Emerging Trends Which Zara Will Need To Respond

The purpose of this report is to analyse the company Zara in terms of their retail strategy, business environment, major decisions taken and to identify the emerging trends they will need to respond to in the future and the experiences which they have learned from other retailers locally and overseas. Zara is Spanish clothing and accessories retailer based in Arteixo, Galicia, Spain. It was founded in 1975 and is the flagship chain store of the Inditex group which is one of the world’s largest fashion retailers operating eight store formats. The report will focus on Zara in Malaysia which currently operates six stores there.

Zara’s business environment will be analysed in terms of its microeconomic and macroeconomic environment and in terms of its internal strengths and weaknesses in the report. Zara’s main retail strategy is its fast response system to consumers’ demands in the fast fashion industry and its short lead time from designing a new piece of clothing to having it in its stores. Rather than being a trend-setting brand with innovative creations, Zara concentrates more on copying the latest catwalk trends in its stores as fast as possible and updating its designs frequently because of the highly perishable nature of fashionable clothes.

One of Zara’s major decisions was to deploy a new process which relies extensively on sophisticated operations research models to determine every single shipment of inventory it sends from its two central warehouses in Spain to its 1,500 stores worldwide, including Malaysia. Another important decision taken by Zara in Malaysia is to limit its spending on advertising and to use its stores as major marketing tool to attract customers.

Zara’s main competitor Topshop’s strengths, achievements and weaknesses are then discussed. By analysing its competitor’s core competencies locally and overseas, Zara can learn valuable experiences which can help the company to develop future effective strategies.

Emerging trends which Zara will need to respond to in the future include the rising influx of Singaporean customers with a high demand for fashionable clothes that patronise Johor. Zara can thus set-up a new store in Johor Bahru. Another trend they will need to capitalise on in the future is online retailing since the use of internet to purchase online has been on the increase in Malaysia.

In conclusion, Zara should attempt to increase its sales promotion efforts in the future eventhough it wants to retain a conservative approach when it comes to mass media advertising and the use of expensive advertising tools like fashion shows. This approach will help the company to compete more effectively with its main competitor Topshop and to retain its market share in the future.

Introduction

The purpose of this report is to analyse the company Zara in terms of their retail strategy, business environment, major decisions taken and to identify the emerging trends they will need to respond to in the future and the experiences which they have learned from other retailers locally and overseas. Zara is Spanish clothing and accessories retailer based in Arteixo, Galicia, Spain. It was founded in 1975 and is the flagship chain store of the Inditex group which is one of the world’s largest fashion retailers operating eight store formats (Inditex, 2011). The report will focus on Zara in Malaysia which currently operates six stores there. Zara’s product range consists of clothes for men, women and kids; shoes especially for women and accessories. Zara is targeted at the higher middle income group and high income group in Malaysia and is targeted at Men, Women and kids.

Business Environment

Macro Environment

Economic

In Malaysia, the new environment of young professionals and executives with more disposable income has fueled more growth and demand in the clothing and footwear market (Euromonitor, 2009). The clothing industry experienced a volume growth of 9.9% and value growth of 8.9% in 2008; however, this growth in demand was hindered in the year 2008 to 2009 as people spent less on clothing caused by the global financial crisis (Euromonitor, 2009). Based on this information, Zara would still benefit from the younger consumers spending more on the latest fashion, while having to bear with the slower growth caused by the world financial crisis.

The Malaysian economy is expected to grow by 4.1 percent in 2010 and domestic demand is expected to grow by 3.2% in 2010. The medium-term outlook for Malaysia seems promising with growth reaching 5.6 and 5.9 percent in 2011 and 2012, respectively, although this will depend on sustained global recovery from the crisis (Economic Outlook, 2009). This implies that consumers will spend more on clothing, indicating a potential rise in sales for Zara. According to forecasts, it is estimated that the value of the retail segment will almost double by 2013, from US$25bn in 2008 to more than US$46bn by the end of the forecast period with growing urbanization and improved standards of living for rural dwellers (Malaysia Retail Report, 2009).

Micro Environment

Competitors

Zara’s main competitors in Malaysia are Topshop, MANGO and Forever 21. Topshop is a British clothes retailer with operations in over 20 countries and online operations in some of its markets. It now owns 300 stores in the UK and 100 overseas. Topshop’s sales mostly come from women’s clothing and fashion accessories. It is part of the Arcadia Group, which owns seven of the high street’s best known fashion brands and is the UK’s largest privately owned clothing retailer (Topshop, 2011).

MANGO (MNG) is a transnational Spanish clothing retailer based in Barcelona, Catalonia. It sells women’s and men’s clothing and accessories. MNG currently has 1,700 stores in 100 countries worldwide. MNG’s key to success lies in its unique concept, team and logistics system (MANGO, 2011).

Forever 21 is an American chain of clothing retailer providing fashion apparel and accessories to young men and women. Forever 21 provides shoppers with an unprecedented selection of up-to-date fashion, always changing and always in style (Forever 21, 2011).

Customers

According to Malaysia retail report (2009), Malaysia is considered as one of the most developed of developing countries, classified as an upper-middle income country by the World Bank. The real per capita of 87 percent of Malaysians have a salary increase over the past 12 months, contributing to the increase of population into the Middle income group (HuangDBS, 2008).

Due to rising affluence, education levels and the high profile international retailers, Malaysian consumer lifestyle has change. Malaysians are more demanding for foreign brands as consumers are becoming more westernized, sophisticated and cosmopolitan (Price Waterhouse Coopers, 2005). Shockingly, even household with low income levels are becoming active consumers driven by aspirational attraction towards strong and leading brand names. In addition to that, research has also shown that Asians placed high importance on image as compared to Westerners, thus brands with credibility or quality latest fashion stores is deemed worthwhile for they are striving to improve their lifestyle, to be perceived as early adopters rather than trend followers (HwangDBS, 2008). Therefore, Malaysian consumer’s growing trends towards fast fashion is an attractive market for Zara to tap on.

Internal Environment

Strengths

Zara’s main strength is its quick response communication strategy which is efficient due to its management and corporate culture. Amancio Ortega, the founder of Inditex, still owns 60% of Zara’s shares. He has effectively transmitted the values of the company, which are: freedom, perfectionism, responsibility, rapidness, flexibility and respect to others and to his management team. This has led to the creation of a very autonomous and flexible corporate culture for Zara. This has allowed the company to work horizontally with an open communication environment instead of a hierarchal one. Owing to this, Zara’s managers work in teams in the countries where the chain is located. These divisional headquarter teams consist of a head country manager who is constantly communicating with local managers and reporting to top management. The regular flow of information between managers allows the company to keep its customers happy, which results in increased sales. Zara’s unique business model whereby it works through the whole value chain from designing to distribution is also a main core competency. Its business model allows it to cut down on storage costs and to respond as fast as possible to emerging consumer needs and demands in the fast fashion industry (Craig, Jones & Nieto, 2004).

Weaknesses

Zara’s vertical integration model often leads to the inability to reap the benefits of economies of scale, which means that they cannot gain the benefits of producing large quantities of goods for a discounted rate which keeps its cost of production high. Futhermore, Zara’s speedy and frequent introduction of new products incurs increased costs as well in the form of higher research and development costs. They also have elevated costs due to the recurrent change of production techniques to manufacture their different apparel lines. This also entails that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers, in comparison do not experience higher costs in all of these areas (Craig, Jones & Nieto, 2004).

Retail Strategy

Zara’s main retail strategy is its fast response system to consumers’ demands in the fast fashion industry and its short lead time from designing a new piece of clothing to having it in its stores. Unlike similar apparel retailers, Zara uses a vertically integrated business model whereby it controls all the steps of manufacturing its clothes from design to fabric manufacturing, distribution and sales in order to cut costs and gain speed and flexibility. Such a business model allows Zara to be flexible in terms of the variety, amount and frequency of new styles produced. Zara’s supply chain consists of two primary warehouses in Spain that periodically receive shipments of finished clothes from suppliers and ship merchandise directly to each Zara store worldwide twice a week (Goliath, 2010). It takes about four weeks for a new piece of clothing to move from Zara’s design team in Spain to a Zara store in Malaysia. With shorter lead times, Zara is able to ship fewer pieces of clothes, in a greater variety of styles, more often and they can more easily eliminate lines that do not sell well, avoiding inventory backlogs (AllBusiness, 2001).

Zara produces 40% of its finished garments internally, and of the remainder, about two-thirds of the items are sourced from Europe and North Africa and one-third from Asia. Internal production is the primary responsibility of 20 fully owned factories, 18 of them situated in and around Zara’s headquarters in Arteixo. The most fashionable items are the riskiest and therefore are the ones that are produced in small lots internally or under contract by suppliers who are located close by. More basic items that are more price-sensitive than time sensitive are particularly outsourced to Asia, since production in Europe is typically 15%-20% more expensive for Zara.

Zara’s fast response system to consumers’demands has allowed it to maintain a strong competitive position in the Malaysian market. Consumers’tastes and preferences are fast changing in the fashion industry and a key to Zara’s success is its ability to identify and catch a winning fashion trend and respond to it as fast as possible. Zara focuses on speeding the information flow of consumers’ desires to their apparel designers. This is done through Zara’s store managers and sales associates who are responsible for submitting the sales analysis, the product life cycles and the store trends to the designers. This allows its designers in Spain to develop the right product within the season to meet the demands of consumers (Craig, Jones & Nieto, 2004). About three-quarter of the displayed merchandise is changed every three to four weeks which also corresponds to the average time between visits, given estimates that the average Zara shopper visited the store 17 times a year relative to an average figure of three to four times a year for other fast fashion retailers and their customers (Ghemawat & Nueno, 2006).

Rather than being a trend-setting brand with innovative creations, Zara concentrates more on copying the latest catwalk trends in its stores as fast as possible and updating its designs frequently because of the highly perishable nature of fashionable clothes. Providing the latest fashion clothes to its consumers at all times is the ultimate goal of Zara (Dutta, 2002). Zara’s aim is to democratise fashion by offering ‘haute couture’ latest fashion in medium quality at affordable prices. Zara attempts to lure customers to its stores and create positive word of mouth through the freshness of its offerings and the creation of a sense of scarcity. Zara’s rapid product turnover creates a sense of “buy now because you won’t see this item later.” In addition, the sense of scarcity is emphasized by small shipments, display shelves that are barely stocked, a limit of one month on how long ndividual items can be sold in the stores, and a degree of deliberate undersupply. This climate of scarcity allows the company to sell more items at full price.

The major decisions taken and the reasons for them

New process

Zara decided in 1996 to deploy a new process which relies extensively on sophisticated operations research models to determine every single shipment of inventory it sends from its two central warehouses in Spain to its 1,500 stores worldwide, including Malaysia. Its two primary warehouses located in Spain periodically receive shipments of finished apparel from suppliers, and ship merchandise directly to every Zara store in the world twice a week. By taking a retail size assortment view of the store inventory, the model incorporates the link between stock levels and demand while choosing store replenishment quantities. This model, which the company uses on a daily basis since 2006, has allowed it to increase sales by 3 to 4% in 2007 and 2008 (Caro, Gallien, Calamonte, Correa, 2009).

Advertising in Malaysia and reliance on the store as a marketing tool.

Zara spends only 0.3% of its revenue on media advertising, compared with 3% to 4% for other fast fashion retailers in Malaysia. Its advertising is generally limited to the start of the sales period and at the end of the season to inform customers about the sales and encourage them to visit the store. The company’s lack of advertising in Malaysia is mainly because of concerns about overexposure and because it wants to limit its spending to minimise costs. Zara first displays its new items in its stores without exhibiting them at the ready-to-wear fashion shows as does its competitors Topshop or Mango (Ghemawat & Nueno, 2006).

Zara relies mostly on its store layout as a major advertising tool to attract customers in Malaysia. It relies on considerable centralisation of store window displays and interior presentations in using its stores to promote its market image. As the season progresses and product offerings change, ideas about consistent looks for windows and for interiors in terms of themes, colour schemes, and product presentation are prototyped in model window and store areas in the headquarters building in Arteixo. These ideas are basically carried to the Malaysian stores by regional teams of window dressers and interior coordinators who visit each store every three weeks. But some adaptation was allowed and even planned for in the look of a store. For example, in Malaysia, while all Zara in-store employees have to wear Zara clothes while working in the stores, the uniforms that the sales assistants are required to wear might vary across different Zara stores in the same city to echo socioeconomic differences in the neighborhoods in which they are located. Uniforms are selected twice a season by store managers from the current season’s collection and submitted to headquarters for authorisation (Ghemawat & Nueno, 2006).

The choice of Zara’s locations in Malaysia also reflects its reliance on its store as a major tool to encourage customer tarffic and as a strategic advertising platform. Zara is found in prime locations with a high pedestrian and vehicular traffic like famous shopping malls.It currently has six outlets in Malaysia in Suria KLCC, Pavilion, Midvalley Megamall, 1 Utama Shopping Complex, Bangsar Village II and in Lot 10 (NewStraitsTimes, 2010). It first opened its outlet at the Mid Valley Megamall in 2003, followed by the one at Suria KLCC during the same year. Its store at 1 Utama was opened in 2004. Zara decided to expand its presence in Malaysia since it set-up in 2003 because of the high degree of fashion-consciousness among Malaysians. Zara is also targetting foreign tourists in Malaysia who are up-to-date on current fashion trends (Ghemawat & Nueno, 2006). Since the number of tourists visiting Malaysia increased by 7% from November 2002 to November 2003, Zara decided to expand to meet the increasing demands of this target market. (Agentur, 2003).

The experiences that have been learned from other retailers locally and overseas

Topshop sells its clothes and accessories online through its online website, making it available to both Malaysian and international markets and thus generating more sales. Zara, on the other hand sells its clothes online only in certain countries like Spain, France, Germany, UK, Portugal and Italy which are its major markets (Superbrands, n.d.)

Topshop is referred to as a trend-setting brand through its design collection, UNIQUE which prides itself in doing the unexpected and striving to do it first. UNIQUE was created to appeal to its most design-aware customers, celebrities and industry insiders. Zara, on the contrary is reknown for following innovators and copying the latest designs of others. However, some consumers in the fast fashion industry like innovative and authentic designs which have not been copied from elsewhere. Topshop is currently doing a better job than Zara to attract these kind or consumers (Superbrands, n.d.).

Topshop is a multi-award winning brand. It won Customer Service Initiative of the Year for its new “Topshop-To-Go” service at the Retail Week Awards 2005. The award has helped to boost up its image and did not fail to make an impact on sales (Superbrands, n.d.). In September 2005, Topshop became the first high-street retailer to show on schedule for London Fashion Week when it showcasted its own acclaimed in-house design collection UNIQUE. Consequently, partnerships with international boutiques in Tokyo and LA followed (Topshop Shoes, 2010). Zara should strive more towards obtaining internationally acclaimed awards to enhance its brand image. Zara does not currently conduct any fashion shows for its new collections. This lack of visibility in the fast fashion world may affect its image. Customers in the fast fashion industry are mostly attracted by new designs worn by models on the catwalk. This form of first contact with the new collection has a higher impact on purchase behaviour of consumers and helps to fasten product turnover.

Topshop also has partnerships with some of history’s most iconic fashion names. In May 2007, the British supermodel Kate Moss, designed her first collection line for Topshop. In July 2007, the British artist Stella Vine designed a limited edition fashion collection exclusively for Topshop inspired by her colorful artworks. It was made up of T-shirts, vest tops, and T-shirt dresses, with the brands designed in pink glitter. Kate Moss’ and Stella Vine’s collections were also available in Malaysia (Topshop Shoes, 2010). As a result, Topshop’s overall sales experienced a drastic increase throughout Malaysia as these new collections lured customers to Topshop stores, especially fans of Kate Moss and Stella Vine.

Zara, in comparison, is not associated with any celebrity names and is less able, compared to Topshop to create excitement, buzz and positive word of mouth among its consumers, especially among the dedicated fashion followers and young teenage girls.

Topshop also offers specialist collections for clothes and accessories like maternity linesTall and Petite designed to be stylish and reflective of seasonal trends (Superbrands, n.d.). Zara, on the other hand provides a standardised product collection which is less targeted at specific consumers. Having different collections for different niche segments may help the company to more effectively cater to all the needs and requirements of its target market.

Furthermore, Topshop offers unique customer services and promotions: a student discount of 10% all year round, made-to-measure dress service and also offers a personal styling service through its style advisors to customers by appointment, which can even be fixed online (Superbrands, n.d.). This service is also available in Malaysia and helps consumers to reduce shopping efforts to look for clothes which suit them as the in-store stylists will automatically direct them to the type of clothes they are looking for and advise them to make the best choice. A personal styling service may help Zara to attract more customers who like to have an expert’s advice before purchase and who like to feel like there is someone available especially to help them chose the best combination of clothes.

However, Zara should be careful not to repeat the mistakes made by Topshop over the past years. In December 2007, UK’s largest student campaigning organisation ‘People and Planet’ criticised Topshop for allegedly using cotton picked in Uzbekistan by slaves and for refusing to join the Ethical Trading Initiative (People and Planet, 2007). Consequently, Topshop’s sales in 2008 was affected and boycotted by consumers concerned about human rights and slavery. Zara should be careful not to spoil its brand image by infringing human rights while looking for cheap raw-materials. Nowadays, people are more conscious about human rights and environmental issues and prefer brands which do not abuse both. The media is also more alert on picking up the actions of international big retailers worldwide with the growing amount of NGOs.

The emerging trends that they will need to respond to in the future

Internet retailing

Zara does not currently sell its products online in Malaysia. However the growing use of the internet as a medium of purchase in Malaysia is an opportunity for Zara to expand its business online. It is an opportunity for the company to expand its market base since the internet has a wide reach, making it easier and cheaper to reach its target audience. Zara can establish online retailing in Malaysia by setting up an online website where it can inform its existing or potential customers about its new collections, about the beginning of its sales periods and persuade them to buy.

The use of the internet in Malaysia has grown from nearly 5 million in 2000 to more than 16 million users in 2008 which accounts for 60% of the Malaysian population (Euromonitor, 2010). Seven out of ten internet users in Malaysia have claimed to have made a purchase over the internet which mostly consists of younger Malaysian consumers (Nielson, 2008). Local researchers have found that Malaysian consumers’ decision to shop online are highly influenced by dominant factors such as “convenience”, “cannot get items elsewhere” and “cheaper price” (Harn, Khatibi & Ismail, 2006, p.236). Therefore, it is crucial for Zara, as an online retailer to provide competitive prices and more variety of products in order to attract and encourage these busy and affluent online shoppers to make a purchase decision (Euromonitor, 2010). In addition, most online shoppers in Malaysia expressed most concerned with security of credit cards and privacy in disclosing personal information when shopping online (Harn, Khatibi & Ismail, 2006). Therefore, online shoppers tend to rely more on personal recommendations from fellow consumers or to choose an online retailer that is more reputable (Nielson, 2008). Zara has to ensure strict privacy protocols when setting up its online website to build up consmer trust of shopping in an online Zara store.

According to Nielson (2008), the majority of internet purchases of Malaysians are airline tickets (55%) where purchase of clothing and footwear online still remain low. However, as online shopping is still in its development phase, clothing and footwear internet retailing are expected to record a strong growth within the next few years, which is good news for Zara.

Affluent Singaporean Consumers

Another emerging trend for Zara is to tap into the increasing affluent Singaporean consumers (10 million in 2009) that frequents Johor along with their growing demand for high quality fashionable products in Johor such as clothing and apparel which would cost 50% more back in Singapore (Seah, 2010). However, Zara’s outlets are mainly centered in the Klang Valley. Therefore, in order to satisfy the demands of this new target market, Zara can open a new store in Johor Bahru.

Conclusion

Zara’s quick response system and unique business model is definitely a core advantage which has prompted the company’s success over the years. However, Zara should not underestimate the changing nature of fast fashion Malaysian consumers who are now increasingly looking for brands with a unique design compared to brands which copies others’ designs. Consumers are also more attracted by benefits like in-store personal styling service and other sales promotions like gift vouchers or student discounts. Zara should attempt to increase its sales promotion efforts eventhough it wants to retain a conservative approach when it comes to mass media advertising and the use of expensive advertising tools like fashion shows. This approach will help the company to compete more effectively with its main competitor Topshop and to retain its market share in the future. Another recommendation for Zara is to invest in online retailing in Malaysia to tap the increasing market of online shoppers. Zara can also expand its presence in Malaysia through an additional store in Johor Bahru which will also help the company to cater for the Singaporean market. (3785 words)