Analysis of Zara
Zara is a Spanish fashion company that was founded by Amancio Ortega in 1975. The firm has consistently grown from the one store that Amancio established in La Coruna to now consisting of over 2000 stores globally. Since its foundation, the business has concentrated on the production and selling of fashionable apparel at lower rates than competitors (Doiron 2). This strategy has made the firm to win a huge market for itself such that by 2014, it was the largest cloths manufacturer in the world. Unfortunately, Zara is facing stiff competition from competitors who are steadily duplicating and improving its sales and supply chain model. Therefore, the company has to modify its current sales strategy for it to remain competitive.
Key Problems or Challenge
One of the primary challenges that Zara is facing is how to keep up with changes in fashion. Due to the continuous variation in customer’s preferences, the company has to develop new designs regularly, which is always costly. This process is further complicated by the unpredictability of fashion trends. Consequently, Zara’s designers must be keen to identify the specific trends in the market. In cases where they fail to predict the most appropriate fashion trends, the firm usually incurs enormous losses when disposing of outdated clothes at throw-away prices. This challenge is also compounded by the fact that peak times for fashionable garments are notoriously short. Therefore, Zara always operates with the risk of missing out on the season, over-stocking, or in worse cases ending up with dead-stock due to the late timing of when to introduce new designs.
Finally, Zara is facing stiff competition from new businesses that have borrowed and improved its system. These companies include Topshop and Uniqlo. The latter sells fashionable sportswear, while the former deals with stylish casual clothes (Doiron 8). In particular, Topshop has replicated and improved Zara’s model, which has enabled it to win many customers. Unlike Zara, the company sells expensive and high-quality products (Doiron 8). This model has helped Topshop to become popular in most markets.
The current apparel market is steadily changing due to various external factors. Since Zara does not influence these phenomena, it should change its strategies so that it can adapt to the current business environment. Therefore, to secure its market and win more customers, Zara should change its tactics.
Increased Number of Middle-Class
Recently, there has been an increase in the number of middle class in the world, especially in emerging economies. Zara notes that the number of middle-class individuals is expected to continue increasing in the future. For example, the company estimates that households’ incomes in emerging economies will grow at a 25 percent compounded interest rate until 2025 (Doiron 13). Consequently, there will be a rise in the demand for clothes in both the emerging and developed economies.
The increased growth rate in emerging economies will make them essential markets for clothes. Due to the high population in developing countries coupled with an increase in their households’ disposable income, these nations will provide the bulk of the market for fashionable clothes. According to Zara, by 2025, the emerging markets will have a 55 percent share of the midmarket segment. However, they will only have a 28 percent share of the luxury market segment, which is still a considerable increase from the 14 percent market share that they had in 2010. As a result, clothes companies will in the future start concentrating in these markets. Moreover, the increase in incomes in both developed and emerging economies will make most individual to purchase high-quality clothes.
Zara’s internal resources and capabilities can enable it to exploit future business opportunities that will be caused by the increase in household incomes and changes in global economy. The company should re-align its resources to enable it to exploit these opportunities. Additionally, it can use its already established brand to have a foothold in its current markets.
Number of Stores
Zara has many stores located in prime businesses areas all over the world. As of 2013, the company had 2085 shops across the globe (Doiron 13). This massive number of stores gives it an excellent platform that it can use to market its products to its customers. In future, however, Zara should start focusing on emerging markets due to their enormous potential, which is primarily driven by their fast economic growth rate.
Zara has ample wealth, which can enable it to re-model its business in a manner that will allow it to exploit most of the current global resources. In 2015, for example, the total company equity was worth more than $11 billion. Additionally, the company has been making huge profits in the last few years. From 2012 until 2015, Zara consistently earned a net income of more than $2 billion (Doiron 13). Further, part of its assets includes its sophisticated production line in Spain, which can enable it to be more competitive in the clothes industry.
Zara’s employees are knowledgeable and highly experienced in their activities. In particular, the company operates through groups of highly competent individuals known as “commercials.” Commercials are categorized into three levels that closely work with one another to ensure timely creation and distribution of new products to the target markets (Doiron 5). Therefore, Zara can use its human resource to penetrate new markets and create high-quality products for its clients.
Mutually Exclusive Alternatives
Currently, Zara has come under stiff competition from companies that have copied its systems. For the enterprise to remain competitive in the future, it will have to change its current business model. Zara has penetrated into most markets by its tactic of selling fashionable but average quality products at low prices when compared to its competitors. Unfortunately, this model is no longer effective since customers are now demanding high-quality clothes. Additionally, the average increase in global wealth has made most people more willing to purchase expensive products. Due to these market changes, Zara should start selling fashionable apparels that are expensive and high-quality. This method will make the company retain most of its customers by satisfying their needs. Importantly, it will increase the company’s revenues.
Alternatively, Zara can increase the volume of products that it re-stocks in its stores. The increase in the quantities of inventories will enable the company to reduce its logistics and handling costs. The only shortcoming with this method is that it will lead to long intervals before the firm introduces new fashionable products.
For Zara to remain competitive in the future, it should start making expensive and high-quality products for its customers. This tactic will enable the company to increase its current incomes due to the high prices of each unit. In the future, the continued increase in the income levels of the overall world population will make most people will demand luxurious and high-quality items. Therefore, Zara’s strategy will enable it to remain competitive.
Doiron, Daniel. “What Business is Zara In?” Richard Ivey School of Business Foundation, W15431, 2015, pp. 1-16.