There then provides recommendations on formulation of

April 2, 2019 Philosophy

There has been a surge of global fashion brands, triggered majorly due to the intensive internationalisation processes interwoven with corporate strategy. Large corporations in each industry are increasingly deciding to expand overseas, searching for cheaper resources, scanning rivals, markets and opportunities on a global scale and spreading out common overhead costs. Recent examples include the technology giant Apple opening merchandising stores in Taiwan ( ) and furniture retailer Ikea entering India ( ).

This qualitative thesis examines the different factors influencing international expansion strategy for the multinational clothing retailer Zara and then provides recommendations on formulation of future strategies. This report concentrates on the internationalisation patterns followed by undertaking an analysis of the company’s activities which has led it to expand operations since the past 30 years, including opening 183 stores in 2017 alone ( ). The dissertation is based on the following question: HOW DOES ZARA ENTER THE DIFFERENT MARKETS SUCCESSFULLY?

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The dissertation will start by providing an overview of the company and the fashion industry. Discussion of Zara’s competitive advantage and competitors’ strategies will provide the reader with an insight into the world of fast fashion. Afterwards, different modes to select and enter countries, along with how the company adapts strategy to each different nation are analysed. The report is concluded with a suitable recommendation plan is offered for the company.

1. Introduction
Zara is one of the leading brands of the Inditex fashion group owned by Amancio Ortega, a pioneer in fast fashion. Daniel Piette, the fashion director of the top luxury brand according to Forbes ( ), LVMH described Zara as “possibly the most innovative and devastating retailer in the world” ( ). Headquartered in Arteixo in Spain, Zara remains the leading part of one of the world’s largest retailers, Inditex. The parent company includes other brands like the playful styled Pull&Bear, naturally sophisticated Massimo Dutti, socially and musically themed Bershka, youthfully creative Stradivarius, femininely elegant Oysho, high quality leatherwear specialist Uterqüe and contemporarily aesthetical interior living styling provided by Zara Home.

Since its first store opening in 1975, Zara’s business philosophy is based on four core values. The company’s business format is functional as it boasts of a heavily intimate relationship with its customers. A continuous flow of information about demands and preferences from stores is delivered to the company’s in-house creative team, who respond and deliver instinctively on the changing trends in product design, imbibing beauty in the brand. As of 2017, the company has integrated the offline and the online store in 47 out of 96 countries, offering customers flexibility to interact with the brand at convenient time, place and way with quick delivery times with up to same day deliveries, representing speed. To stay in line with focus on sustainability, Zara introduced flagship eco stores with ‘Closing the loop’ projects like installation of clothing recycling boxes and free at home collection of used garments. (;title=Inditex+Group+revenue+increases+by+11.5%25+in+the+first+six+months )

According to a journal ( ), concern over the activity systems is advantageous to managers. Decisions over whether activities critical to the business model design should be governed within the firm or not encourages systematic and holistic thinking. Zara’s competitive advantage lies in its ownership over the entire vertical integration chain, including product design, manufacturing and distribution, resulting in the company’s net sales from 2016 to increase by 8% to €16.6 billion ( ). A substantial proportion of the capital and value-added intensive production processes are integrated within the company, protecting knowledge and know-how, while the labour-intensive stages are outsourced to 1,824 suppliers spread around the world ( ). Although some of these activities seem inefficient if viewed in isolation. But taken as a whole, Zara’s carefully designed system at each stage effectively cuts down the time to develop a new, high quality product and display it in stores to two weeks, compared to the average competitor’s six month wait time. This makes a big difference in the world of fast moving fashion retail. Zara’s global supply chain enables the company to be labelled as a fast fashion company. The company differentiates its production as it is mainly based in Spain and Northern Africa compared to other high street fashion chains like H&M whose clothes are made in China with rising labour costs. Using the fundamental supply chain and the company’s ability to ship products about 12 times faster than competition, Zara can ship a greater variety of styles with more frequency and can cancel products which do not perform well, reducing inventory excesses on a global scale. They currently possess the competence to deliver products to their European outlets within 24 hours and to their American and Asian channels within 40 hours. The retail giant provides stylish merchandises for diverse tastes just in time. Additionally, Zara commits to only 15-20% of its products six months in advance and about 50% before the start of the season, leaving them room to adjust, design and distribute up to 50% of their clothes right in the middle of a particular season.

Zara profitability graph

How much is zara % of industry
The clothing and apparel industry encompasses all clothing segments including men, women, accessories, sportswear, children, underwear and hosiery. Worldwide sales were valued at £1.1 trillion in 2017 and is expected to grow 4.2% year on year ( ), demonstrating high promise for the future. Although most prominent procurement locations are in Asia (China, Vietnam, Bangladesh), the majority of key companies are based in Mediterranean countries (Spain, Italy) and other Eastern Europe. Some of these brands can be classified as vertically integrated chains (H;M, Primark), while other departmental stores like TK Maxx are stationary suppliers of multi label products. Furthermore, there are clear differences between mail order e-commerce businesses and fashion brands which build direct customer interaction through independent label stores.

The global retail market continues to flourish at a healthy pace, posting a 6.2% composite net profit margin, remaining more profitable than other comparable sectors such as fast moving consumer goods, hardliner and leisure goods and other diversified retail goods ( p31). A large portion of this growth is attributed to the rising income levels of the middle class in Asian emerging economies and the changing perception of clothes becoming an expression of lifestyle. The industry’s short product life cycles, vast product differentiation, inflexible supply processes and a high speed in demand changes, coupled with low switching costs for buyers results in a moderate level of industry rivalry. It’s a buyer driven market as customers want to not only see fresh products but a fresh shopping experience as a whole. There is significant local variation in customer’s preferences even within a specific region or country. While athletic wear has been the fastest growing product category maintaining a 7% sales growth ( ), the women wear segment is the most lucrative at 38.1% of the industry’s overall value.

A McKinsey article highlights the latest key trends in this industry ( ). Companies need to adapt their core competencies as consumers are becoming more environmentally conscious, expecting conservation, reduced pollution and ethical working conditions for company workers. Zara offers opportunities for development for all its 171, 839 employees ( ), while ensuring strict health and safety policies and implementing values of conduct and an internal responsible practices code. In an effort to be environment friendly, the company consumes 100% of its energy from renewable sources in Spain, Poland, Germany and Belgium and has successfully reduced electricity consumption by 12% for each garment ( ). Zara also pays attention to raw materials sourcing as it sources only sustainable certified PEFC or FSC for wooden and paper products ( ).

McKinsey also states other changes in target market due to shifting demographics, migration and growing apparel demand by men, especially in China as the global economic power shifts from West to East. Increased digitisation has been embedded to fuse a seamless linkage between physical retail and online retail and learn about the customer by compiling user data on search history, social media and product ratings. Retailers have been building faster, more flexible supply chain which offers long product cycle for basics and timeless pieces, short cycles for core products and small test batches for experimental riskiest items. A particular trend is while consumers seek fashionable but low-cost clothing, despite the higher prices, demand for long lasting, value for money footwear has increased. Zara must carefully analyse and adapt according to these changing trends as outlined ahead.

Against Zara, Uniqlo, Gap, and H;M are considered the most valuable fashion brands globally in this sector, with each brand having its own unique selling proposition. Founded in 1949, Uniqlo is a Japanese casual wear lifestyle designer, manufacturer and retailer. With apparel design based on simplicity, elegance and longevity, the company operated with a 9.6% operating profit margin, earning ¥ 1.455 trillion ($ 13.15 billion) in sales revenue in 2016 ( ). Gap is based in the US and is known as an American style clothing and accessories worldwide retailer. The company experienced a 2% growth in sales amounting to $15.9 billion in 2017, earning 85% of its in North America alone amongst its 3600 stores owned and franchised internationally. Based in Sweden, Hennes ; Mauritz is a multinational retail clothing company and is ranked second in the retail industry, after Zara. H;M’s business model is to provide fast, quality fashion at inexpensive prices. Sales revenue increased by 4% to 24.5 billion in 2017 ( ).

Figure shows the brand positioning matrix of the four companies detailed in this section. It perfectly illustrates Zara’s philosophy of high quality fashion at reasonable prices. The company’s position in the market varies according the economic condition of the country. Zara is perceived as a low-price product in countries with high GDP per capita whereas it is observed as high-price in countries with low-medium GDP per capita. Regardless, the level of couture/fashion is constant.

While Zara operates with a ‘mass-tige’ (luxury for the mass) pricing strategy, H&M markets their products with a value for money intention Zara aspires to be perceived as a high-end vendor with reasonable prices and H&M develops unique styles for each of its sub brands with their own price range and visual concept to cater to an even wider market. Zara and H&M price a regular white t-shirt similarly at £8 ( ) and £7 ( ) respectively. Although the pricing is at a similar level, Zara items carry greater prestige as the marketing behind fast fashion make the product seem more desirable and exclusive. Uniqlo and Gap follow a similar strategy, positioning themselves as private label firms. Different from the Zara and H&M, these two companies funnel money into advertising and sporting events to create appeal. Their clothing designs also are relatively simplistic and practical.

The race to global domination through internationalisation has become a growing trend among all apparel brands. One of the key motivations powering the development is the deletion of all import quotas in the clothing industry since January 2005 (Keenan, 2004). This has enabled unrestricted access for all members of the World Trade Organisation. Another major trend in this sector is the consolidation achieved through alliances, mergers and acquisitions ( ). Modernisation of facilities, levelling out of costs due to vertical integration and availability of mixed sources of production achieved through these associations lead to strengthening of the industry.
Although competing in the same segment, Zara varies from each company Uniqlo, H&M and Gap vastly on product philosophy and expansion strategy. Zara remains ahead of most markets simply because of its larger global reputation. For instance, contrary to Zara’s wholly owned subsidiaries, Uniqlo prefers entering a market through mergers and acquisitions. They purchased international labels such as Theory, Helmut Lang, J Brand and Comptoir des Cotonniers to maintain an international presence ( ). They were also in talks of a merger with leading American apparel company J Crew which didn’t work out due to valuation problems ( ). H&M follows a similar model to Zara, opening new stores at an aggressive rate, operating most of them as self-owned with a small percentage of them being licensed. Gap on the other hand markets its brand based on its core products including the Old Navy label, Banana Republic and their iconic Denim line of clothing. Since they cater to the lower middle to the upper middle, their target market is difficult to define. Despite slowing sales up till 2016 (-2% year on year) they continued to open a number of stores mainly in the Asian region, to post a 1.6% sales growth in 2017 from the year before ( ).

Compared to competition, Zara benefits from a strong control over its supply chain as it owns 90% of its stores in the 96 countries. It even boasts in-house production facilities, owning 90% of its manufacturing shops within Portugal and Spain instead of outsourcing it to cheap Asian countries. This helps maintain quality and reduce shipping costs, getting products from plant to stores within 2 weeks. An efficient production management system aids Zara design and produce over 10,000 designs every year, five times the competitors’ average of 2,000 ( ). The development of new styles frequently leads to scarcity and exclusivity in its 2,200 strategically located stores.

International Expansion Strategy

Internationalisation is “the set of operations that allow the establishment of more or less stable
links between a business and international markets, always through a long process of
increasing international involvement and projection” (Galván Sánchez, 2003, p.93). This section will discuss the three issues during the company’s internationalisation process- motivation, market selection and market entry.

4.1 Motivation for internationalisation
Zara has been classified as a trans national retailer. It may appear as if the company has a standardised operating formula for all expansion, but its product development and merchandising strategy in particular are very flexible, allowing quick responses to fashion trends. The company had to constantly tweak their business model to suit new markets, adopting a geocentric model as they adopted local solutions instead of replicating tactics from the home market. The reasons for the international growth varied. One of the main reasons for internationalisation was the company’s need to remain competitive in the global ecosystem. They expanded to the fashion capitals like Paris (1990), Milan (2001) and New York (1989) to build brand awareness justified by image and status reasons and to stay up to date on newer fashion trends, while opening stores in every small market to spread costs and risks to different markets. Although Zara majorly offers homogenous products, minor adjustments in their marketing mix have to be made due to the different laws, cultural differences and entire seasons in countries in the other hemisphere.

The establishment of international business is based on the postulation that multinational presence has a positive effect on firm performance. According to a study by Raymond Vernon in 1971 (Vernon, 1971) for a sample of 500 Fortune companies, multinational enterprises earned a higher return on sales compared to non-multinational enterprises. Today, the need for a company to expand internationally has become increasingly significant as more and more companies are operating on a global scale. Zara too discovered the need to internationalise _____. On justification of international expansion, Inditex’s former CEO Jose Maria Castellano said, “Of course before opening the first store in the host market, we had the feeling and then we knew for certain that the Spanish fashion and design market was on the verge of saturation”. (Martinez, 1997).

A brief literature review ( ) classifies these motives into pull factors like homogenisation of consumption patterns and economies of scale and push factors like saturation of home demand and strategic visions. These were particularly true for entry into the European Union. Zara also benefits from the increased internationalisation as the resulting global supply chain has been an integral advantage. Collecting customer information through interaction with store staff all over the world on a daily basis has given an edge to Zara to determine the success or failure of a product. The parent company, Inditex maintains a varied grid of fabric suppliers in multiple countries including China, India, Italy, Vietnam, Morocco, Germany, Turkey including others. This allows them to ship raw material without delay in case even one contractor fails.


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