MASTER OF MANAGEMENT

GADJAH MADA UNIVERSITY

MARKETING MANAGEMENT

“MANAGING RETAILING, WHOLESALING,

AND LOGISTICS”

CASE STUDY : ZARA CLOTHING

Lecture : Prof. Dr. Basu Swastha Dharmmesta, M.B.A

Group 4

Anne Stam [Student Exchange]

Febrini Wulandari 08/277511/PEK/12841

Irwan Arfandi Bachtiar 08/277521/PEK/12851

Case Summary

Zara’s marketing strategy focuses on product variety, speed-to-market, and store location. It

is also notable for what it excludes. If you want to find out what’s currently available at the

Zara stores you have two options: go to the web site or go to the store. Zara puts 10,000

different items on the store shelves in a single year. It can take a new style from concept to

store shelf in 10-14 days in an industry where nine months is the norm. In its primary

European markets, Zara locates its stores close together.

Zara’s success is as much a result of its history and location, as of its counter-intuitive

business strategies. While it may not be possible for another company to exactly duplicate

the conditions under which Zara flourished, one can certainly learn from its experiences, and

it’s business structures.

COMPANY PROFILE

Zara is the flagship chain store of Inditex Group owned by

Spanish tycoon Amancio Ortega, who also owns brands

such as Massimo Dutti, Pull and Bear, Oysho, Uterqüe,

Stradivarius and Bershka. The group is headquartered in A

Coruña, Spain, where the first Zara store opened in 1975.

It is claimed that Zara needs just two weeks to develop a

new product and get it to stores, compared with a six-

month industry average, and launches around 10,000 new

designs each year. Zara has resisted the industry-wide

trend towards transferring fast fashion production to low-cost countries. Perhaps its most

unusual strategy was its policy of zero advertising; the company preferred to invest a

percentage of revenues in opening new stores instead.1

1 Data accessed on http://en.wikipedia.org/wiki/Zara_(clothing), March 12, 2009.

MAIN ISSUES

The elements supporting Zara’s business structure and strategy are also greatly interlinked

and interdependent. The following three factors stand out:

1. Extensive market research providing a constant stream of inputs into the product

development process, rather than in batches or discrete seasons.

2. Locating various business function in close proximity of the headquarters, and tight

control, allows the various functions to coordinate and take joint-decision very

quickly. Control also refers to early investment in raw material, and direct or indirect

“ownership” of processing and production capacities. These provide the capability to

respond very quickly to the market research-influenced decions.

3. Communication and information Technology are absolutely vital to managing the

constant interface of various and management of the huge variety of product

information.

And also...

“How Zara manage the strategy of distribution and vertical integration ?”

Problem Statement

On which way can vertical integration of zara be an advantage for the company?

On which way can the fact that zara has a single distribution centre be an advantage?

Analysis

What to do before:2

Target market

Zara’s target market is people from teens to adults, men and women.

Product assortment

Zara is broadly and deeply assorted.

Procurement

2 Taken from Kotler and Keller, Marketing Management 13th edition, Prentice Hall

Establishing merchandise sources, policies and practices.

Prices

Zara product price is affordable

Services

Prepurchase service, postpurchase service, ancilary service.

Store atmosphere

Zara store’s athmosphere is high end but classy, high lighting, no pictures on the wall.

Store activities and experiences

Stay update through the website.

Communications

No advertising, but free press is good advertising.

Location decision

Zara locates themselves in central business districts with as many outlets as possible.

Overall about vertical integration

Zara defies most of the current conventional wisdom

about how supply chains should be run. In fact,

some of Zara's practices may seem questionable, if

not downright crazy, when taken individually. Unlike

so many of its peers in retail clothing that rush to

outsource, Zara keeps almost half of its production

in-house. Far from pushing its factories to maximize

their output, the company intentionally leaves extra

capacity.

Rather than chase economies of scale, Zara manufactures and distributes products in small

batches. Instead of relying on outside partners, the company manages all design,

warehousing, distribution, and logistics functions itself. Even many of its day-to-day

operational procedures differ from the norm. It holds its retail stores to a rigid timetable for

placing orders and receiving stock. It puts price tags on items before they're shipped, rather

than at each store. It leaves large areas empty in its expensive retail shops. And it tolerates,

even encourages, occasional stock-outs.3

Under computerized system, the company reduced its design to distribution process

to just 10 to 15 days. Rather than placing the design burden on a single designer, the

company developed its own in-house team of designers—more than 200 by the turn of the

21st century—who began developing clothes based on popular fashions, while at the same

time producing the company's own designs. In this way, the team was able to respond

almost immediately to emerging consumer trends as well as to the demands of the

company's own customers—for instance, by adding new colors or patterns to existing

designs. State-of-the-art production and warehousing procedures, as well as the installation

of computerized inventory systems linking stores to the company's growing number of

factories, enabled the company to avoid taking on the risk and capital outlay of developing

and maintaining a large back inventory.

Strategic Advantages

Zara has been able to achieve excellent financial status due to its core competencies

that provide the chain with a competitive advantage over traditional retailers in the industry.

Zara is an apparel chain that works differently from traditional retailers. Generally, a

traditional retailer outsources all of its production while focusing on distributing and

retailing those goods. This is due to the fact that the global apparel industry is “highly-labor

intensive” rather than capital intensive. Fashion retailers and apparel manufactures are

always seeking to lower costs by outsourcing production to developing countries where the

lowest labor rates are found. In contrast, Zara is a chain that has developed a successful

diverse method of doing business in the fashion industry. Zara by working through the whole

value chain is very vertically integrated and highly capital intensive.

Vertical integration, a distinctive feature of Zara’s business model, has allowed the

company to successfully develop a strong merchandising strategy. This strategy has led Zara

to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara

manufactures 60% of its own products. By owning its in-house production, Zara is able to be

flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of

3 Data accessed on http://www.twistedesign.com/master_logistica/05-12 06/Zara%20rapid%20fulfillment.pdf, March 11, 2009.

this production is done through the season, which allows the chain to constantly provide its

costumer with very updated products. Traditional retailers lack this flexibility. Traditional

retailers are obligated to place production orders to manufacturers overseas at least 6

months in advance of the season.

Zara’s in-house production purposely

creates a rapid product turnover since

its “runs are limited and inventories are

strictly controlled”. This rapid product

turnover creates a climate of scarcity

and opportunity in Zara’s retail stores.

The climate also increases the

frequency and rapidity with which

consumers visit the stores and buy the

products. Regular customers know that new products are introduced every two weeks and

most likely would not be available tomorrow. Therefore, Zara’s scarcity climate allows the

company to sell more items at full price. This strategy minimizes Zara’s total cost because it

reduces 15-20% of markdown merchandise compare to a traditional retailer.

Furthermore, Zara’s unique quick response system, composed of human resources as

well as information technology, allows Zara to respond to the demand of its consumer better

than the competition. Zara, who focuses on the ultimate consumer, places “more emphasis

on using backward vertical integration to be a very quick fashion follower than to achieve

manufacturing efficiencies”. It is extremely important for Zara to speed the information flow

of consumer desires to their apparel designers. For that reason, Zara has human resource

teams in the retail and manufacturing environment that work exclusively toward this goal. In

the manufacturing environment, Zara’s product development teams are responsible for

attending high-fashion fairs and exhibitions to translate the latest trends of the season into

their designs. Also throughout the season, Zara’s product development teams are constantly

researching the market by traveling to universities, and clubs around the world to track

customer preferences. Additionally, the young, fashionable, and international staff helps to

interpret the desire of the moment.

In the retail environment, Zara’s managers and sales associates are in charge of

transmitting the sales analysis, the product life cycles, and the store trends to the designers.

This allows the designers in Spain to develop the right products within the season to meet

consumer demand. The transfer of this communication is also accelerated by IT software

that is specifically designed for Zara’s diverse business. Zara’s quick response communication

strategy is effective due to its management and corporate culture. Amancio Ortega, the

founder of Inditex, still owns 60% of Zara’s shares. Mr. Ortega has effectively transmitted the

values of the company, which are: freedom, perfectionism, responsibility, rapidness,

flexibility and respect to others, to his management team. This has created a very

autonomous and flexible corporate culture for Zara. Also, this has allowed the company to

work horizontally with an open communication environment rather than a hierarchal one.

Due to this, Zara’s managers work in teams in the countries where the chain is located.

These divisional headquarter teams are

composed of a head country manager who is

constantly communicating with local managers

and reporting to top management. The constant

flow of information between managers allows

the company to keep its customers happy, which

results in increased sales.

Moreover, Zara’s centralized distribution

facility gives the chain a competitive advantage by minimizing the lead-time of their goods.

Zara’s internally or externally produced merchandise goes to the distribution center. This is

cost-effective due to the close proximities of the distribution center in Arteixo and their

factories in Coruña. In the distribution center, products are inspected and immediately

shipped, since Zara’s distribution center is a place where merchandise is moved rather than

stored (12). Then, to increase delivery speed, the shipments are scheduled by zones and

shipped by way of air, and land. The typical delivery time within and outside Europe is

between 24 to 48 hours.

Zara also has an advantage over its competitors due to its low advertising costs.

Zara’s advertising investment is 0-.3% as compared to traditional retailers who expends 3 –

4% (13). Zara’s 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 Zara’s global stores. The display positions Zara in the industry

with a prestigious and elegant image.

By targeting a broad market Zara has an international advantage over its competitors.

Zara’s target market is very broad because they do not define their target by segmenting

ages and lifestyles as traditional retailers do. Zara’s 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 Zara offers

globally are relative standardized fashionable products. This is due to the fact that Zara’s

marketing teams believe that a product that sells well in a fashion capital such as New York

will most likely sell well in another such as Milan, Sao Paulo or Madrid since fashion has

become more globally accessible.

On which way can vertical integration of zara be an advantage for the company?

Cutting cost because they do not outsource any channel.

Cutting time, more faster, effective, and efficient.

Avoid conflicts emerge from different channels.

On which way can the fact that zara has a single distribution centre be an advantage?

Centralized control, avoid misunderstanding or conflicts.

Manageable time scheduling, focused on one rather than managing several

different time schedules.

On which way can this be an disadvantage?

Diseconomic of scale – in long term, the costs is getting higher and higher.

Because of managing distributions on their own, designing and production

process might not be in its optimum level.

Recommendation

Design

Cooperate with vary range of designers so Zara can maintain its competitive

advantage to be “the fast fashion” but remain more and more creative.

Production

Cooperate with any channel of production all over the world so new improvements in

operation technology can be applied into Zara instead of keep using the old ones.

Distribution

Making more distribution centres so they will enable Zara to be more faster,

effective, and efficient in distributing their products to the retailers.

Advertising

Advertising might be important in the future when competitors are becoming more

competitive and demands are declining

-FIN-

Typical Zara Store, at Almere, Netherlands.