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Zara Is A Fast Fashion Clothing Retailing Chain Marketing Essay

The global apparel market is considered as one of the most consumer-driven industry. Bearing in mind that globalization and new technologies have provided customers with more and actually better success to fashion, an initial objective of any company that operates in this industry lies in satisfaction of consumers’ needs and wants and correspondence with ever-changing market conditions.

Zara is not an exception to this rule. Focusing its efforts on developing and evolving a consumer-focused product line, Zara aims to satisfy needs of customers of different ages and income. Middle-aged father buys clothes at Zara because it is cheap, while his mid-20s daughter buys it because it is fashionable. The objective of the company is to combine two things – fashion and low prices, interpreting and adapting to its customer’s demands. Following this primary objective, Zara has become extremely effective in contemporary apparel market and one of the world’s most-recognized clothing brands.

The philosophy of Zara lies in giving an immediate response to its customers’ wishes. Zara's designers track consumer preferences on a year-round basis and place orders with both internal and external designers, aiming to produce the most stylish, and therefore most time-sensitive items. That is why it is very important for the company to speed the information flow of consumer desires to their apparel designers. This forms one of the primary objectives of the company. The idea is realized through Zara’s quick response system that is composed of human resources as and perfect information technology. Focusing on the ultimate consumer, Zara “places more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies”. For this purpose, Zara has human resource teams who directly work in the retail stores and manufacturing environment in order to work exclusively toward this goal. Because of such approach towards orientation on the customer, Zara is believed to need only two weeks in order to develop a new product and get it to stores versus a six-month period that is average for the apparel industry.

One of Zara’s most important objectives is to be a truly international brand. It constantly searches for opportunities to enter new markets and to expand at existing ones due to its advantages over competitors and goods offered. It is crucial for Zara to be physically present at every place possible and to ensure that their brand name is familiar everywhere, especially regarding the fact that Zara’s target markets are extremely broad, since the company does not define certain ages or styles as many traditional retailers do. Orienting on people who are sensitive to fashion at affordable prices, Zara uses one of its main advantages of having one of the largest store chains in the world, realizing the fact that fashion has become truly globally standardized.

However, the goals of “presence” and “brand-recognition” are based on more mercantile objectives of efficiency seeking. The company strives to get an advantage from operating in more than one economy, diversifying its capital and seeking for the increase of profit and getting revenues from all the economies it operates in at the same time. In such way Zara also minimizes the potential risks that might arise in one of the countries Zara’s stores are located.

Ultimately, it might be said that principle objectives of Zara incarnate in its business strategy that is characterized with “short cycle time, small batches per product, extensive variety of product every season and heavy investment in information and communication technology”, involved in every aspect of Zara’s business.

Market conditions

Contemporary world apparel market is extremely influenced by a number of factors and is ever changing. Globalization, constantly changing fashion trends, altering consumer preferences and technological developments influence all companies that operate in this industry and settle market conditions that have to be followed in order to survive, since the competition is extremely fierce.

Nowadays all fashion markets that Zara operates in can be characterized as traditional and emerging. France (113 Zara stores), Italy (81 Zara stores), U.K. (65 Zara stores), U.S. (49 Zara stores) and Japan (58 Zara stores) are considered as traditional markets, with the largest demand for the products of fashion apparel industry Zara operates in. However, regarding the fact that the largest number of Zara’s stores (333 to be accurate) are located in Spain, exactly this country is considered as Zara’s largest market and hub. Current market conditions in traditional markets are characterized with severe and ever growing level of competition, undergoing changes in technologies and high quality and fashion requirements of the customers. The level of wealth of an average citizen in these countries is one of the highest in the world, what makes this market the most attractive for the clothing retailing chains. The most powerful drivers of the industry’s development and market expansion are demand of the population and financers in the fashion industry who promote local designers.

However, studies show that there is “significant local variation in customers’ attributes and preferences, even within a region or a country. Just within Western Europe, for instance, one study concluded that the British sought out stores based on social affinity, that the French focuse on variety/quality, and that Germans are more price-sensitive. Relatedly, the French and the Italians are considered more fashion-forward than the Germans or the British. Spaniards are exceptional in buying apparel only seven times a year, compared with a European average of nine times a year, and higher-than-average levels for the Italians and French, among others”.

South Africa, the UAE, Singapore, India, Russia, Brazil and other developing countries are viewed as emerging markets, where unique growth patterns have been observed for the latest several years and major fashion houses and fashion retailers are expanding their presence. South Africa, the UAE, and India are the top emerging apparel markets here on the basis of the increase in the financial size of their markets and increased demand. More and more companies become concerned about their strong brand awareness, which begins to play a crucial role for their business in these countries.

Table 1. Emerging Apparel Markets – Key Growth Drivers

Source: Grail Research

Analyzing the table above it can be said that Government support, an increased awareness of international brands and demand for fashion apparel have been the most prominent industry growth drivers in these countries. If the trend continues, the emerging fashion markets would grow extremely rapidly, opening new horizons for the fashion clothing retailers as Zara.

Talking about market conditions Zara operates in, it is important to notice the existence of local producers and domestic brands that perform in every country and significantly influence their home market. Such companies sometimes include key players in the domestic market and have national recognition, however because of the process of globalization they begin to lose their positions and give ground to such international retailers as Zara, Gap or H&M.

Evaluation and quantification of the product demand

Zara’s business model is characterized with vertical integration. This approach to the process of production and distribution allows the company to successfully develop its strong merchandising strategy and fully satisfy consumers’ demand.

The strategy is based on fast-fashion system and creating a climate of scarcity and rapid product turnover. First, Zara owns its in-house production, manufacturing approximately 60% of its own products. This helps company to be flexible in design and quantity of goods that are produced. Zara is also able to provide the consumers with very updated fashion products, since 85% of all apparel is done through the season. Here Zara differs greatly from traditional apparel retailers, which lack such flexibility and are usually able to introduce new products only within a 6 month period and at least 6 months in advance of the season.

In the manufacturing environment, human resource teams who are responsible for the product development visit numerous fashion shows in order to embody latest fashion fads of the season into their designs. This allows Zara to satisfy needs of the most demanding customers. Other groups, on the other hand, are constantly researching the market through the season, trying to track customer preference and to understand “the desire of the moment”, which is so important for Zara.

In the retail environment, retailers play an important role in ensuring quick response to the customer demand. A set of policies and practices exists to provide proper coordination between retailers, manufacturers and designers. Zara’s managers and sales associates are in charge of transmitting the sales analysis, the product life cycles, and the store trends to the designers. This allows the designers in Spain to develop the right products within the season to meet consumer seasonal fashion preferences.

In order to determine demand and regulate the quantity supplied, climate of scarcity and rapid product turnover is artificially and purposely created using company’s in-house production, since its “runs are limited and inventories are strictly controlled”. Because of this climate, consumers are tend to visit Zara retail stores with higher frequency and rapidity, since they know that some goods might not be available tomorrow. Consequently, Zara sells more items at their full price without any overproduction. At the same time, this approach towards quantity supplied helps to minimize company’s total cost of output, since 15-20% of possible markdown merchandise is reduced.

Key industry fundamentals and variables

The apparel industry is one of the oldest industries in the world that, however, changes and evolves year by year with a lightning speed.

Unlike much of the rest of the industry, where local small- and medium – size businesses are giving way to international corporations and vertical integration, apparel remains an industry segment dominated by small manufacturers, jobbers, and contractors. Manufacturers perform the entire range of operations of garment making. Jobbers are responsible for their own designs, acquire the necessary fabric and related materials, and arrange for sale. The apparel industry is characterized with a number of distinguished features, major of which are: many small firms and producers present on the market; ease of entry; threat of failure; individual firms acting as price-takers, with respect to supplying firms and retain channels of distribution. In their majority the shops are small and usually specialize in a particular narrow product line, oriented on the company’s consumer. In some countries most establishments produce a single generic product or a number of similar products (as it is done in the U.S.). In other countries (predominantly Western Europe, where production of a wide range of garments is more common) the degree of specialization is fuzzy or does not exist at all. This allows the industry to approach to conditions of perfect competition. Intense competition among many small producers is reflected in a slower rise in apparel prices relative to the economy as a whole. Competition in apparel is also demonstrated by comparatively low profit margins. Manufacturers usually expand and contract output through the use of jobbers and contractors, which reduces reliance on heavy capital investment for expansion.

Major centers of manufacturing activity nowadays remain within the developed world in the countries. However, one of the most significant developments in the world economy and apparel industry over the last decade has been the shift in activity away from the older, developed economies towards the newer, developing countries. Since the production of apparel has remained a labor-intensive operation, it is reasonable for firms to relocate their production to low-wage areas as Turkey or China (where labor costs in apparel assembly stand at something like 3% of the average European level). Therefore, it is not a surprise that shifts in apparel production industry has been particularly dramatic during last two decades.

Contemporary clothing industry is characterized with ever changing fashion trends and desires of customers, being one of the most consumer-driven markets. Following the fashion has become ubiquitous phenomenon, while massive process of globalization and altering consumer preferences affect practically all clothing retailers.

Zara financial analysis

The best way to conduct Zara financial analysis is to analyze the performance of its parent group Inditex, where Zara brings 63,8% sales contribution to the group with €7,077 million net sales, €1,105 million EBIT and 15,6% EBIT margin. During the 2009 fiscal year Zara has demonstrated a net growth in sales from 4% to 6% at constant exchange rates, with a 5% growth in EBIT.

2009

2008

Net sales

11,083,514

10,406,960

Cost of merchandise

4,755,505

4,492,720

Gross profit

6,328,009

5,914,240

Gross margin

57.1%

56.8%

Operating expenses

3,952,702

3,707,887

Other net operating income (losses)

1,118

19,497

Operating profit (EBITDA)

2,374,189

2,186,856

Amortization and depreciation

645,801

578,320

Operating profit (EBIT)

1,728,388

1,608,536

Financial results

3,782

21,599

Income before taxes

1,732,170

1,586,937

Income tax

410,033

325,322

Net income

1,322,137

1,261,615

Earnings per share, euro cents

211.4

201.6

Table 2. Inditex consolidated income statement(in thousands of euros)

Source: Inditex

31-01-2010

31-01-2009

ASSETS

Current assets

3,943,795

3,264,041

Non-current assets

4,391,642

4,512,605

Total assets

8,335,437 7,77

7,776,646

LIABILITIES

Current liabilities

2,304,960

2,390,848

Non-current liabilities

659,931

637,198

Equity

5,370,546

4,748,600

TOTAL EQUITY AND LIABILITIES

8,335,437

7,776,646

Table 3. Inditex consolidated Balance sheet

Source: Inditex

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