Zara Case Studies
The analysis of retailing environment in China
Following the low profit times, every retailer keeps trying different market strategies to maintain or extend their business. Zara, one of the clothing companies in Spain is known as a very successful international retailer in these years. Zara began internationalizing in 1989 and gains unprecedented success all over the world via its international expansion.
It’s a serious task for international retailers to find a potential market for them to expend their business. Because developed countries’ markets are getting saturated, more and more retailers are targeting at those emerging markets. According to Jones (2002), emerging markets are considerable, expandable and unsaturated markets. As Garten (1996) defines, emerging markets are so-called Chinese Economic Area (China, Hong Kong, Taiwan, South Korea); Indonesia and India; South Africa; Poland and Turkey and, in Latin America, Mexico, Argentina and Brazil. China and Russia are two of the biggest countries in the world. The following charts describe two nation’s GDP, population and the ratio of total consumer expenditure to clothing expenditure.
According to above charts, China has a huge amount of population and its GDP is growing year after year whilst Russia is developing slowly. These two countries are both attractive to international retailers. However, considering the potential, China might be the biggest emerging market in the world. This paper is going to analyze Zara’s character, explore China’s market and presume that how Zara entry into China.
The analysis of Zara
Zara, a brand of Inditex, was established in 1975 in Spain. It provides consumers with affordable and fashionable clothing on a weekly basis and sale through charming, spacious stores (Euromonitor, 2003). Furthermore, it offers different ranges for different market segments, which include men’s, women’s and kid’s wear. Zara’s marketing strategies could be analyzed by 4P and SWOT theory.
Zara offers various styles which contain formal, casual, occasional, lingerie, underwear and swimwear to their customer. Zara would plan a core collection, composing nearly 50% of its forecast requirements. The rest 50% would be sourced opportunistically according to demand trends during the season, and could be delivered to any store in 2 weeks (Arnold, 2002). This fast fashion strategy could maintain fashion freshness and reduce stock expense. About 50% of the clothes are made by Inditex-owned plants, the rest are produced by outside suppliers. 80% of all apparel is manufactured in Europe, mainly in Spain and Portugal(Euromonitor, 2003).
Zara’s products are not only fashionable but also affordable. Due to the successful operation plan, they do the vertical integration from fabric purchase to distribution. Therefore, they products are known as mid-low price with mid-high quality. However, as an international retailer, Zara’s price is different in each country because the effects of macro and microenvironment such as exchange rates, tax and transport. Another strategy Zara has used is refund guarantee. Customer could refund purchases in any store but within the same country, and credit will be given for returned items according to the prices marked in the original tags, disregarding any later sales promotions (Arnold, 2002).
According to Euromonitor (2003), Zara’s main distribution centre is based near Arteixo in Spain from where merchandise is shipped to stores several times a week. Another Zara’s strategy is that all its stores are located in prominent city center sites. Window display is changed per month and decoration is changed every two years. AS Arnold (2002) points out, clear lighting, white walls and ceiling, and few photographs in every shop, are aimed at creating an elegant atmosphere while spotlighting the clothes.
In terms of promotion, Zara is caviar to the general. Comparing with other rivals, Zara only advertises twice a year and no advertising will be done when they open new store. However, due to its clear-cut brand image and prominent location, Zara can always catch consumer’s eye.
Sourcing from: Euromonitor, 2003.
The analysis of retailing environment in China
In order to minimize the risk and uncertainly, it is essential to analyze carefully the marketing environment. China is a huge, undeveloped and full of potential market. The following sector is going to represent the analysis of China’s macro environment by PEST and national advantage for retailers by Porter’s Diamond model.
Political factor is the most essential issue for foreign retailers in China because of the Communism and bureaucracy. According to Foster (2005), it is tough to get through the bureaucracy that exists in China and gain access to sites and opportunities to expand. It is not necessary to have good connection with the powerful people in the government. However, as Kwan, Yeung and Au (2003) point out that the right connection can significantly help foreign retailers to reduce the time required in negotiations, and enhance the success of business transactions when dealing with the bureaucrat. Kwan, Yeung and Au (2003) also indicate that the legal system is still not complete and the terms of laws and regulations are often flexible. Therefore, foreign retailers should have the knowledge of the connection with government in order to expend their business smoothly.
As mention in introduction, China’s economics are getting higher year by year. In substance, there are numerous economic indicators which are considerable for retailers such as GDP growth rate, exchange rate, inflation rates and employment rate. A stable growing GDP is attractive to retailers because a rapid growth will result in inflation while a delaying or dead growth will result in decreased consumer spending (Kwan, Yeung and Au, 2003). According to Euromonitor (2003), GDP growth rate is increasing steadily and the inflation growth rate is very low since 1999. Moreover, China government adopts exchange control to avoid the sharp appreciation of RMB. Following with the influx of foreign investments, there are more and more job opportunities for China in the urban areas. However, with the increase of rural- urban migration, the urban unemployment rate started to rise since 1985. Furthermore, it is expected that even with increase in jobs in the urban after China join the WTO in 2001, the urban unemployment rate will continue to go up due to the stream of rural- urban migration (Kwan, Yeung and Au, 2003).
Social factor involves demographics and sociocultural. China has more than 1.3 billion people that are about one- fifth of world’s population. The huge amount of population stands for a huge market. Furthermore, most of China’s cities are undeveloped; this situation pulls lots of foreign investment into China. In the last 20 years, it is a trend that more and more rural residents migrate to urban areas. As a result of that, the abundant and cheap labour power generates a tendency of China fever.
According to Kwan, Yeung and Au (2003), China’s consumers are not fashion innovators but they tend to care about the self-image and reputation. As McWilliam and Chernatony (1989) indicate, people would like to purchase clothes that can help them to represent their desired images. China’s consumers are also influenced in their purchasing by famous people. AS a result, endorsement becomes a very popular marketing strategy in China.
In recent years, China government injects numbers of capital in the rebuilding and upgrading of the national infrastructure and inventing new technology (Beijing Consultech’s report, 1999). They try to construct a high tech environment to match with their growing economics. However, with the low credit card popularization and traditional modes of expenditure, the new fashion expenditures such as on-line and home shopping are still in their infancy (Euromonitor, 2004).
National Advantage for Retailers
According to Porter (2004), factor conditions are factors of production such as labour, land, natural resource, capital and infrastructure. Moreover, a disadvantage might be an advantage. Local disadvantages in factors of production force to innovate to over come their problems. This innovation often results in a national comparative advantage.
The big number of population in China provides retailers with a huge and cheap labour power. Furthermore, according to Day (1996), many foreign investors had experienced difficulties in sourcing products in China such as basic raw materials and components due to the poor and unsteady quality, late deliveries and shortage of quantity with local suppliers in the past. However, following with foreign investment and government’s capital, suppliers are getting more competitive. China becomes the most popular outsourcing provider.
A sophisticated domestic market is an important element to generate competitiveness. When the local firms face a sophisticated market, they need to keep improving their product because the saturated market demands high quality products.
In the last 20 years, China’s consumer were lacking in the knowledge of products because the low education and the sequel of the Cultural Revolution. Nevertheless, China’s economics is growing and consumers are also getting more sophisticated and demanding (Kwan, Yeung and Au, 2003). As a result, the high demanding market pushes retailers to innovate. Furthermore, because of the cheap labour, more and more outsourcing firms come to China to cut down their cost. Come along with the high demand, China rises their technique level and provides more skillful labour to attractive foreign firms.
Related and supporting industries
Porter (2004) argues that a set of strong related and supporting industries is important to the competitiveness of firms. When local supporting industries are competitive, firms will gain more cost effective and innovative inputs.
Compared with other countries, the fabric industry is very competitive in price because China is the largest cotton producing cotton. In terms of the apparel retailers, they could gain advantage form their competitive suppliers and become more competitive.
Firm strategy, Structure, and Rivalry
More local rivals is an advantage since competitive rivals spurs firms to innovate and improve. Local competitors forces firms to surpass basic advantage which the home country may enjoy (Quick MBA, 2005).
In the case of retailers in China, the competition is very intense. In the past, price is the main point. However, since more and more firms join the war, price becomes less important. Retails are forced to innovate and improve such as new products or better customer service to enhance their capacity.
As Quick MBA indicates (2005), the role of government in Porter’s model is to encourage firms to raise their performance, stir early demand for advanced products and stimulate local competition by limiting direct cooperation and enforcing antitrust regulations. In short, government should play a supervisal and managing role.
China government adopts a serious policy to enlarge the advantage of retailing environment. According to Euromonitor (2004), China government will issue series of policies to enhance the scale of using foreign capital in business field and allow foreign retailing corporations to enlarge their scope of purchasing activities in China.
A presumption of Zara entry into China market
Market entry strategies
As Bennett (1998) mentions when a company enters a foreign market, it needs to consider carefully all the available options, the costs, the distance, firm experience and size, possible loss of control and the risks involved. Furthermore, the market entry strategies chosen have to relate to the company’s overall strategies. The methods for entering oversea markets are:
l Exporting- is the marketing and direct sale of domestically produced goods in another country.
l Join venture- is a collaborative arrangement between unrelated parties which exchange or combine various resources while remaining separate and independent legal entities.
l Licensing/ Franchsing- consents a company in the target market to use the property of the licensor such like trademarks and patents.
l Direct investment- is the direct ownership of facilities in the target market.
In Zara’s past expansion, they prefer owed- stores, franchising and join venture. According to Foster (2005), Since December 2004, three years after China joined the WTO, fashion retailers can pretty much do what and how they want. However, as above point out, China’s political environment is still a big issue to foreign retailers. Zara might need to face strict restrictions on the location and number of outlets they could open. Therefore, having a local partner will be handy for Zara to deal with the bureaucracy in China. Both franchising and joint venture are co-operative entry mode. However, considering macro and micro environment, joint venture will be the most beneficial entry mode for Zara.
Advantages of joint venture for Zara:
l Higher return than with franchising
l Possibly better relationship with China’s government because of having local partners
l Share resources such as distribution system and suppliers.
l Reduce personnel expense
Fast fashion is the core strategy of Zara. It could be glorified in China with huge labour and sufficient fabric suppliers and garment manufactories. China has plentiful labour in competitive value which could cut down Zara’s production cost. Sufficient suppliers could provide Zara with bargain and various fabrics while manufactories could assure of lead-time. Owing to different figure and weather, Zara need to modify the pattern for Asian markets and innovate lightweight and washable clothes for Asian weather.
Zara’s products are priced differently in each country which is based on the transportation cost, tax and tariff. If Zara does outsourcing with China, it could cut down their cost and become more competitive. In addition, as Euromonitor points out, the China government now allows the foreign capital to hold majority shares in joint venture and allows apparel retailers to distribute all products they manufactured in China. This movement fully opens the door for apparel retailers since the implementation of open door policy in 1978.
According to Foster (2005), the cosmopolitan city Shanghai has been the first stop for many fashion brands looking at the market. However, Beijing is the political epicenter of China as well as the location of the banking and telecoms industries. In addition, Beijing has 11.4 million people with average disposable annual income per head of ￡810, while Shanghai’s 13.3m population has an average income of ￡670. As a consequence, Shanghai and Beijing will be the first two stops for Zara.
As Kindle (1985) says, the buying behaviour of China’s consumer are much more likely to be affected by opinion leaders than western consumers. Thus, it is important to adopt the correct media to express the brand image. Zara might invite celebrities to endorse their products instead of advertising twice a year.
The internationalisation process of a firm is very complicated and needs to be considered carefully. As mentioned above, all aspect of marketing environments will have an impact on the firm’s marketing institutions, operating conditions, entry strategies and marketing mix-4P.
Zara, a fast-fashion apparel retailer, has been successful for last few years. However, as other retailers, they are facing a serious problem which the markets of developed countries are getting saturated. Thus, they do have to find out potential markets to maintain their business.
China, one of the biggest countries in the world, is getting rid of the sequel of the Great Cultural Revolution. Come along with the open door policy in 1978, the economics are growing year by year. Along with the growth of economics, the macro and micro environment have also changed. After joining the WTO, China is regarded as the biggest emerging market on the earth.
This paper is a presumption of Zara entry into China market. After analyzing Zara and China with different theories, it is recommended that joint venture is the most suitable entry mode for Zara into China. If Zara can conduct the correct marketing strategy and adopt competitive advantages in China, it could not only make impressive sales but also build a truly global Zara kingdom.
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