Zara

Zara is a Spanish retail store that specializes in bringing new fashion items to market in less than three weeks.

Firm Information

Amancia Ortega founded Zara, a flagship clothing company of Inditex Group, in 1975.  Zara is headquartered in A Coruña, Spain and is the world’s second largest clothing retailer.  The first Zara featured low priced imitations of popular fashions which proved very successful and gave birth to the Zara of today.  

Ortega started the business forty-four years ago with the help of his wife by making lingerie and gowns in his living room.  Since then, it has grown to a company with ten billion dollars in sales.  There are now 3,000 Zara retail stores in more sixty-five Countries.  In 2006, it grew 21% in sales, raising it from the third largest, to the second largest clothing retailer.  From the beginning of the company’s history, Zara’s success has been due mainly to speed and location. 

Competitive Advantage and Strengths

Normally the retail industry takes about three to five months to come up with a new seasonal collection.  Experts need to guess on the fashion trends people want, and failure means markdowns, write offs, and most importantly, low revenues.  Zara takes a counter-intuitive approach made possible by their speed.  Instead of guessing on the fashion they ask and monitor what the customer wants and is able to distribute the product within 2 weeks to the consumers.  It follows trends that are successful with other retailers and delivers an imitation.  So how does Zara know what the customers want? 

Every Zara employee has a PDA which is used to gather customer opinions about its products and what they want to see in the store.  This kind of data is extensively gathered on a daily basis and sent directly to headquarters.  Then recent graduates from fashion schools are employed to design the clothes that the consumers suggest.  These designs are manufactured and shipped out to the retail stores in as little as ten days.  All of this takes place in Spain, with no outsourced manufacturing.  By avoiding outsourcing, the manufacturing time is reduced by a significant amount. 

A Point of Sales system is also used by every Zara store.  The point of sales system allows the cash register to monitor what is selling and what is not, allowing for more popular items to appear in the store during the season in which its sales are high.  This system means that only those products which are in the highest demand will be available in stores, therefore there is more revenue.  These two methods cause most of the apparel to sell out within a week by keeping inventory low. 
Another advantage that Zara exhibits is the vertical integration within the company.  Instead of having suppliers around the world, they do almost everything in Spain, allowing for delivery to go out to stores twice a week.  They design, manufacture, produce and ship right from Spain, saving time.  In fact, Gap the leading clothing retailer in the world is twelve times slower when it comes to making a new item of clothing compared to Zara.  Even though it costs Zara about 15% more to be quick, the write offs are in single digits which is much less than competitors.  Zara uses its own fabric and its own dyes allowing them to respond to color demands as well.  They even save money on advertising since they spend less than a third of a percent of their revenue on advertising and focus on placing their stores in high traffic and premier locations.  Clothes are tagged at the production site, which allows the employees in stores to be 5% more efficient in other areas of the store. 

Zara also takes advantage of the rarity in their clothing, which means more revenue because differentiability means more bargaining power for Zara.  They have very low inventory for each item which means it lasts for a very limited amount of time at the store.  It is said, that one never sees the same product twice at Zara.  This means more revenue because write offs and mark downs are non-existent.  Since inventory means death in the world of retail, the extra inventory in Gap has lowered it to junk status while Zara is still at the apex allowing them to generate ridiculous amounts of revenue on a quarterly basis.  Another advantage of low inventory is that Zara does not risk substantial loses if one product line fails since they have hundreds more in the pipeline ready to be shipped out on command.

The biggest strength is probably how hard it is to replicate their business model.  To remain competitive in a business, one must always have an advantage over the competitors and having a model that is impossible to replicate makes this advantage possible.  Even though Gap is in a junk status right now, they cannot form a new business model that is similar to Zara because it would cost too much money.  Gap already has too many distribution centers and manufacturing sites which cannot be withdrawn.  Zara is the only clothing retailer with one manufacturing site, and the only one that follows consumer trends instead of creating them.

Future Opportunities

Zara currently is still in the process of infiltrating the market in the United States.  Currently, most of their sales come from Europe and entering the United States could give them the boost needed to bypass Gap as the leading clothing retailer.  Since they have only penetrated one region of the world fully, possibility of growth is without bounds. 

Secondly, since Italy has the highest spending market for apparel, Zara plans on opening more and more stores there, on an annual basis, which could add to Zara’s revenues.  But the greatest source of growth in the near future will probably come from India, where they will form joint ventures with certain companies to create distribution centers to the public.  India has been one of the top retail investment markets for the last three years and Zara intends to take advantage.  In the coming decade, Zara predicts that the retail market will grow twenty-fold. 

Threats and Weaknesses

The biggest threat that Zara has is that it only has one manufacturing and distribution center in the world.  It is both a gift and a curse.  Even though it helps them follow the counter-intuitive approach to apparel, there are huge risks associated with just one center.  If there is a power shortage, strike or even a natural disaster in the area it will be sure to affect Zara dramatically, since the whole business relies on one geographic region.  If a natural disaster affects Zara in any way, revenues could tank almost overnight.

Another weakness of Zara is its euro-centric model.  There is an expected over saturation of Zara stores in Europe by 2013, which would mean that running the stores would actually cost more money than their revenue.  Secondly, the euro-centric model coupled with one of the strongest currency in the world is causing prices of the apparel to climb in places such as the United States.  The same piece of clothing can be up to 50% more in the US than in Spain. 

Opinion

Zara is a very profitable company and will definitely grow.  However, entering the US market will be a challenge without a distribution center closer than Europe.  Also, since it is centered in only one place globally, if a disaster does occur, stock prices will tank.  This threat is something that cannot be predicted which is why long term investors might prefer to stay away from Zara.