Inditex’s Zara: An Analysis

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The overall focus of this dissertation will be the Spanish organization Inditex, in particular its clothing brand Zara. More specifically it will concentrate on Inditexs past and current performance and its unique business model. In order to effectively write this dissertation it will be split into five sections. In the second section a brief overview of the company, operational and financial performance will be described as it is vital to establish an understanding of Inditex’s background before commencing on further analysis. The third section will provide an industry analysis in relation the organisation’s business environment which will include a PEST analysis and Porters Five Forces model analysis. This will allows for an understanding of Inditex’s external business environment which can then be used to analyze the marketing strategy (PEST) and an understanding of the industry in which Inditex is located (Porter). The next section involves an evalutation of Inditex’s business strategy through all stages of business process; design, manufacturing, distribution and marketing stages. The fifth section consists of the business model analysis and a SWOT analysis of Inditex. The business analysis explains why Inditex use a vertical integration model and the SWOT analysis allows for clear evaluation of the strengths, weaknesses, opportunities and threats of the organization. The final section offers a series of recommendations that I will put forward based on my research and analysis carried out in the preceding sections.

The company overview

2.1 The company profile

Inditex ( Industria de Diseno Textil) is a global fashion retailer and has expanded rapidly to become one of the largest fashion retailers in the whole world. The company designed, manufactured and retail apparel, footwear and accessories for women, men and children through its seven apparel retail chains: Zara, Bershka, Stradivarius, Massimo Dutti, Oysho, Pull and Bear, Skhuaban. Each of these brands targets varied market segments in terms of age and disposable income. The group owns more than a hundred companies involved in different textile, manufacturer, infrastructure and distribution businesses. At the end of the 2009, the group operated 4607 stores around the world. At the beginning, Inditex’s operations were mainly focused on its domestic market in Spain with the first Zara shop was opened in 1975. Following on the company has expanded internationally quite quickly within clothing sector.

History of Inditex

In 1963, Amancio Ortega Gaona, Inditex’s founder, founded confecciones Goa to manufacture products such as housecoats. As the demand increased, the company integrated forward into retailing, then the first Zara store was opened in 1975. Zara stores expanded quickly within Spain market. In 1985, Inditex was founded as the holding company of the group of businesses operating at the time. In 1988, Zara opened its first store outside of Spain and began to expand internationally. In 1991 , Pull& Bear was founded, and Inditex bought 65% of the Massimo Dutti Group in 1991. Shortly afterwards, Inditex acquired 100% of Massimo Dutti Group and launched its first shop in 1995. Inditex launched the Bershka chain and then acquired Stradivarius respectively in 1998 and 1999. Soon after, the group launched Oysho chain in 2001 and Zara home in 2003. Zara home was introduced as Inditex’s first online store in 2007.

Exhibit 1 Timeline of Inditex

Picture 1.png

2.3 Products Mix

Over past few decades, Inditex has built its own multi-brand portfolio, which has allowed Inditex to target various market segments more effectively. The group uses a multi-brand name strategy to diversify their seven endorsed brands and one extended brand. Zara is the flagship brand of Inditex . Although Pull and Bear and Massimo Dutti are both fashion brands for women and men, their target market is different. The former brand targets a younger group with more leisure and sports based design, while the latter one targets men and women from 24 to 45 providing a higher quality. Bersha and Stradivarius provide elegant and latest fashion for only young woman.

Exhibit 2 Inditex’s brand portfolio

2.4 Financial Performance and comparison

Exhibit 4 Total revenue

Exhibit 5 Net profit margin

Operating profit margin and return on capital employed ¼ˆROCE¼‰ are two indicators used to evaluate profitability of the firm. The comparison of net profit margins between Inditex and its main competitors over the same period is another indicator to show how effective a company is at cost control and profitability. Net profit margins are calculated from the Net profit divided by net revenues. The net profit margin is a good measure to compare companies in the same industry due to similar business environment all companies confronted. The higher the net profit margin is, the more profitable the company is. To put it in another way, the more effective the company is at converting sales into profit . According to exhibit 4, we can see that H&M have strong capacity to consistently convert around 22% of its total revenue into profit; Inditex’s net profit margin is similar. However, when compared with Inditex and H&M, GAP has lowest net profit margin.

Exhibit 6 Return on capital employed

Exhibit 6, above, demonstrates return on capital employed (ROCE) demonstrating how much profit a company can earn from the investments of its shareholders have made in their company. It basically is used to show how much a company is gaining from its capital. In figure 6, GAP underperforms in this measure, not just due to low profit levels, but also because of huge amount of capital in order to generate profit. However, GAP’s return on capital employed ratio is increasing gradually. On the other hand, Inditex requires higher capital per unit of profit than H&M. there has been a decline in its ROCE ratio since 2007. H&M vastly outperforms all other firms. Inditex invests more than H&M in fixed assets dues to its vertical integration. Inditex has 5371 million euro in assets, plants and equipment¼ˆInditex Annual Report, 2009¼‰, while H&M only has 661 million euro. This is the main reason that H&M has much more higher ROCE ratio than Inditex. Inditex’s business model focuses mainly on vertical integration and in-house production. While at the same time outsourcing is becoming a popular trend in clothing industry. Inditex’s closest comparable competitors had narrower vertical scope than Inditex but outsourced all productions. In today’s competitive business environment, more and more companies choose to send out non-core operations or their manufacturing sections to a supplier in order to reduce the cost by specializing and making the firm focus purely on its core operation. This is due to the low labor cost in some developing countries such as China and Vietnam. On the other hand, there are some companies that constantly try to gain control over as many sections as possible within entire value chain, usually by in-house production.

3. Industry Analysis

The culture of fashion has been changed from haute couture and ready-to-wear to fast fashion. Generally, fast fashion retailers do not heavily invest in the creation of fashion trend and designs, but instead are inspired by the most attractive and promising trends spotted at fashion shows and by cues taken from mainstream consumers (Agins, 1999; Reinach,2005). They are able to keep up with these new fashion trends and add them into their products that can be provided on the market almost immediately with relatively lower price. Fast fashion is dominating the industry on the premise of several conditions. Firstly, short lead times and life cycles are two of key precondition of fast fashion. Secondly, considerable number of retail stores can reach potential customers. In addition, a very fast supply chain is required to connect customers demand with upstream operations from design, manufacture to distribution.

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Nowadays, more and more fashion retailers across the world engaged in this kind of “fast fashion” race. They make every effort to minimize the time in which they respond to fashion trends and the speed of their supply chains. For examples, Spanish Inditex (Zara), US GAP, Swedish company Hennes &Mauritz (H&M). British Topshop and Next, all focus on a fast fashion model. This fast fashion retail can be divided into two categories: some with factories to produce its products represented by Zara (Inditex); some without manufacturing competencies of their own such as H&M and Gap, which therefore means they outsource production to labor intensive countries.

3.1 PESTEL Analysis

Political factors

Since 2005 the global system of quota has phased out, textile and apparel industry entered the global free market. In the meanwhile, the textiles and apparel market has become more competitive than before and has also become more intense for the small and marginal players due to such intense competition. It seems that large fashion companies such as Inditex, H&M, can dominate the fashion industries due to economy of scale, which gives big companies lower cost per unit resulting from increased production. Also, the remove of all import quotas in clothing industry gives Indiex access to a larger market to operate with greater geographical reach and then generates more sales.

Economic factors

The world is facing global economic recession. Consequently, the business environment is difficult to operate within, which in turn has a huge influence on textile industry and fashion industry. This due to rising unemployment, the so-called ‘credit crunch’ and reduced disposable income forcing changes in consumers’ spending habits. Many consumers have become more price-sensitive and cautious. Consumers are more likely to cut budgets on apparel and fashion accessories. Such a change allows Inditex to attract more consumers shopping at its chain stores.

Social factors

Strong brands play a significant role in sales, because consumers prefer branded products as oppose to generic products. Most consumers value highly good branded products or services. Even though many companies went to bankruptcy in economic recession, most Brand fashion retail still managed to remain profitable. In the international fashion retail market, strong brand identity is very important. This is not only a precondition to attract customers, but also is a foundation of global expansion. Inditex not only provides fast fashion with relative lower price, but focus on brands building as well.

Technological factors

Technology is not only limited to companies within the software and computer industry such as Microsoft and Intel. Currently, technology plays a very important role on the fashion industry. With the increased competition, companies are taking advantage of IT to improve its Supply Chain Management (SCM) and using it to ensure a competitive advantage is gained. Many fashion companies are relying on the technological capabilities to add value to their products. More and more companies have adopted an online shopping platform to enhance their service and increase sales.

Legal factors

The fashion industry has been calling for stronger worldwide copyright protection and intellectual property protection for fashion designs because they fear major losses to their competitors. Fridolin Fischer pointed out that a dynamic interaction between innovation and imitation can be seen as a competition. Indeed, new innovation creates superior products; imitation makes these products more available to a greater number of consumers. Therefore, a lively imitation process is crucial for dynamic competition. It is true in reality, but it is not fair to the designer. At present, more developed countries expand their copyright Law to include fashion designs, fashion design owners would be granted the exclusive right to place their design on the marketplace. These copyright Act will limit the development of some fast fashion retailer, such as Zara.

Environmental factors

The environmental impact of the textile and apparel industry stems from its consumption of energy and toxic chemicals. The apparel industry contributes to climate change indirectly through the burning of fossil fuels to create electricity which is used to produce chemical materials which are then used as raw material to take place of cotton. Other major energy consumed involves using fuel for agricultural machinery and for distribution. Toxic chemicals are used widely in cotton planting and in many manufacturing stages such as pre-treatment, dyeing and printing. The volume waste from the fashion industry has become higher because of the advent of ‘fast fashion’. It is undeniable as regard to the current situation that the “Fast fashion” is causing a pollution issue due to shorted clothing life cycle, which has more negative impacts on environment.

3.2 Five Force Analysis

Fashion apparel is a highly competitive business industry that is completely internationalized and posses no boundaries to its operations. The fashion retail industry is a large, mature and highly competitive industry. The annual growth rate of the market was about ** in the past decade. In 2009, total apparel sales were 362 billion. However, high fragmentation gives rise to intensive competition and price pressure in this market. Porter’s Five-Forces Model will be used to illustrate business environment of apparel industry.

Threat of entry

The apparel industry has very low entry barriers. Entry does not require huge amount of capital, workshops can be set up with workers with relative low skills. However, the economy of scale in production has significant impact on the entrant. It forces the entrants either to accept cost disadvantage or produce in a large scale. On the other hand brand identification and production differentiation plays the significant role, because brand identification creates a barrier to entry.

Threat of substitutes

The threat of substitution in this market is very high. The threat comes from other apparel retailers, designer retailers and tailor houses. On the other hand, Generic substitution is more likely to present a threat by offering products at lower prices.

Power of buyers

Today’s buyers have more purchasing power than ever before. Customers demand high quality, a large variety and more frequent changes in the choice available to them. They want the exact garment they require when they want it and accessories in their preferred color and size in same store. This is the reason that retailers differentiate its product in order to satisfy the consumer’s needs. This is done by ensuring there are alternative sources of supply available for consumer and the cost of switching is almost zero. Inditex exactly meets the these customer demand by offer most fashionable clothes to cover various target markets at inexpensive price.

Power of suppliers

Power of suppliers in apparel market is low because most of fashion retailers outsourced the production section to developing countries, switching costs are low, buyes’ brands is powerful enough to get strong bargain power. There existing fashion retail brands command strong enough bargaining power to attain low costs. Therefore, the possibility of forward integration and supplier’s customers are not fragmented. One the other hand, Inditex has more bargain power due to its vertical integration business model.

Competitive rivalry

The apparel industry, due to its low barriers of entry and declined obstacles to trade among nations, is one of the most highly competitive industries in the world. Hennues and Mauritz (H&M) and Gap are Inditex’s major competitors in terms of size and sales.

Hennes and Mauritz ( H&M)

Hennes and Mauritz, was founded in Sweden in 1947, is another high performing fashion retailor. Today H&M has expanded to 2000 stores acorss the world with more than 76,000 employees(H&M Annual report,2009). H&M offers similar product mix with Inditex in the same market, such as clothes, accessorise, nightwear and underwear to women, men and children. While H&M is considered as the closest rival to Inditex, there are many key differences. First of all, H&M outsourced all its production section. Moreover, H&M tends to offer prodcuts at a slightly lower price than Zara by outsourcing it production. Beyond store-based retailing, H&M also ventured into online shopping and Internet retailing. Inditex has been relatively slow to develop its online selling. However, H&M has relied almost exclusively on only one brand. Inditex has broader brand portfolio, which is made up of eight brands in order to reduce risk and refine the company’s targeting of specific consumer groups

Gap

The second biggest clothing retailor, Gap, is American fashion retailer founded in 1969. The company has five brands: GAP, Old Navy,Banana Republic, Piperlime and Athleta. At the beginning, Gap’s merchandise consisted of other brands such as Levi’s and LPs. After Gap continuing to expand rapidly across the United States, Gap started to sell its private label products in its stores. Gap is a famous fashion retailer with a distinct marketing campaign consisting of mainly primetime television adverts which target the fashion conscious 15 to 35 age old women and men. The company operates over 4000 stores all over the world. Gap was well known for extensive collections of T-shirts and jeans which is simple but stylish. However, since 2001 the pace of development became slow due to lack of a clear fashion positioning and failing to meet consumer’s fast fashion demand. More than 90% of its products are outsourced, which has meant the supply chain is too long and they have therefore a slow response to fashion. Also, Gap’s core customer base has aged. Gap needs a reposition for its brand and design, but the chain has struggled to attract a younger generation to its stores. The company lacks an effective approach to deal with it. Gap is suffering from a plummet in sales and its competitors such as Zara and H&M have consequently profited from Gap’s downfall. In 2008, Inditex’s fashion chain Zara overtook Gap to become the world’s largest clothing retailer.

Inditex’s Business Strategies

4.1 Design-Fashion follower, industry leader

The process of Inditex’s product development design programme is constantly working in order to adapt to new fashion trends . Designers and managers attend high-fashion fairs and exhibitions to obtain fashion information and then convert the latest fashion trends of the season into their designs. Other sources of design inspiration come from TV, Internet, film content or trend spotters. product development teams focus on venues such as university campuses and clubs around the world to capture fashion trends and customer preferences. Zara’s product development teams have frequent dialogue via their internal IT system. Inditex gave significant autonomy to each store manager in deciding the quantity of product needed by each store. Moreover, the store manager is able to decide which product to display in their stores and which product is to be sold at a reduced price. The manager’s responsibility is to make these decision based on market research and sales trends. Moreover, by employing young and fashionable member of staff ensures that employees also contribute by helping to report the sales analysis, the product life cycles, and the store trends to the designers.

There are specialized teams in headquarters to analyze feedbacks and information from each store, then design and produce their products. These sales analyses allow the designers to develop the right products to meet consumer Demand.

Design team issues up to approximately 12,000 new design styles per year. Such a design concept obviously depends on the regular creation of new design. For example, Zara’s designer team came up with approximately 40,000 new designs per year, from which only slightly more than one-quarter of them for production. Zara often follows the fashion trends of the high-fashion houses and offers similar products at much lower prices by using less expensive fabric. It also attempts to offer more colors and larger range of sizes to meet the need of consumers. After a prototype of new design was selected, a computer-aided design system is used to refine colors and textures.

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Limited number of new items were produced and presented in certain stores for a trial period and large volumes of the product are produced only if customer’s reaction is positive. As a consequence, failure rates on new products is only 1% which is less than the average rate of 10% of other fashion retailers.

4.2 Manufacture process

Inditex has been able to obtain excellent financial record due to its vertical integration and fast fashion business strategies which provide Inditex with a competitive advantage over traditional fashion retailers in the industry. Generally speaking, apparel retailers always try to keep slower costs by outsourcing production to developing countries where the lowest labor could reduce its manufacture cost. On the other hand, Inditex’s subsidiary retailing chain adopted a successful diverse method of doing business by working through the whole value chain. Highly capital intensity and vertical integration is a distinctive feature of Inditex’s business model.

From the upstream value chain, a subsidiary of Inditex company, Comdietel, funnels fabric and other input supplied by external suppliers. More than half of the fabric was undyed which provide maximum flexibility to produce in-season clothes. Comdietel is able to dye and process gray fabric into certain pattern within only one week to meet the requirement of downstream value chain.

Inditex has 20 fully owned manufacture factories across the Europe. These factories use capital intensive production processes and provide cut garment and semi-manufactured products to approximately 500 in-house workshops. The relevant cutting machines and other systems produce semi-manufactured items and cut garments which will be transited directly into workshops. The progress looks rigmarole, but it is quite efficient because bar codes track the cut pieces through the every production steps. Workshops are located in labor-intensive areas across Europe such as Spain and northern Portugal. These workshops manufacture clothes in small scale to offer specialization in product type. The sewn clothes were sent back from these workshops to various product line under different brands. The center will inspect, iron and fold before sending finished garment to distribution center.

The secret of Inditex’s success is that vertical integration leads to short turnaround times and great flexibility. By implementing in-house production, inditex has obtained high level of variety, quantity and frequency of new styled clothes. Inditex adopts market orientation by reducing lead-times and increasing flexibility. Zara is able to upgrade products in its stores within 10 to 15 days from design to stores. Vertical integration decreased Inditex’s stock to a minimum level and reduced fashion risk. In the mean time, providing small amount of products in a great variety of styles rendered Inditex shorter lead times and high level flexibility. As a consequence of offering fewer amount of product more often, Indite obtains larger percentages of the full price due to in-season sell and thus achieve higher net margins on sales.

By focusing on shorter response times to fashion trends and keeping up with fashion. Inditex made efforts to make sure that its stores are able to offer latest fashion items that consumers desired at a given time. Inditex can move from coming up a design to having clothes in its stores within 2 weeks. Short lead times is Inditex one of the most important competitive advantages over its competitors. When Inditex’s retail stores provide consumer with latest fashion items and gain huge amount of sales, its competitors have still struggled to catch up. In comparison, H&M’s lead time is more than 20 days. Traditional retailers use 4-6 months .

4.3 Distribution

A more systematic approach to inventory distribution is another feature of Inditex. Each retail chain has its own centralized distribution system. Distribution center is located in Arteixo and small satellite centers across the world. In order to keep its stores refreshed with new merchandise every two weeks, the warehouses of Inditex is simply a place to transfer merchandise rather than store them. Under Indetex’s distribution system, most of merchandise stayed at the distribution centers for only few hours. Products are inspected and shipped immediately in distribution center. Store managers can check lists of items available to be shipped to their stores. Based on their store inventories, they can request quantities and type of products. However, Inditex’s international expansion required constant adjustment on distribution. Zara schedules the shipment by time zone to make sure distribute effectively. Inditex uses this method to gain a competitive advantage by minimizing the lead times.

4.4 Marketing mix

Placement

Inditex’s marketing strategy is very effective because its marketing policy involves zero advertising. Inditex invest in selecting locations for its subsidiary retail chains and the presentation of those stores. For example, products in Zara are relative inexpensive, but shopping in Zara shores does not feel cheap. Zara stores are centrally located with spacious and nice interior. The clothes were presented very tide and upscale. There is a big difference between Zara stores and the store of some upper scale stores.

Product

Inditex constantly changes its products. Therefore, customers are never sure what is going to be on Zara’s shelves the following week. Zara designs apparel to meet consumer demand, attempting to pull customers in by producing small amount to create a fear that if customers do not buy immediately, the product will soon be out of stock. There is not any other company that can produce high fashion clothes faster than Zara, which positions itself as high fashion at cheap prices. Although Zara has been accused of copying the design of other upscale fashion retailers, the prime difference is the price, which allows high fashion to be affordable for average consumer.

Price

The pricing strategy chosen can affect revenue. The price of a product is very vital for a company to get back all its effort. The other three elements of marketing mix are costs. Thus, no matter how good the garment is. How efficient the supply chain and how creative the promotion, unless the price covers cost, the company will not make profits. Clothes might suffer from prices that are too low among competition. Pricing is very important since it often send quality cues to customers ¼ˆJobber, 2007¼‰Inditex does not compete on price because they know their customers are more sensitive to fashion instead of the price. Inditex’s subsidiary brands follow a market-based pricing strategy. Inditex sets price in line with its marketing strategy with reference to other marketing decisions such as position, strategic objective, promotion and value to customers. Therefore, Inditex sets price differently on different brands. Zara’s prices are very reasonable. Its objective is to set price as cheap as possible to allow people to have fast fashion clothes. Inditex will adjust its price for certain product to keep low inventories if the company overestimated the demand.

Promotion

The fact that there is no advertising promotion strategy is another effective cost cutting approach for Inditex. Other fashion retailers spend 3.5% of their revenue on advertising, while inditex only spends 0.3% on promotion. Advertisement is carry out only at a new store opening. But that does not means Inditex make less efforts on promotion. Zara does not engage in large advertising campaigns on television and magazines. It just adopts a different approach to promote its products. It invests its money on location, Zara’s stores are situated at commercial center. The company believes that their shop windows presentations are all the advertising it needs and its sores only opened in the most fashionable district.

4.5 International Expansion

Inditex has become possibly the most internationalized fashion retail chain. Zara operates 2707 stores in countries outside its home market Spain. By 2010, its has 1900 stores in rest of Europe, more than 150 stores in Asia, 366 in America, 485 elsewhere in the rest of world. Inditex generates 68 percent of its total revenue from oversea markets. Zara contributes most of international sales and revenue to Inditex. Zara’s international expansion started in 1988 with the opening of store in Portugal, when Inditex found that the company has dominated domestic market and abroad market was very profitable. Since then, Zara entered into one country per year until it opened stores in 7 European countries. After that, the pace of Zara expansion has speed up more rapidly. Zara has successfully entered 74 countries. On the same period, H&M expanded its retail network to 36 countries, and Gap entered into 30 countries worldwide. .( Indetex Annual Report, 2009 )

SALES

2008

2009

Spain

3.730.099

3.708.967

Rest of Europe

4.809.263

5.221.491

America

1.038.065

1.096.709

Asia and rest of the world

829.333

1.056.347

Total

10.406.960

11.083.514

5. Business model Analysis

This section will further analyze the reasons why Inditex, who are competing in the same business field and under the same conditions as rivals such as H&M, next, Gap and Mango, choose different business models. It describes exact competitive advantages that have derived from Inditex’s business model and the negative sides of business models.

According to Inditex’s financial ratios and business models, we can conclude that

Inditex’s higher income result from its business model of vertical integration which keeps costs and operating expenses much lower than Gap and H&M. In-house production allows Inditex have little transaction costs. In light of the transaction cost theory, Madhok said that manage business activities inside the company is direct way to diminish the transaction costs. The costs of managing upstream or downstream of business activities within an institution will be much lower than through the market. Meanwhile, vertical integration gives a firm more control and flexibilities to operate directly. Forward integration can provide product differentiation advantages that are difficult to imitate as well as superior design intelligence. Potential advantage from integration is the degree of value added at the throughout all stages of the business. The group has authority to operate directly through designing, manufacturing and distribution. Due to vertical integration, the group gains a better position in the purchasing of raw materials, controlling the manufacturing process and obtaining better lead time to market. Decreased Cost does not only derive from lower transaction cost but also comes from waste reducing. This happens by designing and cutting its fabric in-house and it acquires fabrics in grey to keep costs low. Zara dyeing and printing fabric until close to manufacture to acquire more flexibilities in order to meet various design requirements, thereby minimize raw material waste and rendered Zara great flexibilit

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