Zara Case Studies
Zara’s Vertical Supply ChainCase study
Zara’s Vertical Supply Chain
Inditex, one of the worlds largest fashion distributors, has eight major sales formats – Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home y Kiddy’s Class- with 3.147 stores in 70 countries around the world. Inditex Group is comprised of over one hundred companies associated in textile design, manufacturing and distribution. The achievements of the company and the uniqueness of its management model, which is based on innovation and flexibility, made Inditex one of the largest fashion distribution groups in the fashion industry. The company’s fashion philosophy -creativity and quality design together with a rapid response to market demands- has resulted in fast international expansion and excellent response to sales concepts.
The first Zara shop opened in 1975 in A Coruña (Spain), the city that saw the Group’s early beginnings and which is now home to its central offices. Its stores can now be found in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa
As of today, Inditex is probably the fastest growing fashion retailer in the world, with over 3,100 stores, in over 70 countries around the world, and Zara is around 1,000 of those stores. Zara, as a member of the one worlds largest fashion distributor, has a high response when it comes to their supply chain. Latest fashion designs are easily supply to all the stores/branches of Zara worldwide, in just a matter of two weeks.
Vertical Supply Chain
Zara operates using a vertical supply chain, which is a unique strategy in the fashion industry. Vertically integrated business undertakes a variety of activities from designing, manufacturing, sourcing, and to distribution to retail stores around the world. A company that operates in a vertically integrated strategy has total control of various business activities, such as designing, manufacturing, sourcing, and to distribution to retail stores. This gives the company total business management.
“While retailers concentrate their money and efforts on building a brand image through advertising campaigns, their lack of control over sub-contractors has left many open to accusations of using sweatshop labour when unacceptable practices are uncovered at factories producing their merchandise.”
Zara is driven by introduction of new designs and releasing new products in just a short time. The strategy is to produce and release products in number or limited in a store, a store may only receive ten of the new product. This strategy closely emulates a ‘make to order environment’. The idea is releasing a design in limited number or exclusive. This strategy this builds up customer’s anticipation of the next product or design to be release, making the next product highly anticipated by customers.
Zara does not focus in advertising their product, because Zara does not focus in building brand image, there target is production and the customer’s anticipation of their product. Instead on focusing their strategy in product advertisement, the company focuses on product design and quality.
Below is a supply chain barometer of Zara, this supply chain barometer shows the balance between the company’s in-house and external operations. The balance in fabric supply and manufacturing of the product itself contributes in the company’s success. Not all the company’s in-house resources are use. A large percentage of the company’s fabric supplies are use in other brands. While in manufacturing, Zara has the most products manufactured.
All the products of Zara are transported from the company’s main central site in Spain. Most of the products are shipped from the “A Coruña depot” (Zara Logistica). All stocks are not held for long periods and are sent out to all the Zara stores twice a week. For international deliveries, the stocks are delivered to the border of Spain, and the logistic provider in charge for that country takes over the distribution to the stores.
The ideas and design of a product came from the designer. The designer gets the idea of what product to design next by means of its sales from stores and customers feedback and comments. The designers based their ideas in product designs from previous product sales. The feedback and comments of customers a bout a product is also considered in the design.
Below is a diagram that shows the cycle how a product is made. The company’s success is because of the total control in every aspect of the business, from designing, to production, and to distribution. By having total control of the entire process, the company can quickly react to the fast changing fashion trend and customer taste, this provides the company an idea of the latest fashion trend. Having total control in all business activities allows Zara to produce and release new design in a short span of time.
All of the functions of the business continuously works together to produce new collections and designs which are updated and completed on a weekly basis, this allows the company to release new product easily. Zara shop managers report to designers in La Coruña in a daily basis on what has and has not sold. This report is used to determine if a product is to be kept or altered, and whether new lines are to be created. This happens in just a few days. The designers mostly rely on product sales, feedbacks and comments from customers.
Stores order their stocks from an offer they received twice a week from the commercial manager who then orders the stock to the logistic who handles the stock. Stores are ranked according to sales and forecast accuracy; this rank will determine the level of priority for store order. If a product is not selling, the company stops the manufacturing. By this means no stock will over pile. If a product is not selling a certain store the company stops manufacturing the product, this avoids over stock of non-selling products.
Each store has different customers or segments. Each country and regions have different values. These segments have different values in terms of their product choice. Shoppers addicted to the Zara brand know exactly when the deliveries will be arriving at their local shop and some even turn up before opening time on delivery days to be the first to pick up the latest lines. Because products are released limitedly, customers regularly visit a store to see if a new stock has arrived. Some product in a region may not be high selling unlike in some region. In Asian market some design are kept and maintain, while in most European country where fashion is at constant change design must be constantly new therefore releasing new product constantly. Customers in other region tend to embrace what is the latest design in Europe, being the fashion capital of the world, these proves that a product can be market in other region such as Asia.
“H&M Hennes & Mauritz AB (H&M, a Sweden-based Company active in the retail clothing industry. The Company, like Zara, is engaged in product design, manufacturing and retailing of clothing and as well as accessories. The company’s products range from various clothing, which including underwear and sportswear, for men, women, children and teenagers, and cosmetic products and accessories. The Company has 20 production offices around the world, buying goods from approximately 700 independent suppliers in and around Asia and in Europe. H&M operates 1,345 retail outlets in 24 countries with its largest markets in Germany, Sweden and the United Kingdom. During 2006, H&M opened 168 new stores, primarily in the United States, Spain, Germany, France and Canada, and launched of online sales outside the Nordic region. The Company’s head office is placed in Stockholm, Sweden.
Competition in the fashion industry has always been tough. H&M Hennes & Mauritz AB, has always been Zara competitor in this industry. H&M has been in business since 1947, while Zara started business in 1975. Experience can play a big role in business, but strategy has been the edge of Zara to gain competitive advantage in the business. Zara has gone against the conventional strategy where other company dare not pursue. The strategy of Zara is unconventional, other companies in fashion retail uses a different strategy. Zara’s strategy works in making the products of the company more anticipated by the customers. The strategy also gives the company the full responsibility in managing all the business processes; form designing, to production, to shipment, etc. This allows the company to focus on each process, making each process vital.
“Investment banks used to say that this model (vertical market strategy) did not work, but we have shown that it gives us more flexibility in production, sales and stock management,” said Inditex chief executive
Early this year, Zara’s market performance is inclining in a steady phase. This shows that Zara’s market performance against their competitor is doing well. The tables below shows both Zara and H&M marketing performance in the start of this year alone:
|Net Profit Margin||14.66%||12.32%||12.32%|
|Return on Average Assets||26.39%||18.46%||18.46%|
|Return on Average Equity||45.06%||31.57%||31.57%|
Table1: Key Stats & Ratios (ZARA)
|Net Profit Margin||13.72%||15.79%||16.11%|
|Return on Average Assets||25.05%||31.41%||31.20%|
|Return on Average Equity||31.74%||40.21%||38.91%|
Table2: Key Stats & Ratios (H&M)
The table shows that as of the start this year Zara has been very productive in terms of return of average assets and equity as well, against its competitor H&M. This shows that the company’s starting performance is at a good start. And it will likely continue to be productive in the long run.
Consumers respond differently in every country. Every customer in different country, have different values. Some customers value quality more than price, and vice versa. Because customers respond differently to a product, it is a vital key to under stand the different response and customer values in order to build a successful retail brand across borders. Zara, understands the different response of customer in every territory the company move into. Understanding the different response of customers allowed Zara to determine the demands of customers and to makes products based on such demands.
“The , a quarterly journal; published on 2002, compared British, French, and Germen shoppers. Comparing more than 1,500 consumers’ ratings of how well a store performed with the store choices these consumers actually made, the research concluded that what the shoppers say and what they do are not always the same. For example: shoppers don’t shop in a particular store but because their friends do, they tend to shop in the same store as well. This means that friends’ shopping choices turn out to be a powerful motivator.
Consumers fall into three (3) different segments. First are customers who care for service/quality, this type of segment care most about the variety and performance of products in stores and the service that the store provide. Next are the price/value customers who are concerned about spending their money wisely. And the affinity customers who primarily seek store that suit people like themselves. This shows the big influence of friends and the society that a customer belongs to, to the customer’s personal decision.
French customers give emphasis on service and quality; the German, price and value are more important; while the English, Affinity. These differences does not conclude that a company that give emphasis to price and value in their product and services will only succeed in German market, this suggest that the size of value-oriented market is different from one country to another. Understanding the reasons and factors what drives customer loyalty in each geographic market can have enormous financial benefits to the company. Zara understands the values of customers in different country, this give the company an advantage and knowledge on what products and services that a segment demands in that country.
|What do European consumers value?|
|Percent of respondents|
|Service/Quality customers||Price/value customers||Affinity customers|
|Table 3: Percentage of European customer value.|
|source: 1,500 customers’ ratings of 40 retail clothing brand in France, Germany, and United Kingdom|
Different values of customers in different country suggest that the strategy used by the company in a certain country, may not be successful to another country. That is why it is very important to distinguish the different values of each market, in order to develop a strategy that will be suitable to the market trends and demands. Having a competitive marketing strategy gives a company a clear focus of exactly what the company must execute in order to gain competitive advantage and succeed.
Competition is a natural aspect of business. It is staying on top of the consumer preference. Companies must continuously be productive, providing customers with best-quality product at competitive price while making profit to be successful competitors in long run.