it to hedge its chances of being successful and consider setting up
manufacturing facilities in markets with high import duties to avoid charging high prices
to the customers which can affect the brand image.