Zara marketing strategy pdf

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WHAT BUSINESS IS ZARA IN?1 Daniel J. Doiron wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-09-24

What would 2016 have in store for Inditex and its flagship brand Zara with its “fast fashion” business model? It had taken years for new competitors to build business models that could effectively compete with Zara’s approach.2 Many would recall the early deference many had towards Zara and its counter-intuitive business model. Why would anyone invest in a fashion manufacturer and retailer who produced their clothes in the high- cost labour market of Spain (versus Asia), spent very little on advertising, ostensibly overspent on positioning high-end stores in chic retail districts across Europe, carried substantially less inventory than competitors, manufactured clothes that were, arguably, of a lesser quality and finally, charged 15 per cent less at the cash register. By all accounts, this approach was viewed as a formula for disaster in the highly competitive retail fashion industry.3 At the time, most observers were just not forward thinking enough to see the value in Zara’s approach. And, over time, Inditex took great pride in proving them wrong. By 2014, Zara was, by far, the number one fashion retailer in the world by many measures.4 It really was its unique business model that enabled this astounding success. Inditex, however, could not dwell on past successes, as the future was full of significant challenges associated with the many new upstart and copycat competitors who had infiltrated the market. These new firms would, more than likely, also enjoy a good degree of success. Disruptive innovations, such as Zara’s business model, inevitably were copied. Examples of how industries evolved around disruptive business models included Southwest Airlines leading the discount airline industry and Wal-Mart dominating the discount department store industry. Perhaps it was time for Inditex to reinvent the industry business model, once again.

For the exclusive use of J. GUO, 2018.

This document is authorized for use only by JIXUAN GUO in BA 4101 Competitive Strategy taught by DAVID MARSHALL, University of New Brunswick from May 2018 to Jun 2018.

Page 2 9B15M088 THE EARLY YEARS In 1963, when Amancio Ortega Gaona started his small dressmaking firm in La Coruña, Spain, at the tender age of 16,5 he never dreamed it would lead to the world’s largest retail fashion empire. Nor did he aspire to become the fourth richest person in the world.6 What he did come to understand over the next twelve years was that textile manufacturing was a very risky, often frustrating, business when you were one step removed from your customers. This was especially true in the fast changing women’s fashion segment of the market. So, in 1975, he opened up his first Zara store in the centre of La Coruña, Spain, a town of 246,000 people and was driven by the overriding principle that the key to success as a fashion retailer was to link fashion design to manufacturing and distribution in a way that allowed for rapid response to the finicky, and often changing, needs of the customers. This was the sole foundation for the creation and growth of Zara. It still is. Early success spurred the opening of nine new stores in Spain’s largest cities over the next eight years.7 Ortega also learned that to be successful he would have to take advantage of the intelligence and trust the judgment of his employees throughout his company.8 In other words, a top down decision-making model, as it related to new product design and distribution, would be counterproductive to his overriding notion of reacting quickly to his customers’ needs. Thus, he put critical processes of product design, manufacturing and distribution decisions in the hands of his employees across the company. It was the combined approach of manufacturing new clothes as quickly as possible in response to customers’ needs and desires while adopting a decentralized decision-making process that allowed Zara to thrive and grow in the ultracompetitive retail fashion industry. Over the next 17 years following the launch of Zara in 1975, Ortega opened more than 1,000 new stores, culminating in an initial public offering on May 23, 2001. The funds raised through this offering would provide the fuel for a tremendous evolution that would see Inditex grow to operate 6,683 stores in 88 markets across eight brands, with fiscal 2014 revenue of €18.1 billion9 and industry leading profit margins (see Exhibit 1).10 THE GLOBAL FASHION RETAIL INDUSTRY The global retail apparel industry had revenues of US$1.323 trillion in 2013, employing approximately seventy-five million people. The industry was expected to grow at a pace of 5.1 per cent annually to reach an estimated US$1.685 trillion by the end of 2018.11 The industry was influenced by a number of factors, including changing demographics and urbanization of the global population. A full 64.4 per cent of the Asian population would be urbanized by 2050, up from 45 per cent in 2011. Likewise, Europe would see 82.2 per cent of its population living in urban centres, 88.6 per cent in North America.12 According to the McKinsey & Company report on succeeding in the future fashion market, “by 2020, a quarter of global wealth will be concentrated in just 60 mega- cities, some of which will be larger than countries.”13 With the global population predicted to grow to over nine billion people by 2050, from the 2014 level of seven billion,14 it would seem the industry was on a trajectory for massive growth. This, tied to a growing middle class in developing nations, like China and India, could lead to a substantive increase in spending on fashion clothing. In 2010, the Brookings Institute predicted that by 2021 “on present trends, there could be more than two billion Asians in middle class households, [with] China alone [accounting for] over 670 million middle class consumers, compared with only perhaps 150 million today.”15 Middle class spending was projected to rise from US$21 trillion today to US$51 trillion in 2030.16 This would surely fuel the retail fashion apparel industry for years to come (see Exhibits 2 and 3).

For the exclusive use of J. GUO, 2018.

This document is authorized for use only by JIXUAN GUO in BA 4101 Competitive Strategy taught by DAVID MARSHALL, University of New Brunswick from May 2018 to Jun 2018.

Page 3 9B15M088 The women’s apparel market was predicted to grow by 4.8 per cent annually from 2010 to 2025, outpacing the previous growth of 3.3 per cent for the six years prior.17 Lu et al. stated that “some 80 per cent of top growth cities for total apparel sales by 2025 will be in emerging markets.” They went on to say that these cities would enlarge the world apparel markets by an additional US$100 billion over this time period.18 Emerging markets at that time would represent 55 per cent of mid-market women’s apparel sales (see Exhibit 4). NDP Group suggested that in 2013 the U.S. women’s apparel business alone reached US$116.4 billion, a 4 per cent increase over 2012. Online purchases were on a fast growth trajectory as well, representing 15 per cent of women’s apparel sales in the United States, up an astounding 17 per cent over 2012.19 Trends and challenges in this market were many. Responsible sourcing, including greater visibility across the entire supply chain, topped the list. Tragic events, like the blaze at the Tazreen garment factory in Bangladesh in November of 2012,20 had heightened the need for textile manufacturers and retailers to strengthen their supply chains to ensure fair trade, safe work environments, living wages, social commitment and responsible resource development. Industry growth opportunities, specifically in developed countries, included the plus-size categories. This was a US$17.5 billion market in the 12 months ending April 2014 in the United States, up 5 per cent over the previous year,21 and was a direct reflection of the obesity epidemic under way in the developed world where seven of 10 Americans were now overweight.22 The apparel industry moved hand-in-hand with fluctuations in the global economy, with the demoralizing recession of 2009 – 2010 having had a significant negative impact on the industry. According to a study by comScore in 2011, there was a noteworthy decrease in consumer’s willingness to buy the brand they want most, from 54 per cent in 2008 to 45 per cent in 2010.23 Price point clearly became a defining factor during economic downturns, with branded retailers such as Gap and H&M (Hennes and Mauritz) suffering the most. Other factors impacting the industry included global transport costs, linked to the price of oil. It would seem, with oil prices near or below US$60 per barrel by mid-2015, these costs were likely on a downward swing. Technological innovation in textile manufacturing was having an impact on important metrics within the industry beyond cost reduction. Mass customization, small batch manufacturing and time to market were becoming key risk management factors. These drove a deeper focus across the entire supply chain. New fabric innovation was also having a strong positive impact on the growth of the apparel industry, specifically in the sportswear market. Commodity prices could significantly impact the industry cost structure, and specifically cotton, which represented approximately 36 per cent of the textile fibres market.24 In 2014, global cotton prices tumbled by 20 cents per pound to an average price of US$1 per pound on lower demand,25 with total global production at 116.7 million bales, down 5 per cent from the previous year.26 Additionally, the rapidly growing aging population of consumers over 60, referred to as a “demographic earthquake” in developed countries would become one of the fastest growing segments for consideration along with their expenditures on clothing.27

For the exclusive use of J. GUO, 2018.

This document is authorized for use only by JIXUAN GUO in BA 4101 Competitive Strategy taught by DAVID MARSHALL, University of New Brunswick from May 2018 to Jun 2018.

Page 4 9B15M088 CUSTOMER BEHAVIOURS Perhaps the most significant factors driving change to the retail apparel industry were associated with shifting customer behaviours. Customer buying behaviours and patterns could directly influence a firm’s ability to succeed and in many cases, these behaviours would determine a firm’s approach, and indeed the resulting industry business model. The urban retail fashion market, where Zara played,28 was inextricably tied to two key customer behaviours: Hard to Predict and Influence Fashion apparel customers were a fickle group that could be extremely hard to predict and influence. They could be easily swayed by unpredictable factors, such as celebrity fashion, friends’ fashion choices or the need to differentiate themselves in a crowded urban environment. These variables made it extremely challenging to predict the next fashion hit and contributed to the single largest risk in retail apparel: a “fashion miss.” In turn, fashion misses resulted in discounts and markdowns in order to make room for new inventory. For example, in 2014, H&M had 24.2 per cent of their entire online offering on discount, with close to 10 per cent discounted by 50 per cent or more.29 Studies have shown that specialty apparel retailers could end up marking down from 30 to 40 per cent of their inventory by up to 60 per cent on average.30 To mitigate this risk, many apparel retailers spent an exorbitant amount of money on advertising, with a focus on building brand awareness and loyalty. And it worked — to a degree. For example, Gap spent US$637 million on advertising in 2013 on sales of US$16.148 billion; representing 3.9 per cent of sales or 10.1 per cent of gross profit.31 In the highly competitive fashion industry this could be a defining driver of profitability. Tastes Change Often Fashion cycles could also be notoriously short, especially in the urban womenswear segment. Trends came and went, which drove fashion retailers to introduce new fashions more often and avoid replenishing old items where old stock might necessitate potential discount. At H&M, upwards of 23.1 per cent of its current range of online offerings had been replenished;32 this impacted both their inventory turnover ratios and ability to sell items at or near full price. Introducing new fashions frequently could have the positive desired effect of enticing customers back to the store more often. An average customer would visit the typical fashion store(s) four times per year, while some fashion retailers, such as Zara, enticed their customers back as many as 17 times per year with fresh fashion choices appearing more often.33 A fashion retailer’s ability to react quickly to shifting fashion preferences could be a defining success factor. INDITEX AND ZARA — A UNIQUE APPROACH Inditex was the public holding company for Zara and seven other retail brands, including Bershka, Massimo Dutti, Pull & Bear and Stradivarius. After 23 years of diversifying into these new categories, Zara still represented the vast majority of the sales (and profitability34) of Inditex. In 2014, Zara represented 64 per cent of Inditex’s revenue across 2,085 stores35 (see Exhibits 5 and 6) and a full 66.4 per cent of its EBIT.36 Inditex had been on a tear for the last decade. It had taken its sales from €5.67 billion in 200437 to €18.1 billion in fiscal 2014.38 This had been accomplished through a focused geographic expansion effort that had

For the exclusive use of J. GUO, 2018.

This document is authorized for use only by JIXUAN GUO in BA 4101 Competitive Strategy taught by DAVID MARSHALL, University of New Brunswick from May 2018 to Jun 2018.

Page 5 9B15M088 seen the company open, on average, 1.22 stores per day across 88 countries.39 Its recent focus for geographic growth was primarily Asia, where 450 stores in China alone where opened by the end of 2014.40 The company’s approach was very different from its traditional competitors. For instance, it was highly vertically integrated, and unlike all its competitors, it manufactured the majority of its own clothes. In fact, it manufactured about half of its own products in what most would consider, the high cost labour markets of Spain, Portugal or other nearby countries, relying less on Third World outsourced manufacturing.41 Its competitors, by contrast, outsourced the vast majority of their production. Unique Capabilities Inditex had built a number of defining competencies, which its competitors did not possess. The first was associated with time to market. The company could move from a sketch of an idea to a product ready for shipment in as little as two weeks.42 This was precisely why Zara had been dubbed as the leading champion of the relatively new “fast fashion” industry. However, Pablo Isla, chief executive officer (CEO) and chairman of Inditex, did not endorse this term. “I don’t identify with the concept of fast fashion,” he said. “We are not about selling a million striped T-shirts as fast as possible.” He went on to say that the success was “based not on speed but on accuracy, on understanding exactly what customers want, week by week, and store by store.”43 This highlights a key capability at Inditex — its ability to identify customer needs and desires and translate these critical inputs back to the design teams in La Coruña. Zara achieved this through employee groups dubbed “commercials.” There were three essential levels of commercials that worked closely with one another at Zara. The design team commercials, which typically consisted of four employees — two product managers and two designers were responsible for designs in a specific category, such as women’s sport clothing. They were given all the decision authority required to succeed, including independence in setting designs, ordering fabric, manufacturing quantities and pricing. These teams decided what Zara would make and sell. In fact, they introduced an astounding 18,000 new individual designs for Zara stores each year. These teams were supported by regional commercials responsible for liaising with store managers (and customers) across certain geographic footprints. Their overriding responsibility was to identify the clothing styles that would sell in their markets. They did this through observing what people were wearing (and importantly wanted to wear), along with the insights (and orders) coming from the store managers.44 Store managers were the third level of commercials. Their primary responsibility was to select the inventory they believed would sell in their stores, accomplished through talking with and observing customers. They had to also be up to the minute and intimate with their store inventory levels and sales. They ordered new inventory within each category in the store twice a week. For many years Zara chose to not implement a store-wide inventory management system, requiring store managers to count inventory by hand. This, among other things, forced the store managers onto the floor and, by default, to interact with customers. The insights gained from this interaction helped managers purchase inventory for their store that was more relevant and compelling for their customers. However, store managers would not always receive the items they ordered. At times, the regional commercials would place new items in stores to “see how they would sell.” They usually made these new clothes in small batches to avoid any significant markdowns in the event they were not popular.45 This approach drove fashion failure rates for Zara’s new products that were as low as 1 per cent, which was considerably lower than the industry average of 10 per cent.46