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 Febrini Wulandari [Student Exchange] 08/277511/PEK/12841

Irwan Arfandi Bachtiar

08/277521/PEK/12851

Case Summary
Zaras 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 whats 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. Zaras 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 its 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, Uterqe, Stradivarius and Bershka. The group is headquartered in A Corua, 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 sixmonth 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

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

MAIN ISSUES
The elements supporting Zaras 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 Zaras target market is people from teens to adults, men and women.

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

 Product assortment Zara is broadly and deeply assorted. Procurement Establishing merchandise sources, policies and practices. Prices Zara product price is affordable Services Prepurchase service, postpurchase service, ancilary service. Store atmosphere Zara stores 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 designersmore than 200 by the turn of the 21st centurywho 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 customersfor 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 Zaras 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. Zaras 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 Zaras 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, Zaras scarcity climate allows the company to sell more items at full price. This strategy minimizes Zaras total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer. Furthermore, Zaras 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, Zaras 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, Zaras 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, Zaras 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 Zaras diverse business. Zaras quick response communication strategy is effective due to its management and corporate culture. Amancio Ortega, the founder of Inditex, still owns 60% of Zaras 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, Zaras 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, Zaras centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. Zaras 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 Corua. In the distribution center, products are inspected and immediately shipped, since Zaras 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. Zaras advertising investment is 0-.3% as compared to traditional retailers who expends 3 4% (13). 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. By targeting a broad market Zara has an international advantage over its competitors. Zaras target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zaras target market is a you ng, 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 Zaras 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.