Zara, a flagship venture of Spain-based Inditex, started its US operations in 1988. Zara USA Inc. is based out of New York and retails men's and women's clothing. The company has now grown to own 49 stores spread across the east and west coast of USA. The once labor-intensive US apparel industry (employing over 1 million workers in the 1980s) has now adopted delocalization and has outsourced production to low-wage countries. For long, the industry relied on a model based on 'mass fashion' products, economies of large-scale and innovations in IT as sources of competitiveness.
In doing so, it ignored the importance of niche product innovation, small-scale supply chains and flexible retailing. Even in NYC, where small firms and fashion markets are important, the large-scale mass-fashion model is pre-dominant & has inhibited contractors from developing highly productive and entrepreneurial supply networks. The lack of emphasis on vertical integration in the US apparel industry even by major brands like the GAP has proved costly. Where GAP faltered, Zara scored.
Its counter intuitive business strategies like high vertical integration, just-in-time manufacturing, limited production runs, rarely running sales, zero advertising and minimal outsourcing have beaten the pants-off its competitors. Tight control on production has enabled Zara to turn its inventories 5.3 times per year, compared to 4.9 times for traditional U.S. apparel retailers. According to a research, while Zara stores take markdowns averaging 15% on about 15% of their inventory, U.S. department stores take an average 40% markdown on about 60% to 70% of their merchandise.
In order to trounce its rivals such as H&M and drive up its sales in America, Zara now plans to start online order processing from the US in September 2011. Launching web stores is a great strategy for Zara, for two reasons:
Firstly, it is more cost-effective to start an online store than invest in real estate in 50 more malls in the US and Secondly, Zara has a strong brand presence in the 25-35 year age-group. This is a more tech-savvy, e-commerce friendly demographic and can help push Zara's US operations
However, as Zara is still relatively new in the US market and is still trying to gain a foothold. There are many challenges that await it here:
As Zara expands in the US, replenishing stores twice a week will be increasingly complex and expensive. Costs are already starting to climb and growth in same-store sales have slowed down.
For now, the company compensates some of the cost by charging more for goods sold in the US. For instance, Zara clothes cost up to 40% more in America than they do in Spain. This trend if continued for long could lead to an inconsistent brand image; also as long as Zara's operations were limited to Europe it could take advantage of its 'fast-fashion' approach. However, the European market is relatively homogeneous and styles that work well in Barcelona, London and Paris are likely to sell equally well in Milan, Berlin and Lisbon.
This may not hold true in the US, The increasing distances between the distribution centers in Europe and stores in the US could take away Zara's 'speed-to-market' advantage as well . The question is whether Zara will continue with its old model to deal with these changes or adopt a new, cutting-edge model that is capable of maintaining the company's competitive advantages and its industry lead?
[...] ➢ China and India the emerging fast fashion and luxury apparel marketspace with special emphasis on procurement suppliers and cost synergies for European manufacturers such as Zara. ➢ Changing FDI regulations in India: An opportunity for Zara in world's second fastest emerging economy. ➢ References ➢ Inditex Annual Report Summary 2011 http://www.inditex.com/en/shareholders_and_investors/corporate_governan ce/general_meeting/gm_2011 ➢ H&M Annual Report 2011 http://about.hm.com/content/dam/hm/about/documents/en/cision/1573157_en .pdf ➢ Gap Inc Annual Report 2011 http://investors.gapinc.com/phoenix.zhtml?c=111302&p=irol- reportsAnnual ➢ N. Craig Smith, “Corporate Social Responsibility: Whether or How?” California Management Review, 45/4 (Summer 2003): 52-76. [...]
[...] September 2011 Zara launched e-commerce platform in United States. August 2011 The parent corporation of Zara launched eco-efficient store of its non-core brand “Bershka” in Germany. July 2011 Inditex acquired building hosting Zara store in Italy worth average selling space of 4,500 square meters. April 2011 Launched standalone Zara store in Sydney (Australia). March 2011 Inditex acquired retail space worth 3,600 square meters in Manhattan (United States). January 2011 Pablo Isla appointed as Chairman of Inditex Source: Corporate Press Releases In past 12-18 months, the company has aggressively expanded retail outlet portfolio in non European economies i.e. [...]
[...] Gap, H&M etc. ➢ Weaknesses: Europe (including Spain) is the biggest marketspace for Ikea Group constituting 80% of group revenues. On the other hand, economic downturn centric North America is the second biggest marketspace contributing additional 18% of total revenues. Higher dependency on home marketspace with European crises hampering large economies such as UK, Italy, Portugal, Spain and Ireland might impact margins and sustainability. Majority of retailers worldwide are aggressively spending on social media and mobile based advertising campaigns to improve brand equity and customer segmentation in past 18- 24 months. [...]
[...] Europe and Spain. Higher operating and net margins Negligible promotional and than closest competitors advertising expenditure might hamper competitive advantage in social media and mobile centric global economy Opportunities Threats High e-commerce based retail market Fluctuation in raw material pricing growth prospects Fastest growing regions such as India, China, Eastern Europe etc are highly unregulated apparel markets with high penetration of counterfeits ➢ Strengths: Zara is vertically integrated fast fashion retail brand with Parent Corporation managing 20 textile manufacturing facilities worldwide. [...]
[...] ➢ Breach of partnership and alliances will hamper brand positioning. ➢ Changing consumer perception and purchasing behavior: Zara launches 11,000 designs and product portfolio on annual basis. Higher fast moving fashion with lower return on investment on majority of new product developments attributed to changing consumer behavior will hamper margins. ➢ Product recall will hamper brand positioning: Higher consumer lawsuits will hamper brand image and value. Zara (Inditex S.A.) Risk Map (2012) Disclaimer: The risk map is prepared on our assumptions and is not taken from any public announcement or article. [...]
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