Professional Documents
Culture Documents
Table of Contents
Zara
Zara Overview and History ................................................................................................................. 3 Zara in India............................................................................................................................................... 4 Mission and Vision ................................................................................................................................ 5 International Timeline .......................................................................................................................... 6
Page |1
Page |2
Page |3
ZARA IN INDIA
In 2009, Spanish retailer INDITEX and Trent Limited, a Tata group company signed an agreement to form a joint venture to develop Zara stores in India. Perhaps, considering the Indian regulations for business by foreign retailers in India, it was the best way to start the venture. With INDITEX holding 51% stake, the partnership planned to open its first stores starting in 2010 in New Delhi, Mumbai and other major cities of India. Presently, there are 9 ZARA stores in 4 cities of India viz. Delhi, Mumbai, Bangalore and Pune. Zara has been a hot favorite among Indian shoppers because it offers trendy styles. The day it opened a South Delhi outlet the store recorded the largest single-day sale by an international retailer in the country. In India, the brand sells its products in the range of 1500-2300 which is premium segment looking at the economic stature of India. With ZARA sales expecting over 12% contribution in sales from Asian stores, India appears to be one of the potential markets. Zara owner INDITEX, the world's largest clothes retailer, has beaten forecasts by reporting a 10% rise in profits, helped by expansion in Asia and online sales which further strengthens the opportunity for ZARA in India.
Page |4
We save energy- by implementing an eco-friendly management model in our shops that reduce energy consumption by 20% We produce less waste and recycle- Ms of hangers and alarms are processed each year, cardboard and plastic used for packaging are also recycled. Our commitment extends to all our staff. An environmentally aware team- We hold In-company awareness campaigns and specific multimedia-based training programmes to educate our staff in sustainable practices, such as limiting energy consumption, using sustainable transport and modifying behaviour patterns.
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) We manufacture PVC-free footwear- No petroleum derivatives or non-biodegradable materials are used in the production of our footwear.
In Transport
We use biodiesel fuel- Zara's fleets of Lorries, which transport more than 200 M items of clothing a year, use 5% biodiesel fuel resulting in reduction of CO2 emissions by 500 tons.
Page |5
Page |6
Page |7
Market Characteristics
Indias textile clothing and apparels sector has opened up significantly with the dismantling of quotas. Global apparel market is gradually shifting from western countries to Asia on account of cost competitiveness. India has also the added advantage of low labor cost along with other countries like Bangladesh, Indonesia and China.
Market Size
Apparel is the second largest retail category in India. There are a number of factors that have contributed to a definite swell in apparel market size. The rising affluence of the middle class due to rising disposable income and strong per capita income have considerably helped the industry to move ahead from a commodity level garment purchasing to a life style or a branded level product. Indias domestic market for clothing is currently worth Euro 20,219 M in 2008. It has registered a steady compounded annual growth rate (CAGR) of 13.6% in the past 5 years. Volume wise, apparel market has grown from 4.8 billion units in 2004 to 5.9 billion units in 2008 at a CAGR of 5.3%. India's Apparel Market Size
Category 2004 Volume Value (M (M Rs.) units) 1328 1368 466 1222 423 4807 284800 246784 64896 117504 63424 777408 2005 Volume Value (M (M Rs.) units) 1379 1443 486 1269 457 5034 318400 283712 73728 130880 76736 883392 2006 Volume Value (M (M Rs.) units) 1443 1523 519 1323 498 5306 358720 326784 93504 149312 93504 1021824 2007 Volume Value (M (M Rs.) units) 1516 1609 548 1381 543 5597 408384 379072 108480 172928 115008 1183872 2008 Volume Value (M (M Rs.) units) 1600 1676 579 1468 581 5905 444032 410496 116224 190400 132928 1294016
CAGR by Volume 5%; By Value: 13.6% (Conversion Rate: 1 Euro = 64 Indian Rupees)
Page |8
Page |9
Reflecting the huge opportunity in this segment, AT Kearney's 'Retail Apparel Index' ranks India as the third most attractive market for apparel retailers. According to the CIIErnst & Young Textiles and Apparel Report 2007, the Indian sourcing market is estimated to grow at an annual average rate of 12 per cent from an expected market size of US$ 22 billion-25 billion in 2008 to US$ 35 billion-37 billion by 2011. More international brands have started queuing up to source from India, through vendors or wholly owned units. German kids wear brand Kanz, Ireland's biggest linen manufacturer Baird McNutt, and Finnish textile major Ahlstrom are buying into the India garment story. Consumer spending on apparel in India has grown over the last five years, touching the global benchmark of 5 per cent of the total income, according to Consultancy firm MCKinsey. Growth in consumer spending has been sustained on the strength of macro-economic fundamentals, Economic recession has, however, indirectly helped India to retain some of its exports in the EU and US market. The latest import data from both the countries seem to substantiate the fact. In the wake of depression, US which was earlier sourcing from Mexico and Central and Latin America is moving to Asian countries particularly from China and also India and other countries. EU which was concentrating mainly from other EU countries has also taken the same strategy of moving towards Asian region.
Demand Projection
The domestic demand is projected to go up at a CAGR of 10.5% by value over the next 3 years. In volume terms the growth rate is expected to be 5% per year in the next three years. Demand Projection Apparel Market: By Volume Demand Projection Apparel Market: By Value
P a g e | 10
purchasing power. It seems to indicate that consumer life style and preferences are changing fast which is a prominent driving factor. Rising Income Level A large number of households are getting added to the consuming class with growing income levels. This has been a significant rise in high income group households from 5.5 M in 1995 to 18 M households in 2005 and from 18 M households to 31 M households for high middle income group. There has also been increase in the nuclear family structure, a growing number of educated and employed women, media proliferation and growing consumerism, have all contributed to the growth of organized retailing. There is increase in awareness of the tier II cities and this is eroding the difference between the metros and the tier II cities in terms of urban aspirations. Retail Space Quality retail space has been one of the key hurdles for the development of organized retail. In 2007 there were 375 shopping centers / malls covering 90 M sq.ft quality retail space. Even though this still constitutes a small fraction of total retail in India, this growth in quality retail space is expected to impact the growth in the apparel market as there will be considerable change in the shopping habits. Impulse shopping is expected to go up to 40% of total mall shopping. Awareness and sensitivity of brands will also be heightened. Mall Culture The emergence of mall culture and rapid development of malls would act as a catalyst in this retail growth story. Drivers of Exports Rising outsourcing budgets of retail giants Indian companies evolving from mere converters to vendor partners of global buyers Large outsourcing orders helping Indian companies build capacities, lower their per unit cost and become more competitive
P a g e | 11
The market, well dispersed and fragmented on considerations of quality and price may be classified under three broad categories. The low end market: Lower and economy (marginally improved product segment in relation to the lower category), solely volume driven, products are mostly unbranded and dominated by large number of manufacturers. The manufacturers operating in these segments are beset with problems of high competition, limited capacities, inadequate logistics and paucity of funds. Essentially the manufacturers are regional or even local players.
P a g e | 12
The mid-range market: This segment features medium range of products, though primarily volume driven caters to diverse sections of Indian consumers across all regions, its quality is by and large acceptable to all sections. Majority of manufacturers, large and medium, have products on offer for these categories of consumers. The high end market: MNCs and large Indian players operate in the premium and super-premium product categories. Exclusivity in product features such as high quality raw materials, embellishments, design developments and above all branding of products for years make the products very special. Elitist categories of consumers pay for the products on demand.
P a g e | 13
Distribution Structure
Trade channels
There is a commonality of approach adopted by manufacturers / importers for marketing their wares. Large manufacturers maintain an exhaustive marketing set-up at an all India level to reach maximum geographical spread and service customer requirements through various mechanisms. Major functions of the marketing department include: Organizing sales promotion measures through interface with potential / existing customers Production of company literature, brochures, related ad materials Organizing marketing campaign domestic & overseas market Appointment of dealership net-work & servicing the requirements of distribution network.
Sales
Business Development
Marketing
Dy. Manager
Outside Agencies
Sales Network
The products are mostly sold through a variety of cannels. These include Sales through exclusive company owned retail outlets. One of the major players using this channel as a major route is Arvind Mills Ltd, Color Plus, (Raymond Ltd). Increasing use of retail space in various malls for showcasing products and maximizing sales. Outright sales to retailers: Majority of the players are using this channel. Prominent among them are Louis Philippe, Aditya Birla Group. Operating through franchisee arrangement: Foreign players without any joint venture collaboration or technology tie-up in India prefer this route. Major advantage of this system is that one need not make substantial investment for popularizing the brand. The main onus for development of the market lies with the franchisees. If the product does not sell well or there is a danger to brand reputation, the franchise agreements are terminated. This is a cost effective measure. PGDM FINANCE 2012-14 Marketing Project Group 2 P a g e | 14
Distribution Network
More than 60% of products in the domestic market are sold through distribution network. Most extensively used and popular network is presented as under: Distribution Network
Own Outlets
Stockist
Distributor
Retailer
Major strategy of the manufacturers is creation of widest distribution network for reaching out to maximum customers across the country. In view of the expanding market demand, the manufacturers are streamlining and revamping their distribution net-work across various cities, hitherto untapped.
P a g e | 15
Competition
Characteristics
The market is characterized by: Branding and sub-branding Offering variety: current trend and variety Quality standardsin material, stitching and cuts Moving up the value chain- ensuring better returns. Export market: sticking to delivery schedules, conforming to quality and Quantity commitment, ability to interpret fashion changes. Highly dynamic market- design changing frequently
Market Highlights
Despite substantial growth, Indian clothing market is still in the early developmental phase. Despite presence of foreign players, domestic players are not much scared of any competition from outside. The main impediment to the organized players is the presence of huge unorganized sector. In a move to compete, organized players have started their own strategy of standardizing the products. Indian womens wear market is largely influenced by international fashion trend. International companies sell their apparels to retailers owned by international companies or retail through local franchisees. Forward Integration: Several fabric manufacturers have now started venturing in to garment production. Major fabric company Siyaram is a precursor to this trend in India. Madura Garments have entered the apparel market with successful brands like Van Heusen, Allen Solly, Peter England and Louis Philippe. Textile leader, Bombay Dyeing also tied up with Proline to enter the sportswear
P a g e | 16
segment, as well as adding Vivaldi range to its formal menswear. The brand has been targeted towards the young group, offering a wide range of style with perfect fitting. Acquisition: Another strategy major textile players are adopting is acquisition. Raymond's acquired ColorpIus to jump in casual-wear, adding brands like Raymonds, Parx and Park Avenue. Using a similar strategy, Indian Rayon acquired garments division of Madura Coats. Licensing has also been established as a major business strategy. A number of domestic Indian brands have become licensees of popular international brands such as Disney, Barbie and Powerful Girls to market both garments and other products under these brands. Traditional tailor-made garment is continually being relegated in to the background. More and more working women look for ready to wear dresses. Attitude towards casual wear at the work place is gradually transforming. Some companies ask their employees to come to office in casual dress for some days in a week /month. The liberalization of casual wear at the work place is also driving growth in the share of womens share in total apparel retailing. Mens and womens wear were traditional established market segments. Kids wear retailing was an offshoot of mens and womens apparel. The growing importance of the opinion of children has propped up demand for kids wear brands. With increasing affluence of lesser number of children per urban couple, urban couples now are not only spending more on their children but are also seeking quality products, including branded goods for children as well.
Competition by Segment:
The premium and super-premium segments of the industry are gaining, following a consumer shift from economy and mid-market segments to the premium segment, while the low and economy segment is gaining from the industry becoming more organized
Low Economy Medium Premium Super Premium 21% 18% 14% 2% 3% 0% 5% 10%
19%
20%
30%
40%
50%
60% Unisex
70%
80%
90%
100%
Menswear
Womenswear
P a g e | 17
P a g e | 18
Arvind Mills Ltd Raymond India Ltd Raymond India Ltd Raymond India Ltd Madura Garments Ltd, Group Company of Aditya Birla Novo Ltd DCM Benetton India Ltd Future Group Fabindia
Technical Collaboration JV JV JV JV
Reliance
JV for development of knits JV JV to include womens wear (retailing skirts, trousers, dresses and tops) Strategic Partnership
P a g e | 19
P a g e | 20
Entry barriers for foreign players planning to enter Indian apparel retailing industry: 1. Scale Economies When existing firms achieve significant scale economies, it becomes difficult for new entrants to be competitive. Two types of scale economies that can act as barrier to entry are: Supply-side scale economy These arise when firms with large production volumes enjoy lower costs per unit by spreading fixed costs over more units, utilizing more efficient technology, or demanding better terms from suppliers. Although Indian retail sales are dominated by unorganized retailers, they are mostly small stores which have little buying power or ability to achieve scale economies. In contrast, the large domestic retailers have achieved supply-side scale economies through their large order volume and extensive market presence. Demand side scale economy Demand-side scale benefits arise with the increase in customers willingness to pay for a companys products. Buyers (customers) tend to trust larger firms due to their large customer base, preferring to be part of a large network of customers. Large domestic retailers in India have safeguarded their position in the increasingly competitive market by aggressively expanding their geographic presence or by building relationships with foreign brands to identify niche segments for further expansion. Thus, foreign retailers may enter the market on a large scale or penetrate the market by marketing the uniqueness of western products and the emotional or symbolic value of foreign brands.
P a g e | 21
2. Switching costs The costs incurred when a customer changes from one supplier or marketplace to another. The higher these costs are, the more difficult it is to execute the switch. High switching costs deter new entrants from entering in the market. However, apparel manufacturing is labor intensive and usually does not require heavy investment leading to low switching costs. Moreover, foreign apparel retailers may be encouraged to switch to local suppliers because the Indian textile industry has vendors capable of catering to the sophisticated needs of foreign retailers. A number of foreign retailers have chosen India as a sourcing destination for their products. Foreign apparel firms currently sourcing from India include GAP, Wal-Mart, Tommy Hilfiger, and Nike.
3. Access to Distribution channels Access to distribution channels refers to accessible resources that a new entrant can use to distribute its product. The primary distribution channel for apparel retailers is retail space in the form of specialty stores, departmental stores, or shopping malls. While all these formats are present in India, mall space has grown rapidly in big cities. To meet fast growing demand for global luxury brands among Indian consumers, many projects are in the pipeline to attract more foreign brands. Although the specialty store format has steadily increased, the growth rate of malls has shadowed its development. Retailers who wish to operate in a standalone specialty format may face a challenge due to high real estate costs in Indian cities as well as multiple regulations on land usage.
4. Cost Disadvantages (Independent of Size ) Regardless of size of a firm, new entrants may have cost disadvantages in terms of access to raw material, location, government subsidies, and experience. The most prominent cost disadvantage for foreign retailers in India relates to retail locations and local experience. Domestic retailers have gained incumbency advantages due to their better understanding and cumulative experience of serving the culturally diverse Indian market.
5. Government Policy Government policy can be a direct or indirect entry barrier. For example, licensing requirements and restrictions on foreign investments can be direct barriers, whereas regulations on land, environment, or safety may be indirect barriers. Therefore, foreign companies e.g. Adidas, Benetton, Levis and Reebok could operate in the Indian market via high control entry modes such as joint ventures or wholly owned subsidiaries. In 2006, the government introduced relaxed FDI policies in retail sectors, allowing joint ventures with up to 51% ownership in retail trade of single brand products, and wholly owned subsidiaries for wholesale trade in the cash and carry retail format.
P a g e | 22
Wal-Mart entered India in 2007 via a joint venture with Indias leading business Bharti Enterprises. ZARA entered India in 2010 via joint venture with TATA Groups retail arm Trent.
P a g e | 23
P a g e | 24
P a g e | 25
THREAT OF SUBSTITUTES
The threat of substitute products can be evaluated in terms of the availability and performance of substitutes, switching costs incurred by the consumer, and propensity of the consumer to substitute. There is a high threat of substitutes in the Indian apparel sector due to its unique market structure. Indian apparel consumers have an array of options to shop, including small unorganized retailers and large organized retailers for domestic and foreign brands. Proliferation of a gray market for domestic and foreign brands poses a serious threat of substitutes for both existing players and new entrants. Foreign retailers (e.g., Benetton and Levis) have reduced the threat of substitutes by providing strong brands and differentiated products and store environments. Small domestic retailers are also taking steps to increase their competitiveness by embracing a selfservice format to appeal to changing Indian consumers these indicators also demonstrate the increased competition among existing players and a need for new entrants to deliver better and unique value to attract the Indian consumers.
P a g e | 26
INTENSITY OF RIVALRY
The intensity of rivalry is determined by industry growth, industry concentration, diversity of competitors, and product differences. High rivalry within an industry drives down the profitability of an industry by influencing prices and costs of competition .While high intensity of rivalry makes an industry less attractive, a fast-growing market creates opportunities for revenues. Since the 2006 trade liberalization, the Indian apparel retail industry has led an influx of foreign retailers into the market. The industry value in this sector has grown from $22.3 billion in 2006 to $27 billion in 2008, showing an approximately 21% increase within 2 years. Immense growth opportunities have led to the entry of large number of players in the market, increasing competition. To drive the nature of competition in a positive direction, foreign retailers may avoid competing on the same market by focusing on specific customer segments and offering unique products, services, and brand identities. The presence of different types of retailers in India (i.e. foreign retailers, domestic organized vs. unorganized retailers) creates diversity in competition. Foreign and domestic retailers in the organized sectors are competing on large size, broad assortment, self-service format, and pleasant store environment. The number of shopping malls and retail chains is rising as large retailers are improving their supply chains and expanding their geographical spread to gain market access. Product differentiation can increase profitability by creating lesser rivalry in the market, and delivery of customer value though non-price competition, such as product features, services, delivery time, or brand image, is less likely to erode profitability. Large domestic retailers are improving their strategies by carrying more SKUs and embracing the self-service format. Unorganized retailers, with no financial capabilities for improving store environment, offset these limitations by offering high levels of service and forming close relationships with their customers.
P a g e | 27
SWOT Analysis:
STRENGTH Assured raw material base abundant supply of cotton and manmade fiber. Well-established production infrastructure and production base. Large pool of skilled and cheap work force, adding to the competitive edge of the industry in the International arena. Excellent design capability of Indian designers. A paradigm shift from commodity based trading to high value-added fashion garments. Vertical integration & horizontal consolidation of production process leading to lowering of manufacturing Production flexibility of the manufacturers contributes to improvement in productivity. An expanding and lucrative market boon to International manufacturers and retailers encouraging them to invest and set-up manufacturing base. Government support to increasingly diversify and further exports.
WEAKNESS Highly fragmented industry. Informal sector accounts for larger part of manufacturing base. Critically dependent upon cotton. Raw cotton prices are highly fluctuating in India and impact the manufacturing industry adversely. Superior varieties of cotton fabrics are regularly imported in to India for premium quality garments. Technological obsolescence adversely affects major part of the organized sector in terms of productivity and in the entire value chain. Infrastructural bottlenecks such as loss of transportation time & transaction time at ports, land borders adversely affecting the competitiveness of exporters. Imports of cheap textiles from other Asian neighbors such as China, Bangladesh etc are eroding the competitiveness of domestic manufacturers. Increase in power tariff, indirect tax and interest rate has contributed to increase in production cost. India is becoming less and less competitive with respect to Asian counterparts escalating over the years. Lack of standardization and quality control of Indian garments have resulted in large scale rejections of products in the export market
P a g e | 28
OPPORTUNITIES Tremendous boom in retailing as a result of change in consumption pattern and private incomes. Changing life style has led to dramatic shifts in the buying pattern in favor of ready to wear. Several large foreign players have been retailing branded products in India for years. Elimination of Quota Restriction, according to FICCI research, has helped India expand its global market further since 2005 Indian market is gradually shifting towards branded products. Indian retailing industry, now at its nascent stage has exploited not more than 15 to 20% of sales potential due to retail boom. Good prospect for more foreign investment in view of the increasing market presence of international giants. Governments favorable foreign investment policy is expected to work as a catalyst to garner more direct as well as foreign institutional investment. THREATS Rupee fluctuations with respect to US $ and Euro affects the volume and value of exports as the price competitiveness of Indian exports. Rising ecological & social awareness among the consumers in the west may impact sourcing from India. The western countries conform to certain guidelines of ILO in regard to certain sensitive Issues such as deployment of child labor, unhealthy working environment of labor etc when it comes to sourcing of products. Domestic industry facing increasing competition from low cost countries is likely move towards consolidation of local players. Regional trade blocks play a significant role in the global trade with member countries enjoying lower tariffs. Export prospects of India, not being a member of regional trade block, may be adversely jeopardized. The US & EU governments discourage imports from countries that use polluting dyes and environment damaging manufacturing practices. This has resulted in putting pressure on buyers to limit their sourcing from developing countries.
P a g e | 29
Different Segments of Indian Consumers Socialites: Socialites belong to the upper class. They prefer to shop in specialty stores, go to clubs on weekends, and spend a good amount on luxury goods. They are always looking for something different. They are the darlings of exclusive establishments. They go for high value, exclusive products. Socialites are also very brand conscious and would go only for the best known in the market. The Conservatives: The Conservatives belong to the middle class. The conservative segment is the reflection of the true Indian culture. They are traditional in their outlook, cautious in their approach towards purchases; spend more time with family than in partying and focus more on savings than spending. Slow in decision making, they seek a lot of information before making any purchase. They look for durability and functionality but at the same time is also image conscious. They prefer high value consumer products, but often have to settle for the more affordable one. These habits in turn affect their purchasing habits where they are trying to go for the middle and upper middle level priced products. The Working Women: The working womens segment is the one, which has seen a tremendous growth in the late nineties. This segment has opened the floodgates for the Indian retailers. The Indian women have grown out of their long-standing image of being homemakers. Working women have their own mind in decision to purchase the products that appeal to them. The Rich: India has over 1 M rich households (income greater than Euro 8,000 per annum). These people are upwardly mobile. Some of them in this category are Double Income No Kids (DINK) households. They spend more on leisure and entertainment-activities than on future looking investments.
P a g e | 30
Factors that Influence the Choices of Consumers The consumers put major emphasis on product quality. Price is another important consideration attracting customers to a particular shop/brand/product. Pre and post sales services, parking facilities and ambience of the store or mall are the other major factors that attract local customers. In the selection of products, the consumers do not give automatic precedence to local brands over national or foreign brands. Value for money has become the over-riding consideration. Fabric, texture and color followed by proper fits and sizing weigh more importance to the local consumers rather than just easy availability of local brands on account of proximity.
Local consumers of apparels in each region are also guided by: Window POS Displays Roadside Hoardings Gift Vouchers Fresh arrivals Event Sponsorships Discount Offers Celebrity Endorsements Advertisements / Features in Magazines Advertisements on TV/ Electronic Media Degree of Elasticity of Demand Considering that price elasticity depends to a large extent on the extent of competition among the manufacturers, the Lower and Economy segments of the market are usually price-inelastic. These segments being highly competitive do not allow the manufacturers any leverage to increase the price. Higher up along the value chain, the affordability or paying capacity of the consumer is higher. The product market which characterizes mid-product segment becomes increasingly quality oriented and more diversified. Despite competitive pressure, the price in this segment keeps on rising. The demand for the product becomes price elastic. In case of premium and super-premium product segments, where entire focus is on quality, style and brand value, the consumer is insensitive to change in price. As per the findings of retailer survey, even an increase of 5% in the price has an effect on low end / economy category products, while mid-end category is usually able to absorb a 5-10% price increase without a major adverse impact on the sales of a brand.
P a g e | 31
P a g e | 32
increased further to 30% in 2007-08. The trend seems to suggest that the quality of Indian consumers is also improving and its base increasing. Indian tastes, preferences and aptitudes are going through a process of qualitative transformation. People in the upper income strata have become increasingly fashion conscious. Like their counterparts in the developed world, rich urban households spend fabulously and dress well. This observation may be substantiated from the import data which suggests steep rise in the import trend of apparels from Italy. Import of apparels has shown a consistent rising trend from 0.22 M units in 2005-06 to 0.39 M units in 2006-07 and further to 0.49 M units in 2007-08 at a CAGR of 47%. Import trend of apparels by value has also pointed to a rising trend. Import has escalated marginally from Euro 4 M in 2005-06 to marginally high Euro 5 M in 2006-07 and then shot up to a high of Euro 8 M in 2007-08.
Main European producers present in India Several European players belong to multinational corporations and have been operating in India as JV partners or operates in India on the basis of franchisee or licensing arrangements: Major players include: Benetton Adidas Puma Zara Oxford Company Benetton Adidas Puma AG Espirit Mango ZARA
Esprit Dewitte Marzotton John Player Mango Entry Strategy Licensed JV (Majority) Licensed Franchisee JV
Product positioning European apparels are positioned in the premium and super-premium segments. The products are targeted to the affluent sections of Indian population especially towards the younger generation, for whom overall quality is the main focus. Besides, the quality of fabric, color combination, design, style, fashion, fitness and cuts are all important considerations. Italian products are considered the most fashionable and prices charged are one of the highest.
P a g e | 33
P a g e | 34
P a g e | 35
Consumer Focus
Consumer focus is an organizational orientation toward satisfying the needs of potential and actual customers. It is considered to be one of the keys to business success. Achieving customer focus involves ensuring that the whole organization, and not just frontline service staff, puts its customers first. All activities, from the planning of a new product to its production, marketing, and after-sales care, should be built around the customer. Every department and every employee should share the same customer-focused vision. This can be aided by practicing good customer relationship management and maintaining a customer relations program. The results of a survey of one hundred companies, clearly, indicate that the companies with high Consumer Satisfaction will have financial results statistically more favorable than companies with low Consumer Satisfaction. Zara focuses on middle aged women, men especially youth and kids.
Products
Zaras product lines are segmented into womens, mens, and childrens, with further segmentation of the womens line, considered the strongest, into three sets of offerings that vary in terms of their prices, fashion content, and age targets. Zara aims to offer fresh assortments of designer-style garments and accessoriesshoes, bags, scarves, jewellery and, more recently, toiletries and cosmeticsfor high prices in sophisticated stores in prime locations in order to draw masses of fashion-conscious repeat customers.
P a g e | 36
Value Capture
Perhaps its most unusual strategy was its policy of zero advertising; Zaras advertising investment is 0.3% as compared to traditional retailers who expends 3 4%. Zaras cuts in advertising investments reduce total expenses, which make the international expansion more economical. This also signifies that Zara relies mainly on its stores to project their image. For that reason, Zara has a department, which exclusively works in acquiring global prime real estate locations. In addition, this department is responsible for the frequent refurbishing of store layouts, as well as the creation of a common window display for Zaras global stores. The display positions Zara in the industry with a prestigious and elegant image (Zara). It has high design success of 99% as compared to 90% of the industry. Apart from designing to the fashion-of-the-day, Zaras strategy of producing low volumes per style and changing products quickly in its stores enables it to cut down on the discounts as well. Only about 18 per cent of Inditex clothing doesnt work with its customers and must be discounted. Thats half the industry average of 35 per cent. Zara also has two clearly time-limited sales a year rather than constant markdowns.
Differentiation
What sets Zara apart from many of its competitors is what it has done to its business information and business process. Rather than concentrating on forecasting accurately, it has developed its business around reacting swiftly. Over a period of 3-5 months they develop the ideas into physical samples. Therefore, Zara is a rapid fashion follower with medium to high prices. Zara sees 17 visits per customer per year (vs. 3 industry average) and managers and staff are periodically incentivized to maximize sales.
P a g e | 37
STP Analysis
Segmentation Product lines are segmented into womens, mens, and childrens, with further segmentation of the
womens line, considered the strongest, into three sets of offerings that vary in terms of their prices, fashion content, and age targets
Target Market
Zaras target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Its target market is a young, educated one that likes fashion and is sensitive to fashion. Today, people around the world through various communication devices have more access to information about fashion. Therefore, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. For that reason, 80- 85% of the products that the company offers globally are relative standardized fashionable products. The international strategy of this fashion chain is excellent because it adopted a balanced mixture of standardization and customization.
P a g e | 38
Product Positioning
Products position is important because represents the place the product occupies in consumers minds relative to competing products: is the key of the success in selling the product. Product positioning is a marketing tool used by a company to gain competitive advantage in the market. It helps the company to differentiate its product offering from that of its competitors and ensure that the same reaches the exact market profile for which it is intended. Product positioning strategy is critical in today's hyper-competitive marketplace where everybody competes for the same shrinking budget and differentiation is hard to come by. The customer is attracted by the inherent characteristics of the product itself, either due to its low cost, which provides a price advantage to the custode, or due to its differentiation, which introduces unique features that the customers value and for which they are willing to pay a premium. In the fashion business analysis position is usually developed using the matrix value clothing styles that allows translating the reading of the market positioning decisions coherent, considering the choices of competition. On horizontal axis are placed clothing styles (classic / traditional, contemporary, avant-garde) whereas on vertical axis is placed the market segmentation based on price (couture-designerdiffusion bridge- better).
Price +
MANGO ZARA
UCB
Fashion +
P a g e | 39
The middle-aged mother buys clothes at the Zara chain because they are cheap, while her daughter aged in the mid-20s buys Zara clothing because it is fashionable. Clearly, Zara is riding two of the winning retail trends - being in fashion and low prices - and making a very effective combination out of it. While management stressed that Zara used the same business system in all the countries in which it operated, there was the same variation in retailing operations at the local level. The first store opened in each market-often a flagship store in a major city-played a particularly critical role in refining the marketing mix by affording detailed insights into local demand. The marketing mix that emerged there was applied to other stores in the country as well. Differences in positioning also affect the stores in which products are sold and Zaras overall image. For example, in South America, Zara products had to present a high-end rather than a mid-market image and it was emphasized that they were made in Europe.
P a g e | 40
Product
A Product is anything that can be offered in a market for attention, acquisition, use, or consumption that might satisfy a need or want. Consumer products are products and services for personal consumption. They can be classified by how consumers buy them into following categories: Convenience products Shopping products Specialty products Unsought products Zaras products fall into shopping products category. Each of Zaras three product linesfor women, men, and childrenhave a creative team consisting of designers, sourcing specialists, and product development personnel. The creative teams simultaneously work on products for the current season by creating constant variation, expanding on successful product items and continuing in-season development, and on the following season and year by selecting the fabrics and product mix that would be the basis for an initial collection. Zara creates two basic collections each year that are phased in through the fall/winter and spring/summer seasons, starting in July and January, respectively. Zaras designers refer to catalogues of luxury brand collections, and work with store managers to begin to develop the initial sketches for a collection close to nine months before the start of a season. Designers then select fabrics and other complements. Simultaneously, the relative price at which a product would be sold is determined, guiding further development of samples. Samples are prepared and presented to the sourcing and product development personnel and the selection process begins. As the collection comes together, the sourcing personnel identifies production requirements, decides whether an item would be in sourced or outsourced, and set a timeline to ensure that the initial collection arrives in stores at the start of the selling season. Product development personnel played a key role in linking the designers and the stores, and were often from the country in which the stores they dealt with were located. On average, several dozen items are designed each day, but only slightly more than one-third of them actually go into production. Time permitting, very limited volumes of new items are prepared and presented in certain key stores and produced on a larger scale only if consumer reactions are unambiguously positive. As a result, failure rates on new products are supposed to be only 1%, compared with an average of 10% for the sector. Learning by doing is considered very important in achieving such favorable outcomes.
P a g e | 41
Design and product development is a highly people-intensive process. The heavy creative workload of 1,000 new styles every month is managed by a design and development team of over 200 people, all based in Spain, each person in effect producing around 60 styles in a year (or 1-2 styles a week). With new styles being developed and introduced frequently, each style would provide only around 200,000-300,000 of retail sales, a far lower figure than other retailers or brands, and certainly not cost-efficient in terms of design and product development costs. But obviously, this higher cost of product development is more than adequately compensated by higher realized margins. In addition, the entire product development cycle begins from the market research. This combines information from visiting university campuses, discos and other venues to observe what young fashion leaders are wearing, from daily feedback from the stores, and from the sales reports. At the leading edge of research are the sales associates and store managers in Zara stores, who zap orders on customized handheld computers over the Internet to Zara headquarters based on what they are seeing. And not just orders, but ideas for cuts, fabrics or even a whole new line.
PRICING
Pricing is marked-based. However, if a decision was taken to enter a particular market, customers effectively bore the extra costs of supplying it from Spain. Prices are, on average, 40% higher in Northern European countries that in Spain, 10% higher in other European countries, 70% higher in the Americas, and 100% higher in Japan. Zara and historically marked local currency prices for all the countries in which it operates on each garments price tag, making the latter an atlas as its footprint expanded. The higher prices outside Spain did imply a somewhat positioning for Zara overseas, particularly in emerging markets. For example, in Spain, with the prices they have and the information available to the public, about the 80% of Spanish citizens can afford Zara. When they go to the Mexico, for cultural reasons, for incremental reasons, for economic reasons-because the average income in Mexico is $3000 compared to $14000-their targeted customer base is narrower is the upper class and the middle class. That is the class that knows fashion that is accustomed to buying in Europe, or in the United States, in New York or Miami. Prices, which are determined centrally, are supposed to be lower than competitors for comparable products in Zaras major markets, but percentage margins are expected to hold up not only because of the direct efficiencies associated with a shortened, vertically integrated supply chain but also because of significant reductions in advertising and markdown requirements.
P a g e | 42
PLACE
Like each of Inditexs chains, Zara has its own centralized distribution system. Zaras system consists of an approximately 400,000-square-meter facility located in Arteixo and much smaller satellite centres in Argentina, Brazil, and Mexico that consolidates shipments from Arteixo.
Distributions System All of Zaras merchandise, from internal and external suppliers, passes through the distribution centre in Arteixo, which operates on a dual-shift basis and features a mobile tracking system that docks hanging garments in the appropriate bar-coded area on carousels capable of handling 45,000 folded garments per hour. As orders are received from hand-held computers in the stores (twice a week during regular periods, and thrice weekly during the sales season), they are checked in the distribution centre and, if a particular item was in short supply, allocation decisions are made on the basis of historical sales levels and other considerations. Once an order had been approved, the warehouse issues the lists that are used to organize deliveries. The warehouse is regarded as a place to move merchandise rather than to store it. According to logistics Director, The vast majority of clothes are in here only a few hours, and none ever stayed at the distribution centre for more than three days. Of course, the rapidly expanding store network demands constant adjustment to the sequencing and size of deliveries as well as their routing. The most recent revamp had been in January 2002, when Zara had started to schedule shipments by time zone. In the early morning while European store managers were still stocktaking, the distribution centre packed and shipped orders to the Americas, the Middle-East, and Asia; in the afternoon, it focused on the European stores.
P a g e | 43
The distribution centre generally runs at half its rated capacity, but surges in demand, particularly during the start of the two selling seasons in January and July, boosted utilization rates and required the hiring of several hundred temporary workers to complement close to 1,000 permanent employees. Shipments from the warehouse were made twice a week to each store via third-party delivery services, with shipments two days a week to one part of the store network and two days a week to the other. Approximately 75% of Zaras merchandise by weight was shipped by truck by a third party delivery service to stores in Spain, Portugal, France, Belgium, the United Kingdom, and parts of Germany. The remaining 25% was shipped mainly by air via KLM and DHL from airports in Santiago de Compostela (a major pilgrimage centre in Galicia) and Porto in Portugal. Products were typically delivered within 2436 hours to stores located in Europe and within 2448 hours to stores located outside Europe. Air shipment was more expensive, but not prohibitively so. Thus, one industry participant suggested that air freight from Spain to the Middle East might cost 3%5% of FOB price (compared with 1.5% for sea freight) and, along with a 1.5% landing charge, a 1% finance charge, miscellaneous expenses, and (generally) a 4% customs duty, bring the landed mark-up on FOB price to 12% or so. In the case of the United States, a 20%25% landed mark-up seemed a better approximation because of tariffs of up to 12% as well as other added cost elements.
PROCESS
Sourcing and Manufacturing
Zara sources fabric, other inputs, and finished products from external suppliers with the help of purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters. About one-half of the fabric purchased is gray (undyed) to facilitate in-season updating with maximum flexibility. Much of this volume is funnelled through Comditel, a 100%-owned subsidiary of Inditex that deals with more than 200 external suppliers of fabric and other raw materials. Comditel manages the dyeing, patterning, and finishing of gray fabric for all of Inditexs chains, not just Zara, and supplied finished fabric to external as well as in-house manufacturers. This process, reminiscent of Benettons, meant that it took only one week to finish fabric. Further down the value chain, about 40% of finished garments are manufactured internally, and of the remainder, approximately two-thirds of the items are sourced from Europe and North Africa and one-third from Asia.
P a g e | 44
The most fashionable items tend to be the riskiest and therefore are the ones that are produced in small lots internally or under contract by suppliers who are located close by, and reordered if they sell well. More basic items those are more price-sensitive than time sensitive are particularly likely to be outsourced to Asia, since production in Europe is typically 15%20% more expensive for Zara. About 20 suppliers accounted for 70% of all external purchases. Internal manufacture is the primary responsibility of 20 fully owned factories , 18 of them located in and around Zaras headquarters in Arteixo. Room for growth is provided by vacant lots around the principal manufacturing complex and also north of La Corua and in Barcelona. Zaras factories are heavily automated, specialized by garment type, and focused on the capitalintensive parts of the production processpattern design and cuttingas well as on final finishing and inspection. Vertical integration into manufacturing had begun in 1980, and starting in 1990, significant investments had been made in installing a just-in-time system in these factories in cooperation with Toyotaone of the first experiments of its kind in Europe.. Even for the garments that are manufactured in-house, cut garments are sent out to about 450 workshops, located primarily in Galicia and across the border in northern Portugal, that perform the labour-intensive, scale-insensitive activity of sewing. These workshops are generally small operations, averaging about 2030 employees (although a few employed more than 100 people a piece), which specializes by product type. The sewn garments are sent back from the workshops to Zaras manufacturing complex, where they are inspected, ironed, folded, bagged, and ticketed before being sent on to the adjoining distribution centre.
Retailing
Zara aims to offer fresh assortments of designer-style garments and accessoriesshoes, bags, scarves, jewellery and, more recently, toiletries and cosmeticsfor relatively high prices in sophisticated stores in prime locations in order to draw masses of fashion-conscious repeat customers. Despite its tapered integration into manufacturing, Zara places more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies by building up significant forward order books for the upstream operations.
P a g e | 45
Merchandising
Zaras product merchandising policies emphasize broad, rapidly changing product lines, relatively high fashion content, and reasonable but not excessive physical quality clothes to be worn 10 times, some said. In the last twenty years the supply chain has undergone drastic changes. The traditional push system, in which consumer demand outweighed supply, has transformed into a pull system or what some have coinedthe demand chain. The consumer is now empowered and they are demanding a continuous supply of new innovative products at low, low prices.
PROMOTION
Zara spends only 0.3% of its revenue on media advertising, compared with 3%4% for most specialty retailers. Its advertising is generally limited to the start of the sales period at the end of the season, and the little that is undertaken do not create too strong a presence for the Zara brand or too specific an image of the Zara Woman or the Zara Girl (unlike the Mango Girl of Spanish competitor Mango). These choices reflect concerns about overexposure and lock-in as well as limits on spending. Nor did Zara exhibit its merchandise at the ready-to-wear fashion shows: its new items are first displayed in its stores. The Zara name had nevertheless developed considerable drawing power in its major markets. Thus by the mid-1990s, it had already become one of the three clothing brands of which customers were most aware in its home market of Spain, with particular strengths among women between ages of 18 and 34 from households with premium to super premium market.
P a g e | 46
PHYSICAL ENVIRONMENT
Zaras drawing power reflects the freshness of its offerings, the creation of a sense of scarcity and an attractive ambience around them, and the positive word of mouth that resulted. Freshness is rooted in rapid product turnover, with new designs arriving in each twice-weekly shipment. Devout Zara shoppers even knew which days of the week delivery trucks came into stores, and shopped accordingly. About three-quarters of the merchandise on display is changed every three to four weeks , which also corresponded to the average time between visits given estimates that the average Zara shopper visits the chain 17 times a year, compared with an average figure of 3-4 times a year for competing chains and their customers. Attractive stores, outside and inside, also help. Luis Blanc, one of Inditexs international directors, summarized some of these additional influences: We invest in prime locations. We place great care in the presentation of our storefronts. That is how we project our image. We want our clients to enter a beautiful store, where they are offered the latest fashions. But most important, we want our customers to understand that if they like something, they must buy it now, because it wont be in the shops the following week. It is all about creating a climate of scarcity and opportunity.
Store Operations
Zaras stores function as both the companys face to the world and as information sources. The stores are typically located in highly visible locations, often including the premier shopping streets in a local market and upscale shopping centre. Zara actively manages its portfolio of stores. Stores are occasionally relocated in response to the evolution of shopping districts and traffic patterns. More frequently, older, smaller stores might be relocated as well as updated (and typically expanded) in new, more suitable sites. The average size of the stores has gradually increased as Zara improved the breadth and strength of its customer pull. Thus, while the average size of Zara stores at the beginning of fiscal year 2001 was 910 square meters, the average size of the stores opened during the year was 1,376 square meters. In addition, Zara invests more heavily and more frequently than key competitors in refurbishing its store base, with older stores getting makeovers every three to four years. Zara also relies on significant centralization of store window displays and interior presentations in using the stores to promote its market image. As the season progresses and product offerings evolve, ideas about consistent looks for windows and for interiors in terms of themes, color schemes, and product presentation are prototyped in model window and store areas in the headquarters building in Arteixo. These ideas are principally carried to the stores by regional teams of window dressers and interior coordinators who visit each store every three weeks. But some adaptation is permitted and even planned for in the look of a store.
P a g e | 47
PEOPLE
The size, location, and type of Zara store affected the number of employees in it. The number of sales assistants in each store is determined on the basis of variables such as sales volume and selling area. And the larger stores with the full complement of stores-within-storeswomens, mens, and childrenstypically have a manager for each section, with the head of the womens section also serving as store manager. Personnel are selected by the store manager in consultation with the section manager concerned. Training is the responsibility of the section manager and is exclusively on-the-job. After the first 15 days, the trainees suitability for the post is reviewed. Personnel assessment is, once again, the job of the store manager. In addition to overseeing in-store personnel, store managers decide which merchandise to order and which to discontinue, and also transmit customer data and their own sense of inflection points to Zaras design teams. In particular, they provide the creative teams with a sense of latent demand for new products that could not be captured through an automated sales-tracking system. Zara promote approximately 90% of its store managers from within and have generally experienced low store manager turnover. Once an employee is selected for promotion, his or her store, together with the human resources department, develop a comprehensive training program that included training at other stores and a two-week training program, with specialized staff, at Zaras headquarters. Such off-site training fulfils important socialization goals as well, and was followed up by periodic supplemental training. Store managers receive a fixed salary plus variable compensation based primarily on their stores performance, with the variable component representing up to one-half of the total, which make their compensation very incentive-intensive. Since prices are fixed centrally, the store managers energies are primarily focused on volume and mix. Top management tries to make each store manager feel as if she were running a small business.
P a g e | 48
The awkward factor in the profitability formula Buy low, sell high. Buy on credit, sell on cash. Retail profitability often seems like a no-brainer. In high perishable goods such as fashion products that are susceptible to seasons, gross margin is meaningless if the product does not sell as planned. In simpler terms, you make more money if you sell more, even at a lower margin. 30 per cent on sales of Rs. 100 is better than 60 per cent on Rs. 10. Zara, which contributes around 80 per cent of group sales, concentrates on three winning formulae to bake its fresh fashions: Short Lead Time= More fashionable clothes Lower quantities= Scarce supply More styles = More choice, and more chances of hitting it right
P a g e | 49
retailers, Zaras machinery can react to the report immediately and produce a response in terms of a new style or a modification within 2-4 weeks.
P a g e | 50
Reducing Risks
By reducing the quantity manufactured in each style, Zara not only reduces its exposure to any single product but also creates an artificial scarcity. As with all things fashionable, the less its availability, the more desirable the object becomes. When Zara opened its first store on Londons Regent Street, shoppers are said to have browsed without shopping, thinking that they would come back to buy during a sale. Then the store assistants explained that the styles were changed every week, and the style liked by the customer would very likely not be available later. Subsequently, Regent Street became one of Zaras most profitable stores and more stores opened in the UK.
P a g e | 51
By retaining control over the dyeing and processing areas, Inditex has fabric processing capacity available on demand to provide the correct fabrics for new styles. It also does not own the labour intensive process of garment stitching, but controls it through a network of subcontracted workshops in Spain and Portugal.
P a g e | 52
Apart from designing to the fashion-of-the-day, Zaras strategy of producing low volumes per style and changing products quickly in its stores enables it to cut down on the discounts as well. Only about 18 per cent of Inditex clothing doesnt work with its customers and must be discounted. Thats half the industry average of 35 per cent. Zara also has two clearly time-limited sales a year rather than constant markdowns.
P a g e | 53
Strategic Drawbacks
Although Zara has a successful business model that differs from that of traditional retailers, it
also has disadvantages that can affect its sustainable growth. Due its model, Zaras weaknesses also differ from the traditional retailer. Their strategy has more advantages than drawbacks but it is important to recognize its limitations. Zaras weaknesses may are discussed below: Higher costs due to vertical integration: Vertical integration often leads to the inability to acquire economies of scale, which means they cannot gain the advantages of producing large quantities of goods for a discounted rate. Higher costs due to continuous innovation: Zaras speedy and recurrent introduction of new products incurs increased costs as well. They have higher research and development costs. They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. That also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers do not experience higher costs in all of these areas. Large number of competitors due to large product range: Almost any retailer can be a threat to Zara due to their wide range of merchandise categories. Zara offers clothing and accessories for men, women, maternity, children, and baby. Many other retailers also offer goods to one or all of those merchandise groupings. The Gap is one of these competitors because they are also international and sell the same range of merchandise with a less trendy style. Threat of cannibalization: Zaras extensive location strategy involves putting multiple Zara stores that carry the same merchandise in the same cities. That means Zara is trying to sell the same exact merchandise to the same people that reside in that city. Despite Zaras historical success at scaling up its distribution system, observers speculated that the centralized logistics model might ultimately be subject to diseconomies of scalethat what worked well with 1,000 stores might not work with 2,000 stores. In an attempt to increase capacity, Zara was beginning construction of a second distribution centre, at Zaragoza, northeast of Madrid.
P a g e | 54
Conclusion
Zaras global model will be tested in India on three counts. One, there arent too many seasonal variations. In most parts of the country, winter is non-existent or at best lasts barely a couple of months. So driving new fashions every season isnt easy. Two, there is the cultural issue: Although the new mall culture is inducing buying habits to change, Indians still dont change their wardrobe that quickly. And it is Zaras ability to get customers to visit and buy several times a year that enables it to achieve scale. Three, as a concept, Western womens wear is still catching on. For most part, traditional Indian wear tends to dominate the wardrobe. And there is a strong preference for bright colours as opposed to the limited colour palette black, white and browns in the West.
P a g e | 55