GLOBAL CORPORATE STUDY

Case study - ZARA: Staying fast and fresh

Abstract

Zara is a famous Spanish clothing company that uses a brilliant marketing strategy to achieve its business goals. As
a result, Zara has become Europe’s best-known fashion brand. Amancio Ortea Gaona started the company in 1963.
Half a century later, it has become one of the world’s fastest growing manufactures in fashion clothing. Currently,
there are over 2000 stores in 77 countries including China and India, and the numbers are likely to double in the near
future.
In this document we will try to understand as clearly as possible the company’s prevalence in the competitive
landscape of clothing industry, its continuous business cycle and its radical movement to go green and sustain its
organic growth.

Fashion clothing industry competitiveness

Zara’s fundamental resources and capacities have given it the power to thrive over its competitors and become the
prominent global clothing retailer. Among these resources and capacities, Zara’s most highly regarded competitive
advantages include its “fast fashion” business model, authentic management style and exclusive client-oriented
stores.
To be more specific, the fact that new products arrive twice a week in Zara’s stores offers their customers joy in
shopping new and different products each time they shop and at the same time alerts them to visit Zara’s stores
more often than its competitors’. A business model like this increases customer satisfaction and company profits at
the same time (Hansen,2012).
Moreover, unlike most of their competitors, Zara’s stores are created in attractive way towards the customers and are
re-designed every three to four weeks so that to lay hold of the customers’ attention and interest.
As of Zara’s network, directors handle each store as its own business so that they can deal with individual
requirements about products. “For those who want to adapt to our business model, they will have to…change the
method of applying human resources, which is most costly. This is where Inditex’s competitive advantage lies” (Zara:
Fast Fashion Video). In addition to that, highly developed systems spot with no difficulty the customers’ preferences,
new trends and fashion passions.
By producing small quantities of clothing and having restricted amounts of merchandise in stores, Zara has been able
to artificially boost the demand for its products. Unlike its competitors, where seasonal clothing may stay on the
shelves for weeks or months, a specific line in a Zara store can disappear within days” (Global Logistics & Supply
Chain Strategies). This creates a sense of “scarcity and opportunity” and promotes critical cash flow (Korn, 2013).
Since there are small quantities of merchandise, the possibility of failures is very narrow. Limited quantities of poor
performance items are sold quickly and easily during sales (Forbes, 2012).
Another strong asset of Zara is the way they make their presence known in the market. In 2003, Zara only spent 0.3
percent of its profits on advertising. They did not focus on creating an image for women, men or children through
media advertising. On the contrary, they chose the word-of-mouth advertising to promote their products. This strategy
made Zara a sophisticated name instead of becoming another irritating retail brand name that consumers see daily.
“The subsequent word-of-mouth, every time you open a store, the trajectory of your growth is improved and the
awareness of your product increases” explained Diego Copado, a specialist at Zara’s Corporate Communications
(Zara: Fast Fashion Video). Zara chooses not to advertise, focusing on brand loyalty and customer satisfaction from
their existing shoppers to encourage new customers. Deciding not to advertise differentiates the brand and
decreases overall costs.
Furthermore, Zara has expanded so largely and so successfully that it has become the world’s largest clothing
retailer in the world, defeating its most tenacious competitor, Gap. It was the first time that a Spanish brand outpaced
Gap (much of this success can be attributed to the buying power of the Euro). In the preceding three years Zara got
the upper hand over H&M becoming the most successful European brand. In fact, in 2007, Inditex’s profits came up
to 25 percent to 1.25 billion Euros. Two thirds of Inditex’s revenue was due to Zara’s success. 2007 revenue for
Inditex came up to 9.43 billion Euros with 6.26 billion Euros from sales from Zara (Guardian, 2013).

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Zara’s unique strategy has set it apart from its competitors and has enabled it to be the number one clothing retailer.
Contrary to the climate of opinion, Zara’s business model is not merely based on financial results but on customer
demand. Borja de la Clerva, Finance and Management Control expert stated “We think the company has never been
run accordingly to financial parameters nor has it been governed by financiers, and therefore, it should never be
governed by financial investors such as stock market investors” (Zara: Fast Fashion Video). Focusing on its
customers rather than only on its investors has opened the doors to Zara to remain a leader in the retail market.
A SWOT analysis of Zara shows that all the success gained by the company over its competitors and the
acquisition of a leading market position has been made possible by rationale decision making. Current weaknesses
may be lack of communication of products i.e. less stress on promotional activities which is necessary to attract more
customers and Euro-centric model approach. Opportunities are welcoming Zara to enter new markets geographically
and dividing product line into new more segments offering specialized and more customer oriented products. Another
prevailing opportunity is to get advantage of low cost labor. US have a potential for Zara to grow and expand its
business as it has its customers and communication in US. Threats identified include, potential oversaturation of
competitors in current markets, exchange rates may fluctuate and cause a major setback, and any natural disaster
may physically affect the only manufacturing plant (Porter, 1990).

Zara

Parent Company Inditex Group

Category Apparel and Accessories

Sector Lifestyle and Retail

Tagline/ Slogan Zara

USP Perfect combination of high end, chic clothing at affordable prices

STP

Segment Clothes for people with a combination attitude of work and play

People with Medium to high purchasing power who love to look glamorous at all
Target Group times

Fashionable look alike merchandise which is still extremely innovative, an irony of

Positioning sorts

SWOT Analysis

Strength 1. They have about 74 stores all over the world

2. Part of one of the biggest Spanish retailers in the world
3. Have a well established brand name worldwide
4. Their supply chain management is extremely low cost as well as most of their
processes like operations, manufacturing are all vertically integrated

5. Unlike other retailers they handle all their processes as well as follow Just in Time
system (Value Chain Management)

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 6.Clothes are produced at a low cost with the most innovative and fashionable
designs

7. Extremely trendy, well designed and fast delivery of new products

1.They use an unusual strategy of no advertisements

2.Target segment is not extremely consumer loyal and might go for cheaper and
Weakness newer collections

1.There are more global markets which they can explore

2.They can also enter into segments and expand those areas where they haven’t

Opportunity 3.Online marketing and E Retail is gaining importance

1.The high end fashion merchandisers can be a major threat to them

2.Economic downturn can also be a threat to their target segment
Threats 3.There is a large amount of consumer switching taking place

Competition

1.Gap
2.Mango
Competitors 3.H&M

(mbaskool, 2015)
In a few words, we can conclude from the above that differentiation in management was the key point in Zara’s
company success. By the time Zara entered the clothing market, it had incredibly low lead times which allowed them
to follow trends quickly and imitate runaway fashion, to adapt quickly to customer tastes, to create scarcity on
purpose and to reduce sales up to 15% as opposed to the industry average 30% - 40%.

International expansion strategies

Zara has become the leader in the clothing industry and what makes it so distinctive is its unique supply chain
strategies. Zara uses the following principles to increase their net income and keep its brand name to the top (Daft,
2010).
 Quick response to demand –They make up to 1000 designs every month based on store sales and current
trends. They observe customer spending in the store to evaluate and understand what types of designs are
being consumed and then accordingly move on to the next designs.
 Small Batch Productions – Zara has a fast turnover, they produce small number of quantities for every product.
This gives them the opportunity to quickly understand what designs are successful. It is also a great way to
explore new designs and understand its acceptance rate in the market. This also heavily minimizes the risk of
producing large quantities of something that the customer does not want.
 Central Distribution Center – Zara has very strong IT systems that back its distribution. All the clothes are
shipped back to Spain, the central location. From here, it is distributed to different countries and stores based on
individual requirements and needs of the particular locality.
Zara keeps a significant amount of its production in-house and makes sure that its own factories reserve 85
percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in
the amount, frequency, and variety of new products to be launched. The company often relies heavily on
sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain.
The wages of these European workers are higher than those of their developing-world counterparts, but the
turnaround time is miraculous.

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Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to
60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and
manufactured smack in the middle of the season.
If a certain style or design suddenly become the rage, Zara reacts quickly, designs new styles, and gets them
into stores while the trend is still peaking. Store managers communicate customer feedback on what shoppers
like, what they dislike, and what they’re looking for. That data is instantly sent to Zara’s designers who begin
sketching on the spot.
Zara also has extra capacity on hand to respond to demand as it develops and changes. For example, it
operates typically 4.5 days per week around the clock on full capacity, leaving some flexibility for extra shifts and
temporary labor to be added when needed.
This then translates to frequent shipments and higher numbers of customer visits to the stores, creating an
environment of shortage and opportunity (Lukac, 2006).

 This strategy allows Zara to sell more items at full price because of the sense of scarcity and exclusiveness
the company gives off. Zara’s total cost is minimized because merchandise that is marked down is reduced
dramatically as compared to competitors.
 Zara gets 85 percent of the full price on its clothes, while the industry average is 60 to70 percent. Unsold
items account for less than 10 percent of its stock, compared with an industry average of 17 to 20 percent.
 Zara is fully aware of the saying, “inventory = death”. It avoids piling up inventory in any part of its supply
chain from raw materials to finished products (Theophile de Penanster, 2012).
 Inventory optimization models are put in place to help the company to determine the quantity that should
be delivered to every single one of its retail stores via shipments that go out twice every week. The stock
delivered is strictly limited, ensuring that each store only receives just want they need. This goes towards
the brand image of being exclusive while avoiding the buildup of unpopular stock.
 This quick in-season turnaround, from production facilities located close to Zara’s distribution headquarters
in Spain, allows Zara to ship more often and in smaller batches. If the design Zara hastily creates in an
attempt to chase the latest trend does not in fact sell well, little harm is done.
 “The secret to their success has been centralization,” says Felipe Caro, an associate professor at the
University of California at Los Angeles’s Anderson School of Management and a business adviser to the
company. “They can make decisions in a very coordinated manner.”
 Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.

 Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times
and shipments arrive in stores at specific times. Garments are already labeled and priced upon destination
(Theophile de Penanster, 2012).
 As a result of this clearly defined rhythm, every staff involved (from design to procurement, production,
distribution, and retail) knows the timeline and how their activities pan out with respect to other functions.
That certainly also extends to Zara customers, who know when to visit stores for fresh new garments.
 Zara’s strong distribution network enables the company to deliver goods to its European stores within 24
hours, and to its American and Asian outlets in less than 40 hours.
 According to Nelson Fraiman, a Columbia Business School professor who wrote a 2010 case study about
Zara, the retail giant can get a product out from concept to store in just 15 days, while the industry standard
is 6 months.
At Zara, change doesn’t disrupt the system, it is part of the system.
This brand’s success story shows the strength of its operations. Its cross-functional operations strategy,
coupled with its vertically integrated supply chain, enables mass production under push control, leading to
well-managed inventories, lower markdowns, higher profitability, and value creation for shareholders in the
short and long term (Inditex, 2014).

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 To sum up, Zara’s dynamism to change the typical clothing commerce, its internal structure, logistics,
generation of value for customers and expansion strategy led it to be acknowledged not only by its
economic success but as an example in leadership in the market and as a promoter of innovation as well.

Corporate social responsibility, environmental dimensions and strategic leadership

According to Zara’s official page, the company’s environmental policies are the following:

AT THE STORE

 We save energy.

 The eco-friendly store.

 We produce less waste, and recycle.

 Our commitment extends to all our staff.

 An environmentally aware team.

We save energy. The eco-friendly store.

We are implementing an eco-friendly management model in our stores in order to reduce energy consumption by
20%, introducing sustainability and efficiency criteria. This management model sets out measures to be applied to all
processes, including the design of the store itself, the lighting, heating and cooling systems and the possibility of
recycling furniture and decoration.
We produce less waste and recycle.
Recycling hangers and alarms, which are picked up from our stores and processed into other plastic elements, is an
example of our waste management policy. Millions of hangers and alarms are processed each year and both the
cardboard and plastic used for packaging are also recycled.
Our commitment extends to all our staff. Increased awareness among our team members.
We hold In-company awareness campaigns and specific multimedia-based training programs to educate our staff in
sustainable practices, such as limiting energy consumption, using sustainable transport and modifying behavior
patterns.

WITH THE PRODUCT

 We use ecological fabrics.

 Organic cotton.
We use ecological fabrics. Organic cotton.
Zara supports organic farming and makes some of its garments out of organic cotton (100% cotton, completely free
of pesticides, chemicals and bleach). They have specific labels and are easy to spot in our stores.

IN TRANSPORT
We use biodiesel fuel.
Zara's fleet of lorries, which transport more than 200 million items of clothing a year, use 5% biodiesel fuel. This
allows us to reduce our CO2 emissions by 500 tons.
Animal welfare policy
All Zara products, including materials of animal origin, comply with the applicable Inditex animal welfare policy. This
policy requires the products to come from animals treated in an ethical and responsible manner at all times. Under no
circumstances may animal products deriving from animals slaughtered exclusively for the sale of their skins, shells,
horns, bones, feathers, down or any other material be used.
Zara, being a member of the Fur Free Allience under the Inditex group, does not sell products containing fur, thus
following the principles of the Fur Free Program.

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No cosmetics sold by Zara, nor their ingredients, have been tested on animals (Zara’s official internet page, 2015).
Analyzing the INDITEX gross income from 2006 to 2010, we can see that it has continuously grown from the
previous years. The net profit grew from 1,002 to 1,732 million euros. The EBITDA also grew from 1,790 to 2,966
million euros. The Sales had the highest growth, increasing from 8,196 to 12,527 million euros. The increasing trend
in all aspects of the company’s economics shows that the incidents mentioned about environment or bad working
conditions had no influence on their reputation or sales of the products (Berfield, 2013).
Zara stated that they use ecological materials. It was suggested that clothes would have to be made without mixing
different materials. When a cloth is made with only one type of material it can then be up-cycle into different things
and be re-used. Zara already uses Ecological fabrics, Organic cotton, PVC - free footwear. Based on the C2C
principles the new collection uses eco-friendly materials which can be recycled either in a biological or a technical
circuit. Having the control of the material supply, Zara is able to produce fabrics for the new collection in their own
factories (Fox, 2011).
Although Zara already uses organic cotton in their products, the intension of the new collection is to increase the use
of organic cotton and other environmental friendly materials (Greenpeace, 2014).
Some of their future ideas about their organic growth are the following. Walking in to Zara in the future will give you a
whole new shopping experience. The stores will be a lot more spacious. Using natural materials and colors in the
store’s design and furniture, choosing for example wood, leather and non-toxic paint, will create a more relaxed
atmosphere. Transparency is the key word in the new concept. This means that the aim is to create a glass wall
between the customers and the production of the clothes. There are three things the team is focusing on: technology,
education and a visible workroom. In some places in the store touch screens will be found. These screens would be
used as an interaction between Zara and its customers. They contain all the information regarding the garments.
For example, if the customer finds a t-shirt they like, they can look it up on the screen and discover where the cotton
comes from, how it was spun and woven, what materials were used etc. Customers could also use it to look up
information about how Zara, amongst others, saves resources, recycles and takes care of good labor conditions.
When the screens are not used, they broadcast a conceptual film about the way clothes are made (Fan, 2009).
All this is to raise people’s interest and awareness about everything that is behind the clothes and thereby make
them have more appreciation. When customers have an interest in the production of clothes, they should be able to
ask questions about it. And who is better to answer them than the staff in the store? In the Shop of the Future, Zara’s
staff will have a good knowledge about materials, production and the Zara way of working. This is interesting for Zara
in more than one way: it would improve customer relationships and it would be a very clever marketing tool.
The third tool to make Zara into a more green company is an up-cycling visible workroom, in the back of the store.
This is where old clothes are given new life. The old clothes come from customers who bring the Zara items that they
no longer wear to the store, in return for a small discount. This is truly a win-win situation, as it is profitable for the
company, the costumers and the environment. Having a visible workroom will, again, raise consumer awareness. It is
the most direct way of seeing how much effort goes into every piece of clothing and subconsciously urge people to
treat clothing with respect (Kira Van den Ende, 2013).
Personal reflections on learning
In order for a clothing company to stand above the rest of its competition, it’s important that they develop a strong
business model. Without a strong business model, companies fail to gain market share and fall behind. A business
model that stands out compared to the rest of the competition will also gain more market share as they are operating
differently than the rest of the companies (Hansen, 2012).
Developing a company’s strengths through organic growth can make it a stronger competitor in its industry.
Leadership needs to sustain real growth, not just increase margins by cutting costs. In order for this to be
accomplished it is essential for a company to develop a vision in the vicious world of global fashion and determine if
its team has the skills to support this vision.
Moreover, the company should have the ability to take initiative and to be inspirational and enthusiastic. They should
also build strong relationships based on trust and respect. Their integrity will give credit to others, admit mistakes,
provide good quality constructive feedback, keep commitments, and share ideas and information (Korn, 2013).
A company has to decide an implementable combination for its future. It is recommended that, not to implement all
the decisions in a single step, rather act and wait for response and then decide for further actions to be taken.

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Detailed assessment of scenarios is to be done before finalizing any decision because fashion market changes
frequently that rough estimates may lead to undesired results.

References

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th
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