Marketing Management: Zara Case Study

Q.) What customer behaviour patterns exist in this industry and how do these translate into risk for
incumbent firms?

Sol.) Customer behaviour patterns

1. Hard to predict and influence

• Unpredictable Factors
• Celebrity fashion etc.
• Fashion miss
• Inventory and advertisement
• Discounts – H&M 24% inventory on discount (In order to make in room for new
Inventory)
2. Tastes Change Often
• Short fashion cycle
• Stress of selling old inventory

Risks

Operational Risks

• Managing the inventory and supply chain (low-cost production)

• Customer needs (Area, country, trend, season)

Financial Risks

• Pressure to invest heavily on advertisement to drive profit (Gap spent US$637 million on
advertising in 2013 on sales of US$16.148 billion)
• Sell out inventory at a mark down of 60% (For old apparel)

Supply Chain Risk

• Copycat competitors to cope up with new trend

• Store openings due to Inventory limitation in one store

Speed and Creativity

• Produce new fashion trends (Trend shift)

• Sell of Inventory before trend ends
Q.) Why does Zara’s approach seem so irrational?

Sol.)

• Manufacturing the majority of the products in high-cost Spain.

• Selling the products for 15 per cent lower than their competitors.

• Maintaining very high-cost retail outlets in high-end retailing sectors of major urban centers.

• Manufacturing clothes of lesser quality.

• Spending little on advertising

Q.) What are the key business metrics that companies must manage in order to mitigate these risks?

Sol.)

• Inventory Turnover Ratios: Average inventory turnover ratios with the industry are between
four and six times per year. Zara’s is over 20. This ultimately will have an impact on the amount
of revenue any one store can drive.

• Customer Return Visits: Return visits refer to how often a customer comes back to a store
annually. The industry standard is in the range of four times per year, while Zara’s is 17

• Cost of Goods Sold: Zara’s is higher due to the fact that it manufactures the majority of its
clothes in high-cost Spain (and surrounding countries) versus Third World countries. This drives
an approximate 20 per cent cost disadvantage.

• Finished Goods Inventory: Gap would have a significant amount of finished goods inventory. In
fact, its total inventory is finished goods. This is risky inventory because if it is not selling (i.e., a
fashion miss), its only option is move it through discounting (60% markdown). Zara, on the other
hand, has about half its inventory in raw materials. This can be made into any new fashion
design that is popular at the time, thereby carrying a much lower risk (only 15% inventory is sold
at a markdown as compared to 50% industry standard).