Zara was founded in 1963, by Amancio Ortega Goana. He started the company because he wanted to improve the manufacturing and retail aspects of fashion and to reduce the cost of the apparel chain. He opened the first stores in Spain, and slowly over the decades started to expand to different countries. Zara headquarters is in Arteixo, Spain, with their distribution center close by. Inditex, the holding company that owns Zara, has a business model, which states, “Global specialty retailer that designed, manufactured, and sold apparel, footwear, and accessories for women, men, and children”, and Zara’s business model is to be, “medium quality clothing at affordable prices”.
Zara has five hundred and seven stores that account for seventy two percent of Inditex total capital. Zara’s biggest competitors are the US company, Gap, the Sweden company, Hennes and Mauritz, and the Italian company, Benetton. Out of all the completion Gap is the largest company but had a negative net income in 2001, Hennes and Mauritz had the highest net income, Benetton has stores in the most countries, and Inditex had the biggest change in market value. Zara owns a few different manufactures that produce their higher quality, popular products; they only outsource cheaper, standard clothing. Zara markets their products to infants all the way up to forty five year old males and females.
While doing the environmental scan of Zara, I found the company strengths are the short cycle time that reduces working capital integrity allowing them to commit to a fashion line much later in the season, compared to competitors. Also they position their stores in diverse location with high foot traffic areas. Their vision is to provide quality, high fashion apparel for an affordable price. Zara’s weaknesses are that there is a low entry to barrier to enter the fashion industry, customers are constantly changing demand, and products are easily duplicated by other manufactures.
Competitive trends are to produce high fashion goods at an affordable price that every income level can afford. In 2001 Zara had no internet market, leaving an opportunity for them to grow and expand their business model. Things that threaten Zara’s market share are they could be undersold by their competitors who outsource their manufacturing, missing opportunities in the ever so changing fashion industry, and shortages in their supply because they use the just in time method. In the economy, regulations can affect sales and depending on the country you’re in determines the amount of problems you may see. Political, environment and regulations in host country play a role in the success of a Zara store. Zara’s target demographic is middle to middle-high class individuals up to the age of forty five. A social factor that allows Zara to be successful is the need and the want for fashion forward clothing, that looks expensive but isn’t.
While conduction a five forces analysis, I found that Zara seems to have a good hold on the market. The supplier power is extremely low because Zara owns its own manufacturing companies that produce their quality, higher end products. This means they aren’t relying on other manufactures in different countries to make their products. I also believe buyer power to be low in most countries. Because buyers are looking for a quality fashion product that they could find on the runway and runway fashion is what Zara offers at an affordable price, buyers want what they are selling. There is a substantial firm and rivalry presence in the fashion industry, but as I have stated before
Zara is gaining market value over its competitors. I also believe that Zara’s production, distribution system, and infrastructure provide speed that gives them a competitive advantage. Their fast fashion model challenges the status quo, having a short lead time, lower quantities, and more styles leave consumers wanting more. Along with having substantial competitors that also means that Zara’s products can be easily substituted for competitor products. Barriers to entry are low because it takes a relatively low amount of capital to produce and design clothing. I chose to compare Zara to Hennas and Mauritz because they are considered close competitors, yet their businesses are run differently.
Hennas and Mauritz expanded to different regions more quickly than Zara had in the past, but now Inditex has grown into thirty nine different countries, while Hennas and Mauritz is only in fourteen. One major difference between the two companies is that Hennas and Mauritz outsources all its production, while Zara produces at least half of their products in manufactures that they own. Hennas and Mauritz also spends a large amount on marketing like most companies, yet it didn’t help their expansion efforts in the United States. While looking over the financials between companies, Hennas and Mauritz are listed but Zara’s individual financials aren’t listed but their holding group Inditex financials are listed. In 2001, Hennas and Mauritz had a higher net income than Inditex did, but the one year change in market value for Inditex jumped to forty seven percent, while Hennas and Mauritz was only an eight percent change.
Zara has a more efficient lead time, with a three week design to store method that beats out the industry average of six months that Hennas and Mauritz follows. It seems that even though they are close competition, they run their business differently, and Zara has a more efficient method. Zara has the capacity to fail because investors are expecting high growth out of the fashion company that they might not be able to meet. When considering the expansion of Zara they have to take into account, price and distribution channels that have to be adjusted for entering new countries, the fashion conscious consumer base, and considering fashion do’s and don’ts of the country that’s being entered.
Another reason Zara might fail is because they don’t rely on marketing like their competitors do. Zara relies on return consumers and word of mouth and this could be a downfall for them. Zara might not travel globally very well because the further you get from Spain and the distribution center; the more it’s going to cost to export the products. Since Zara has its manufactures in Spain and its distribution center in Spain, the distribution to further countries is expensive. From reading the case study it seems that Zara isn’t interested in opening multiple distribution centers, therefore this will be something Zara has to work around in their goals of global expansion. Zara’s current business model is working very well for them now, but as they continue to expand I believe they will have to adapt their model to changing prices and distribution areas.