Zara

LAL BAHADUR SHASTRI INSTITUE OF O F MANAGEMENT

ZARA Marketing Analysis With Respect To Indian Apparel Industry Group 2

Kriti Mehan – 217 Neetesh Bansal – 230 Prashant Aggarwal  – 232 Deepti Saluja – 252 Subhav Budhia  – 262 Submission Date: September 03, 2012

Table of Contents Zara Zara Overview and History ..................................................... .................................................... ........ 3

Zara in India............................................................................................................................................... 4 Mission and Vision ................................................................................................................................ 5 International Timeline .......................................................................................................................... 6

 Apparel Industry Analysis Market Characteristics ............................................................................ ........................................... 8

Market Size ............................................................................................................................................... 8 Future Outlook ...................................................................................................................................... 9 Demand Projection ................................................................................................................................. 10 Market Structure and Segmentation ...................................................................................................... 12 Distribution Distribution Structure............................................... .................................................................................................... ..................................................... ............... 14

Trade Channels ....................................................................................................................................... 14 Sales Network ......................................................................................................................................... 14 Distribution Network .............................................................................................................................. 15 Competition Competition ............................................................................... .................................................. 16 Michael Porter’s 5 Forces Model ............................................................................................... Model ............................................................................................... .... 20

Threat of New Entrants ........................................................................................................................... 21 Bargaining Power of Suppliers ............................................................................................................ 24 Bargaining Power of Buyers .................................................................................................................... 25 Threat of Substitutes............................................................................................................................... 26 Intensity of Rivalry .................................................................................................................................. 27 SWOT Analysis .................................................................................... ......................................... 28 Consumer Behavior and Preferences............................................................. ................................ 30 Potential for European Companies in India ......................... .................................................... ...... 32

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Zara Marketing Analysis Entry Strategy ..................................................................................... ......................................... 35 Business Model ................................................................................... ......................................... 36 STP Analysis ................................................................................................. ................................ 38 Marketing Mix Analysis ............................................................... ................................................. 40

Product .................................................................................................................................................... 41 Pricing...................................................................................................................................................... 42 Place ........................................................................................................................................................ 43 Process .................................................................................................................................................... 44 Promotion ............................................................................................................................................... 46 Physical Environment .............................................................................................................................. 47 People ..................................................................................................................................................... 48 Competitive Advantage ................................................................................................. ............... 49 Strategic Drawbacks ................................................. ...................................................................................................... ..................................................... ............... 54 Conclusion ................................................................................. .................................................. 55

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ZARA Overview and History  Amancio Ortega Gaona, the founder of Inditex, thought that consumers would regard clothes as a  perishable commodity just like yogurt, bread or fish to be consumed quickly, rather than stored in cupboards, and he has gone about building a retail business that provides “freshly baked clothes”. 

Zara is one of Spain's primary fashion and clothing line companies with regards to profit and sales volume.

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In 1975, Zara begin its activity with the opening in A Coruna (Spain) of its first store, although the origins of the Group date back to 1963, the year in which Amancio Ortega Gaona, chairman and founder, begins his business activity. Its headquarters are situated in Arteixo, Spain.

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In the year 1985, INDITEX was created as head of the group and later on ZARA opened its first store outside Spain in December 1988 in Oporto (Portugal). Since then, ZARA has continuously expanded its market globally year on year with its stores present all over the world. Also, the INDITEX group launched new brands like Pulls and Bear, BERSHKA and expanded its business by acquiring MASSIMO DUTTI and STRADIVARIUS groups.

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ZARA launched e-commerce for the first time in September, 2011 in EUROPE and later on expanded its online operations to US and other European and Asian countries that helped in boosting up the revenues.

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ZARA now has 1,830 stores in 82 markets and 5 continents including 107 new stores opened last year all of which have criteria of eco-efficiency. With little over 80% of its 109,000 employees working in stores, the Group has almost 80% of its workforce as Females.

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Over 50% of INDITEX’s manufacturing takes place in suppliers from proximity. At the end of 2011,

INDITEX had 1,398 active suppliers with whom it maintains stable relationships based on ethics and responsibility governed by the Code of Conduct for External Manufacturers and Suppliers, which must be accepted in order to maintain commercial relations relations with the Group. 

The company has also one of the most extensive presences among all international fashion and clothing companies. This is done through the use of a marketing strategy of global networking of distributors.

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The business system that had resulted was particularly distinctive in that Zara manufactured its most fashion-sensitive products internally

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Zara Company utilizes the prestigious name of both the company and its excellent clothing labels, and this strategy has enabled the company to fulfill an integrated marketing approach which gives emphasis to the company name.

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There are also a wide range of integrated integrate d Marketing Communication Communicatio n (IMC) strategies str ategies available av ailable that Zara Company could utilize of in order to manage their promotional endeavors .

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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.

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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.

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In India, the brand sells its products in the range of 1500-2300 which is premium segment looking at the economic stature of India.

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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.

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ZARA Mission and Vision Through Zara’s business model, we aim to contribute to the sustainable development of society and that of the environment with which we interacts.

Following are some of the objectives and actions included in the framework of the group's environmental commitment: At the Eco-friendly Store 

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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.

With the Product  

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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.

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Zara International Timeline 

1975:  ZARA begins its activity with the opening in A Coruna (Spain) of its first store,

although the origins of the group date back to 1963, the year in which Amancio Ortega Gaona, chairman and founder, begins his business activity. 

1976: GOASAM is founded by the owner of the ZARA stores and continues with the opening

of the first stores in Spain. 

1985: The creation of INDITEX as head of the corporate group.

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1988: The opening of the first ZARA store outside Spain occurs in December 1988 in Oporto

(Portugal). 

1989-1990: The United States and France are the next markets in which the Group begins

its activity with the opening of outlets in New N ew York (1989) and Paris (1990). 

1991: The birth of the PULL&BEAR chain and the purchase of 65 per cent of the MASSIMO

DUTTI Group. 

1992-1994: INDITEX continues to open new international markets: Mexico in 1992, Greece

in 1993 and Belgium and Sweden in 1994. 

1995: INDITEX acquires the whole of the share capital of MASSIMO DUTTI. This year also

sees the opening of the first store of the Group in Malta and in the following year in Cyprus. 

1997: Norway and Israel join the list of countries in which INDITEX is present.

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1998: The BERSHKA chain, targeting the younger female market, commences its activity in a

year which also sees the opening of stores in new countries: Argentina, Japan, United Kingdom, Venezuela, Lebanon, United Arab Emirates, Kuwait and Turkey. 

1999: The acquisition of STRADIVARIUS makes it the fifth chain of the Group and stores are

also opened in new countries: the Netherlands, Germany, Poland, Saudi Arabia, Bahrain, Canada, Brazil, Chile and Uruguay. 

2000: The opening of stores in four new countries takes place in 2000: Austria, Denmark,

Qatar and Andorra. INDITEX installs its headquarters in a new building located in Arteixo. 

rd

2001: On 23   May 2001 Inditex goes public and is listed on the Spanish Stock Market.

During this year the group begins its activity in the following markets: Puerto Rico, Jordon, Ireland, Iceland, Luxemburg, Czech Republic and Italy.

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APPAREL INDUSTRY ANALYSIS

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Market Characteristics India’s 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 purchasing to a life style or a branded level product.

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India’s 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

2005

2006

Value (M Rs.)

Volume (M units)

Menswear Women's wear Uniisex apparel

1328

284800

1379

318400

1443

358720

1516

408384

1600

444032

1368

246784

1443

283712

1523

326784

1609

379072

1676

410496

466

64896

486

73728

519

93504

548

108480

579

116224

Kids' wear

1222

117504

1269

130880

1323

149312

1381

172928

1468

190400

Uniforms

423

63424

457

76736

498

93504

543

115008

581

132928

4807

777408

5034

883392

5306

1021824

5597

1183872

5905

1294016

Total

Value (M Rs.)

Volume (M units)

2008

Volume (M units)

Value (M Rs.)

Volume (M units)

2007 Value (M Rs.)

Volume (M units)

Value (M Rs.)

CAGR by Volume 5%; By Value: 13.6% (Conversion Rate: 1 Euro = 64 Indian Rupees)

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India's Apparel Market Size: By Volume 6000 5000

Menswear

4000

Womenswear

3000

Unisex apparel Kidswear

2000

Uniforms 1000

Total

0 2004-05

2005-06

2006-07

2007-08

2008-09

India's Apparel Market Size: By Value

25000 Menswear

20000

Womenswear

15000

Unisex apparel 10000

Kidswear

5000

Uniforms Total

0 2004-05

2005-06

2006-07

2007-08

2008-09

Assessment of Demand and Market Potential in India Indian textile clothing and apparel industry has been one of the worst affected under the impact of financial meltdown that has impacted impacted the economies of US and EU. As a fall- out, India’s domestic  textile and apparels market suffered some set-back. However, India’s economy during the past 2/ 3 months has shown signs of recovery. Government of 

India has projected GDP growth rate of 6.5% for 2009-10. This is much better economic situation when one compares with the developed western countries. countries.

Future Outlook for Clothing and Apparels sector 

Apparel, is the second largest retail category in India. Retail boom in India continues to stimulate consumer demand for apparels and is estimated to grow at the rate of 12-15 per cent annually in terms of growth in rupee value.

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Reflecting the huge opportunity in this segment, AT Kearney's 'Retail Apparel Index' ranks India as the third most attractive market for apparel retailers.

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 –Ernst & Young Textiles and Apparel Report 2007, the Indian sourcing market is According to the CII –

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.

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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.

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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.

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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

Key Market Drivers – Drivers  – Domestic  Domestic market Changing demographic profile works as a major stimulus to market development. India has a young consumer profile with over 65% of the population below 35% years of age. The composition of the Indian population is shifting more towards the age –group 20-49, viz, the working population with

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purchasing power. It seems to indicate that consumer life style and preferences are changing fast which is a prominent driving factor. factor. Rising Income Level 

A large number of households are getting added to the consuming class with growing income levels.

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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.

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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.

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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 

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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.

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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

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Indian companies evolving from mere converters to vendor partners of global buyers

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Large outsourcing orders helping Indian companies build capacities, lower their per unit cost and become more competitive

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Market Structure and Segmentation Indian apparel market is vast, and fragmented and yet growing, characterized by presence of large number of players, widely dispersed across the country. The market is segmented in three different ways: 

Segmentation by User category

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Segmentation by Use

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Segmentation by Price

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.

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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.

Regional Characteristics of the Market 

The consumer behavior of a particular region which is economically not so developed is different as compared to developed ones. The consumers in the less developed region are understandably, more price-conscious. Always on the lookout for quality products, their guiding principle is ’value for money’. A lower per capita income, in eastern region for   example, compared to western and

northern India leads to a lower per capita purchasing power. 

Additionally, Delhi being centrally located and Mumbai, being the financial capital have certain advantages. The consumers who live in these cities are more exposed to latest apparel collections and are more familiar with design, quality and latest trendy fashion, as well as the luxury of greater choice.

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The relatively undeveloped region offers several in-built advantages as well. Fashion contenders setting out to do businesses in these regions find to their advantage that the region has not been exploited commercially and is prone to competition? The market, therefore, offers much but it needs to be cultivated in an organized manner.

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Local ready availability of products also influences a consumer. The decision to stick to a particular vailable brand seems to govern the purchase decision than the rarely available choicest product. Logistics, convenience convenience and easy availability are important considerations considerations for a local consumer.

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Regional considerations, such as climatic conditions etc., play a major role in so far as the purchase decision of apparels is concerned. For instance, a consumer in Northern region would spend more on woolen apparels and clothing than his counterpart in the west or south where the winter is much milder. Similar is the case with linen products. It has not found much acceptance among Indian consumers. Besides being expensive, expensive, linen has not become popular in a tropical country like India.

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There are certain common considerations for consumers regardless of locations. The consumers by and large are becoming increasingly more and more conscious of value of money. Price sensitivity is a common concern. Purchase decisions of consumers anywhere are more guided a combination of demographic and psychometric factors, such as, disposable income, age-distribution, pattern of income distribution, distribution, quality of upbringing, upbringing, aptitude, tastes and preferences and so on.

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Distribution Structure Trade channels 

There is a commonality commonality of approach adopted by manufacturers / importers for marketing their wares. Large manufacturers manufacturers maintain an exhaustive marketing set-up at an all India level to reach maximum geographical spread and service customer requirements through various mechanisms.

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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 Appointment of dealership net-work & servicing the requirements of distribution distribution network.

Structure of Marketing Department 

The structure of marketing department varies with size and scale of o perations, as well as the product range of individual companies. There is no uniform hierarchy in the marketing department. department.

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However the typical commonly used structure is as under: Brand Manager (Retail)

Business Development

Sales

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 fo r showcasing products and maximizing sales.

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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.

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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

Distributor

Stockist

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.

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Competition Characteristics The market is characterized characterized by: 

Branding and sub-branding

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Offering variety: current trend and variety

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Quality standards—in material, stitching and cuts

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Moving up the value chain- ensuring better returns.

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Export market: sticking to delivery schedules, conforming to quality and Quantity commitment, ability to interpret interpret fashion changes.

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Highly dynamic market- design changing frequently

Product Range, Brand and Category

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.

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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 ‘women’s 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

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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 Raymond’s, Parx and Park Avenue. Using a similar strategy, Indian Rayon acquired garments division o f 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 women’s share in total apparel retailing. 

Men’s and women’s wear were traditional established market segments. Kids’ wear retailing was an offshoot of men’s and women’s 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

44%

Economy

26%

21%

Medium

36%

18%

Premium

14% 2%

Super Premium

31%

19%

5%

3% 0%

26%

24% 11%

19%

10%

2 0%

30%

Menswear

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40%

50%

Womenswear

60%

7 0%

80%

90%

100%

Unisex

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Market Share of Leading Players

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Major Foreign Collaborations in Indian Apparel Industry Name of India Indian n Compan Company y Trent Ltd, Tata Group

Foreign Manufact Manufacturer urer

Nature & Area of Collaborat Collaboration ion

Inditex Indite x SA (Zara) (Zara )

Arvind Mills Ltd

VF Corporation Lee, Wrangler, Vanity Fair, Nautica, JanSports and Kipling CF ITALIA, Italy Gruppo Zambaiti, Italy Lanificio Fedora, Italy UCO NV, Belgium Espirit Global Ltd, USA

JV to promote Zara Stores in India JV

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

Reliance

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Benetton International International Lee Cooper Ltd East, UK

Wrangler, John Player & Lee

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Technical Collaboration JV JV JV JV

JV for development development of knits JV JV to include women’s wear (retailing skirts, trousers, dresses and tops) Strategic Partnership

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Michael Porter’s 5 forces model Theoretical Framework Porter's five forces analysis  is a framework for industry analysis and business strategy development

formed by Michael E. Porter of Harvard Business School in 1979. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness attractiveness of a market. Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: competition: the bargaining power of suppliers and the bargaining power of customers.

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THREATS OF NEW ENTRANTS New companies often bring new resources and can drive down product prices and reduce profitability of the industry. Therefore, existing firms try to raise the threats for new entrants. The threats for new entrants are increased when 1. Incumbent players have achieved economies of scale 2. Switching costs are high, 3. There is a limited access to distribution channels, 4. There is a cost disadvantage, 5. Government policy is favorable to the domestic firms. 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. 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.

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Demand side scale economy Demand-side scale benefits arise with the increase in customers’ willingness to pay for a company’s 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 emotional or symbolic value of foreign brands.

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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 ventures or wholly wholly owned subsidiaries. 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.

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

Wal-Mart entered India in 2007 via a joint venture with India’s leading business Bharti Enterprises. ZARA entered India in 2010 via joint venture with TATA Group’s retail arm Trent.

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BARGAINING POWER OF SUPPLIERS 



It depends on the level of supplier concentration, importance of volume, and threats of forward integration. Suppliers are powerful when they are concentrated and there is a high threat of forward integration, affecting the buyer’s ability to achieve profi tability. The fragmented structure of these sectors diminishes the power of Indian suppliers due to the lack of capability to achieve scale economies. However there are few large domestic suppliers who have, over the years, accrued the power and capital to pose a threat to the retail apparel industry. They also pose a threat of forward integration

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BARGAINING POWER OF BUYERS 

Buyer power accrues with lower buyer-to-supplier ratio, large purchase volume, and high threat to integrate backward. The Indian retail sectors are approximately 15 M outlets, of which 12 M are unorganized retailers.



Retailers in the organized sectors  in India are characterized by large size, differentiated products, high purchase volume, and greater geographical spread and revenue, thus creating a buyers’ market





By contrast, unorganized retailers are characterized by small size, undifferentiated products, and small purchase volume and revenues, factors limiting their market capability and the number of suppliers from which to choose, thus creating a sellers’ market. Although the Indian retailing sectors have been deregulated since 2006, the complexity of the Indian market and lack of experience with diverse local markets may discourage foreign retailers’ capital investment in backward integration. However, the government’s encouragement of local sourcing and manufacturing, together with the availability of low cost labor and raw materials, are likely to increase foreign apparel firms’ intentions of backward vertical integration as the Indian economy is rapidly growing and providing great market opportunities.

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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 o rganized retailers 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 self-

service 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.

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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.

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SWOT Analysis: STRENGTH   

Assured raw material base – abundant supply of cotton and manmade fiber. Well-established 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 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 standardization and quality control of Indian garments have resulted in large scale rejections of products in the export market

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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 we ar’.



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.



Government’s 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 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. 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.

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Consumer Behavior and Preferences Characteristics of Indian Consumer 



The Indian consumers are noted for the high degree of value orientation. Such orientation to value has labeled Indians as one of the most discerning consumers in the world. Even, luxury brands have to design a unique pricing strategy in order to get a foothold in the Indian market. Indian consumers have a high degree of family orientation. This orientation in fact, extends to the extended family and friends as well. Brands with identities that support family values tend to be popular and are accepted easily in the Indian market.



Indian consumers are also associated with values of nurturing, care and affection. These values are far more dominant than values of ambition and achievement. Products, which communicate feelings and emotions, gel with the Indian consumers.

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 women’s 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.

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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. 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. 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.

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Potential for European Companies in India Apparel manufacturing activities in the European Union have been tapering off for some time due to escalating costs of labor and other key inputs, as well as hardening of currency. The situation has further intensified in the years post WTO. Dismantling of the quota regime has further sharpened global competition in the apparel industry. Many manufacturers have been forced to close down their manufacturing plants. plants. The apparel industry in EU has witnessed major decline in production, export and employment. Some of the manufacturers have started relocating their plants to remain in business. The abolition of quota has radically transformed the center of gravity of global apparel manufacturing activities from the developed to the developing countries. India has of late emerged as a major force to reckon with. Volumes and changes in the market for European textile clothing and Apparel 

European Union has a traditional bilateral trade relationship with India for many decades. Many multinational corporations have been operating from India. EU textile and apparel companies have considerable investments in India. European apparel manufacturing companies in recent years had considerably diverted their exports from the USA to India as a matter of compulsion.



Massive imports of apparel in to India from EU had started pouring in the past few years. Since the financial meltdown gripped EU in 2008, EU companies have now started looking at India for relocating their plants and using India’s developed textile infrastructure as a base for third country exports.

Growth of Imports from EU 



European apparels have been well received in Indian market. This has been corroborated by import data available from the Ministry of Commerce, Commerce, Government of India. Import of European apparels has registered an appreciable rise from 1.03 M units in 2005-06 to 2.58 M units in 2007-08 at a high CAGR of 58%. Import of European apparels has more than doubled from 10 M Euro in 2005-06 to 22 M Euro at a CAGR of 48% within a short span of 3 Years.



For European apparel manufacturers, Indian market works as a savior since their own market is saddled with deep depression and products do not sell. US market does not offer any short or medium term safeguard for the same reason.

Share of Imports

• 



Apparel import from EU comprises of medium and premium quality products. Import accounts for about 11 to 12% by volume of total apparel imports and this percentage has remained at this level in the past 3 years. Unit value realization of EU import of apparel has been on the higher side because of its superior quality. EU import constituted about 25% of total apparel imports by value in 2005-06. Its share

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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 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



Esprit



Adidas



Dewitte



Puma



Marzotton



Zara



John Player



Oxford



Mango

Company

Brands

Entry Strategy

Benetton

United Colors of Betton

Licensed

Adidas

Adidas

JV (Majority)

Puma AG

PUMA

Licensed

Espirit

Espirit

Mango

Mango

Franchisee

ZARA

ZARA

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.

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ZARA Mark Marketing eting Analysis

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Market Entry Strategy "The most important thing for Zara to enter a new market is the existence of potential customers: customers: People sensible to fashion phenomenon”. 

ZARA’s entrance on international market has been undertaken through three entry modes: Own subsidiaries, Franchising and Joint ventures.





If Zara doesn’t have knowledge about the market it prefers to use Joint ventures approach in order to make synergy with the local companies. The brand made its debut on the Indian market through a  joint venture with Trent Ltd. In India’s case it had more to do with the FDI regulations and less with market knowledge. INDITEX, Zara’s parent company, controls 51 percent of the joint venture, while Trent Ltd. owns 49 percent in accordance with current regulations on foreign direct investment in India, which stipulates that foreign single-brand retailers retailers must pass a 49 percent stake on to a local partner.





After selecting a market entry strategy for a particular country, Zara follows a pattern of expansion known in the company as “oil stain ”. This involves opening one or two 'insignia' store aimed at building up its name in a new location, before setting up smaller shops of different brands to reach a certain density of outlets that allows it to create economies of scale and boost profit margins. It means Zara opens its first few stores in a country to get an understanding of a market and then uses that knowledge as it expands into that market.



Zara followed the similar approach with its first store opening in New Delhi and within 5 weeks it opened 2 more stores, one in Delhi and other in Mumbai. The group had plans to open stores in Bangalore, Hyderabad, Chennai and Pune soon.



On the occasion of joint venture Trent Ltd managing director Noel Tata said, “We see great

opportunities for Zara in a country which is becoming increasingly fashion conscious. Zara has proven itself capable of quickly adapting to changing consumer tastes across geographies. It will satisfy the discerning Indian consumers’ demand for the latest fashion trends very well”. 

“We view our entry into the Indian market to be of significant strategic importance...Our retail

offering has been very well received by shoppers in Asian markets, and we have rapidly expanded there and now India will be one of our top priorities in the region,” INDITEX first deputy chairman and chief executive Pablo Isla shared his views about group’s Indian entry.

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ZARA: BUSINESS MODEL 

The Zara business model is characterized by a high degree of vertical integration compared to other models developed by our international competitors. It covers all phases of the fashion process: design, manufacture, logistics and distribution to its own managed stores. It has a flexible structure and a strong customer focus in all its business areas.The key element in the organization is the store, a carefully designed space conceived to make customers comfortable as they discover fashion concepts. It is also where we obtain the information required to adapt the offer to meet customer demands.



The key to this model is the ability to adapt the offer to customer desire in the shortest time possible. For Zara, time is the main factor to be considered, above and beyond production costs. Vertical integration enables us to shorten turnaround times and achieve greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.



Its business model, very different from other companies operating in the same industry, has been fundamental to its success. For this, today it is studied and taken as reference by companies would enter the market.

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 

Zara’s product lines are segmented into women’s, men’s, and children’s, with further segmentation of the women’s line, considered the strongest, into three sets of offerings th at vary in terms of their

prices, fashion content, and age targets. 

Zara aims to offer fresh assortments of designer-style garments and accessories —shoes, bags, scarves, jewellery and, more recently, toiletries and cosmetics —for high prices in sophisticated stores in prime locations in order o rder to draw masses of fashion-conscious repeat customers. customers.

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Scope and Capabilities 

At its heart Zara is building on a vertically integrated demand and supply chain. A company that operates in a vertically integrated strategy has total control of all business activities from designing, designing, manufacturing, sourcing, distribution to retail stores.



It enables company to short turnaround times and achieves greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent. The strategy is to produce and release products in number or limited in a store, a store may only receive ten of the new product. This strategy closely emulates a 'make to order environment'. environment'. This strategy this builds up customer's anticipation of the next product or design to be release, making the next product highly anticipated by customers.



All of Zara’s 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. 

Zara has centralized distribution centre in Spain with satellites in LATAM, ship and Inventory replenishment is done twice weekly (thrice during sales season) vs. less than once a week for industry.

Value Capture 

Perhaps its most unusual strategy was its policy of zero advertising; Zara’s advertising investment is

0.3% as compared to traditional retailers who expends 3  – 4%. 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. T he 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, Zara’s 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 doesn’t work with its customers and must be discounted. That’s 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 incentivized to maximize sales.

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STP Analysis Segmentation 

Product lines are segmented into women’s, men’s, and children’s, with further segmentation of the women’s line, considered the strongest, into three sets of offerings that vary in terms of their prices, fashion content, and age targets



Clothes for people with the combination of attitude and play

Target Market 

Zara’s 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 strategy of this fashion chain is excellent because because it adopted a balanced mixture of standardization standardization and customization.

Differentiation 

Perfect combination of high end fashion clothing at reasonable prices

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Product Positioning 

Product’s 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 -

Fashion + LEVIS

PANTALOON

Price -

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Marketing Mix Analysis

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 Zara’s 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 we re “made in Europe”.

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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



Zara’s products fall into shopping products’ category.



Each of Zara’s three product lines— for women, men, and children —have a creative team consisting

of designers, sourcing specialists, and product development personnel. 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. Zara’s designers refer to catalogues of  luxury   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.

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Supercharged Product Development

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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).

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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.

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

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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 garment’s 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.

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Prices, which are determined centrally, are supposed to be lower than competitors’ for comparable products in Zara’s 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 reductions in advertising and markdown requirements. requirements.

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PLACE Like each of Inditex’s chains, Zara has its own centralized distribution system. Zara’s 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.

Distribution’s Distribution’s System 

All of Zara’s 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. deliveries.

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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 adjustment to the sequencing and size of deliveries as well as their routing.

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The most recent revamp had been in January 2002, when Zara had started to schedule shipments by time zone.

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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.

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

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.

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Shipments from the warehouse were made twice a week  to each store via t hird-party delivery services, with shipments two days a week to one part of the store network and two days a week to the other.

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Approximately 75% of Zara’s 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 24 –36  –36 hours to stores located in Europe and within 24 –48  –48 hours to stores located outside Europe. Air shipment was more expensive, but not prohibitively so.

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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.

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About one-half one-half of the fabric purchased is “gray” (undy ed) to facilitate in-season updating with maximum flexibility. Much of this volume is funnelled through Comditel, a 100%-owned subsidiary subsidiary of Inditex that deals with more than 200 external suppliers of fabric and other raw materials.

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Comditel manages the dyeing, patterning, and finishing of gray fabric for all of Inditex’s  chains, not  just Zara, and supplied finished fabric to external as well as in-house manufacturers. This process, reminiscent of Benetton’s, 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.

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

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. purchases.

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Internal manufacture is the primary responsibility of 20 fully owned factories , 18 of them located

in and around Zara’s headquarters in Arteixo. Room for growth is provided by vacant lots  around the

principal manufacturing manufacturing complex and also north of La Coruña and in Barcelona. 

Zara’s factories are heavily automated , specialized by garment type, and focused on the capital-

intensive parts of the production process —pattern design and cutting—as 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 Toyota—one of the first experiments of its kind in Europe..

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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 20 –30 employees (although a few employed more than 100 people a piece), which specializes by product type.

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The sewn garments are sent back from the workshops to Zara’s 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 accessories —shoes, bags, scarves, jewellery and, more recently, toiletries and cosmetics —for relatively high prices in sophisticated stores in prime locations in order to draw masses of fashion-conscious repeat customers.

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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. operations.

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Merchandising Zara’s 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 coined—the demand chain. The consumer is now empowered and they are demanding a continuous supply of new innovative products at low, low prices.

PUSH Vs. PULL The transformation from a push to a pull system can be attributed in part to an oversupply of inexpensive products. Consumers can now pick and choose. The phenomenon of branding has also helped to usher in the pull system. In the past, trends and colours were forecasted by the spinners, weavers and knitters—far back into the supply chain and far removed from the consumer. Forecasting has changed hands. Today, large organized brand designers who are close to the consumer are effectively taking over forecasting duties—pulling the goods through the supply chain.

PROMOTION 

Zara spends only 0.3% of o f its revenue on media advertising, compared compared with 3% –4% for most specialty retailers.

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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).

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These choices reflect concerns about overexposure 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.

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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.

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PHYSICAL ENVIRONMENT 

Zara’s 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.

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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. customers.

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Attractive stores, outside and inside , also help. Luis Blanc, one of Inditex’s international directors,

summarized summarized some of o f 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 won’t be in the shops the following week. It is all about creating a climate of scarcity and opportunity.”

Store Operations  

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Zara’s stores function as both the company’s 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,

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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.

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Zara also relies on significant centralization 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. Arteixo.

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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.

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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.

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And the larger stores with the full complement of stores-within-stores —women’s, men’s, and children’s—typically have a manager for each section, with the head of the women’s section also serving as store manager.

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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 trainee’s 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 o wn sense of inflection points to Zara’s 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 Zara’s 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 store’s performance, with the variable component representing up to one -half of the total, which make their compensation very incentive-intensive. incentive-intensive.

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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.

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Zara’s

Competitive Advantage Advantage

Reasons for Success The sources of the competitive advantage advantage are: 

Vertical integration

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Short lead time

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Information technologies technologies

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Lower quantities and more styles

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Policy pricing

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Target market

The awkward factor in the profitability formula Buy low, sell high. Buy on credit, sell on cash. Retail profitability 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 contributes around 80 per cent of group sales, concentrates on three winning formulae to bake its fresh fashions: 

Short Lead Time= More fashionable clothes

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Lower quantities= Scarce supply 

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More styles = More choice, and more chances of hitting it right 

Short Lead Times: Keeping Up with fashion 

By focusing on shorter response times, the company ensures that its stores are able to carry clothes that the consumers want at that time.

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Zara can move from identifying a trend to having clothes in its stores within 30 days . That means that Zara can quickly identify and catch a winning fashion trend, while its competitors are struggling to catch up. Catching fashion while it is hot is a clear recipe for better margins with more sales happening at full prices and fewer discounts. In comparison, most retailers of comparable size or even smaller, work on timelines that stretch into 4-12 months.

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Thus, most retailers try to forecast what and how much its customers might buy many months in the future, while Zara moves in step with its customers. A very large design team based in A Coruna in North West Spain is busy throughout the year, identifying the prevalent fashion trends, and designing styles to match the trends . Unlike other

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retailers, Zara’s machinery can react to the report immediately and produce a response in terms of a

new style or a modification within 2-4 weeks.

Cycle Time Compression through Quick Response The activities of design and procurement start from three to six months before the selling season in order to capture the availability of approximately 65% of the needs of fabrics, the rest depends on market trends. It was estimated that Zara committed just 15%-25% of production before the season began (from three to six months before), 50%-60% at the start of the season, and the remainder was manufactured in season. Percentage of Zara sales consisting of markdowns was 15%-20%.Similarly, even the predominant part of the collection produced in-house (about 85%) depends on the sale trends. With regard, however, deliveries to shops, at the start of the season is sent the "basic collection", 15-20% 15-20% of the overall supply, usually placed on the market, which is then continually revised and supplemented with extraordinary rapidity based on commercial information collected by the shops.

Production Commitment and Markdown

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Product Pre-commitments: Zara Vs. Traditional Industry 

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 London’s 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 Zara’s most profitable stores and more stores opened in the UK.

Ownership and Control of Production For one, most other retailers completely outsource their production to factories around the world, many of them in low cost Asian countries. In contrast, it is estimated that 80 % of Zara’s production is carried

out in Europe, much of it within a small radius of its headquarters in Spain. In fact, almost half of its production is in owned or closely controlled facilities. While this gives Zara a tremendous amount of flexibility and control, it does have to contend with higher people costs, averaging 17-20 times the costs in Asia.

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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.

React Rather than Predict 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. These are also simultaneously costed. Sales budgets and stock plans are developed based on what is going on in the business right then (roughly one-year ahead of the targeted style). From beginning to end, the process of defining a concept to receiving goods in the retail store might take anywhere from 9 to 12 months for a typical retailer. Zara, on the other hand, largely concentrates its forecasting effort on the kind and amount of fabric it will buy . For an extra degree of flexibility Zara buys semi-processed or un-colored fabric  that it colors up close to the selling season based on the immediate need.

Quick-Bake Recipe: Well Mixed Ingredients Garment styling for Zara actually starts from the email or phone call received from the stores . Thus, from the beginning Zara is responding to an actual need, rather than forecasting future. Based on the store demand, Zara’s commercial managers and designers sit down and conceptualize

what the garment will look like, what fabric it will be made out of, what it will cost and at what price it will sell. The designer then actually sketches the garment out, details the specifications and prepares the technical brief. Since fabrics and trims are already in Zara’s warehouse, sampling takes very little time . Approvals are equally quick, since the entire team is located in the same place.

As soon as approvals are received, instructions are issued to cut the appropriate fabric. The cutting is done in Zara’s own high -tech automated cutting facilities. The cut pieces are distributed for assembly to a network of small workshops mostly in Galicia and northern Portugal. Thus, what takes months for other companies, takes no more than a few days for Zara.

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Information Technology keeps it Boiling Information and communications technology is at the heart of Zara’s business. 

Collecting information on consumer needs: trend information flows daily, and is fed into a

database at head office. Designers check the database for these dispatches as well as daily sales numbers, using the information to create new lines and modify existing ones thus, designers have access to real-time information when deciding with the commercial team on the fabric, cut, and price points of a new garment. 

Standardization of product information  different or incomplete specifications, and varying

product information availability typically add several weeks to a typical retailer’s product design and approval process, but Zara warehouses’ the product information with common definitions, allowing it to quickly and accurately prepare designs, with clear cut manufacturing instructions. 

Product information and inventory management being able to manage thousands of fabric and

trim specifications, design specifications as well as their physical inventory, gives Zara’s team the

capability to design a garment with available stocks, rather than having to order and wait for the material to come in. 

Distribution Management: its state-of-the-art distribution facility functions with minimal human

intervention.

Apart from designing to the fashion-of-the- day, Zara’s 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 doesn’t work with its customers and must be discounted. That’s half the industry average of 35 per cent . Zara also has two clearly time-limited sales a year rather than constant

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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, Zara’s weaknesses also differ from the traditional retailer. Their strategy has more advantages than drawbacks but it is important to recognize its limitations. Zara’s 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 : Zara’s 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: Zara’s 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 Zara’s historical success at scaling up its distribution system, observers speculated that the centralized logistics model might ultimately be subject to diseconomies of scale —that 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.

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Conclusion ’ 

’ 

Zara s global model will be tested in India on three counts. One, there aren t 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 isn ’t easy. Two, there is the cultural issue: Although the new mall ’ 

culture is inducing buying habits to change, Indians still don t change their wardrobe that quickly. And it ’ 

is Zara s ability to get customers to visit and buy several times a year that enables it to achieve scale. ’ 

Three, as a concept, Western women s 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.

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