Executive Summary

Zara is a successful fashion retailer that belongs to the parent company Inditex. Although Zara is the most successful chain among all Inditex’s businesses, it has several problems regardless. First, it needs to review its supply chain model because it is very centralized. As a result, the company suffers financial losses due to high transportation costs. Second, the company should enter the US market in an appropriate fashion. For example, it could start with online sales and only then offer physical shopping experiences. The company should use aggressive advertising and develop specific offerings for American customers to gain a market share in the US. Third, the retailer needs a new distribution center to reduce transportation costs and accelerate delivery. Finally, the company should create an education program for store managers to prepare enough specialists for new facilities.

 

Introduction

Zara, a major chain belonging to Inditex, was founded in Spain in the 1970s. The speciality of the brand is popularizing practically identical fashion culture across the world. Additionally, the business avoids intensive advertising campaigns. Instead, it has variable fashionable product offerings, which are sold in comfortable stores. Inditex currently operates six chains, such as Zara, Massimo Dutti, Pull&Bear, Bershka, Oysho, and Stradivarius. Each of these chains tries to satisfy different needs of customers so that Inditex is able to target various market segments. Zara is particularly suitable for the people that like innovations in clothing. The age of target customers ranges from infants to people aged 45. Massimo Dutti is for women and men focused on fashion. The age of the target audience is 25-45. Bershka offers trendy clothes for females aged 13-23. Pull & Bear provides casual items for affordable prices that can attract men and women aged14-28. Stradivarius sells modern urban fashion for men and women aged 15-25. Oysho is for people searching for modern lingerie at reasonable prices.

Despite operating in different market segments, all these chains have one goal. They attempt to gain a leading position in their segment by applying a flexible business model, which could be easily used on a global level. Inditex does not control its chains strictly. The parent company only offers major strategies for development and observes key financial ratios. Depending on the needs of international markets, Inditex uses one of three development strategies, such as becoming the only/major shareholder, reaching franchising agreements with local market leaders, or starting joint ventures. Today, the company has problems with its supply chain, entering the US market, economies of scale, distribution of resources, and store management. This paper will analyse all of the issues stated above and offer alternative courses of action. The common decision criteria for all the issues are operational costs and time. Following the recommendations will allow the company to reduce costs and accelerate its processes.

Supply Chain

Zara is a vertically integrated organization, which relies on various levels of the supply chain. The company owns its warehouses and factories. This approach allows Zara to expand to international markets easily and avoid the bullwhip effect. Data is also centralized so that the participants’ of the supply chain have access to it. Nevertheless, vertical organization does not allow Zara to receive benefits from economies of scale by manufacturing an immense quantity of clothing item for low unit costs. Additionally, frequent changes of items in stores require greater spending on staff and IT professionals to be able to create products in a fast and efficient manner. As a result, Zara has higher production costs than its competitors.

In addition, the company’s supply chain is characterized by the absence of predictions for the following seasons before the manufacturing of clothing items starts. The creative team simply monitors the current trends and addresses people’s needs. Today, Zara has problems with supplying goods to Asia and North America because delivery there is more expensive and slow. As a result, lead times for these markets become longer and Zara loses its competitive advantage. Thus, the company cannot react to the tastes and needs of customers as quickly as it does in Europe. Zara should change its supply chain model for non-European countries. The decision criteria are price considerations and time.

An alternative course action for this problem is opening a new distribution centre in Asia and in South American. The advantages of the solution is reducing transportation costs and accelerating delivery. The disadvantages include possible risks due to low demand in these markets. Additionally, the company might have difficulties with managing the work of three distribution centres. Nevertheless, the company should accept these risks in order to prepare the basis for future expansion. Inditex plans to expand to South America, the US, Asia, and increase its presence in European countries, so new distribution centres are essential.

Entering the US Market

The American market is less focused on fashion than Europe and it has a greater amount of sub-cultures with specific needs. Therefore, Zara should have short-term and long-term strategies for integrating a new group of customers. The short-time strategy is entering the US market through website sales. Although Zara has already started to sell online, it still needs improvements regarding this direction. This strategy will help the company learn the specific tastes of American customers as well as raise brand awareness. In addition, Zara needs to implement a more aggressive advertising campaign in the USA, because this market is overcrowded with fashion retailers (Randewich 2016). Moreover, American customers have got used to aggressive advertising and marketing so it would be difficult to attract them only by offering competitive products and enjoyable shopping experiences. The locations that have the most potential for Zara’s products are New York and Los Angeles, because these two cities are inhabited by representatives of numerous sub-cultures and fashion-focused customers.

When Zara learns more about the needs of American customers, it should start implementing the long-term strategy. In particular, the retailer should produce items developed specifically for American customers. Zara would have to create more conservative but still trendy clothes for Americans. Another component of the long-term strategy is opening stores in the U.S. Zara should start opening stores along the coasts because these places are expected to have a stronger demand for the company’s goods. In case of successful sales in physical stores, Zara needs to open a distribution centre in the US or near it. Additionally, Zara needs a refinement center to adapt basic clothes to the specific needs of the American market. Therefore, the company needs to use aggressive promotion in the US as well as address the specific tastes of local customers.

However, the suggested course of action has some disadvantages and potential risks. First, Zara does not have experience in conducting aggressive advertising campaigns, so it might fail its promotion in the US. Second, the company keeps its affordable prices due to low spending on advertising, so raising advertising costs may lead to financial losses. Third, customers choose Zara for its attractive stores and scarcity of goods. Online sales would eliminate these competitive advantages. In particular, the company would have difficulties concerning products replacement on its website every two weeks. Zara is able to change the products frequently because it sells very similar products across the world. Developing specific goods for the American market would cause issues in supply chain. Nevertheless, the company should try to use alternative courses of action. The decision criteria are high potential profit and opportunities for testing new business models.

Economies of Scale

There is only one significant barrier, which may prevent Zara from successful expansion to foreign markets. The company has an extremely centralized distribution system. All Zara products are transported from the distribution center located in Spain. Today, the center works effectively, but global expansion would increase the pressure on the staff. Zara’s competitive advantage is changing products on shelves every few weeks, so the company would have to make numerous small-sized deliveries all around the world. It would cause financial losses. In addition, Zara currently keeps the transportation costs low by using trucks rather than airplanes. Entering the US, Asia, and South America will force the company to use airplanes, which is considerably more expensive.

The problem can be addressed by opening another distribution centre. This course of action has been already offered while discussing the problems with the supply chain. Therefore, this recommendation will not only improve the economy of scale but will update the supply chain. To avoid financial losses, Zara should build the centre in a country where it enjoys high sales volumes or which is a favourable location by itself. For example, Zara can open a distribution center in Mexico. This country has low labour costs, which would allow minimizing Zara’s spendings (Anderson 2013). Additionally, it is situated near the United States, which is a very attractive market for the fashion retailer. Zara can also use the centre to expand to countries located in South America. The risks are low demand on non-European markets, in which case the distribution center will not have enough work. Despite the risks, the company should open the center. The decision criterion is operating costs.

Change of the Company’s Focus

Today, Inditex tries to increase the variety of its products to attract more customers. It has six different chains, which are organized as independent structures. Each of them has six areas (e.g. expansion, factories, and logistics) and nine departments. Each chain has its own strategy, distribution, staff, production, financial outcomes, and target audience. Moreover, all six chains have specific features. For example, Zara manufactures 11,000 different products each year, has direct shopping, changes items every few months, and modifies the design of stores. Such complexity of the company’s structure and operations can prevent the company from effective expansion to new markets.

The solution is to stop dividing chains into more pieces to attract more customers. Inditex should only invest into one of them. Further division will only distract potential customers. An alternative recommendation is focusing on developing Zara as the most successful brand. The disadvantages of the alternative course of action include failing to address the needs of certain customer groups. As a result, the company would lose potential customers and profits. Nevertheless, Inditex should try this course of action to continue its successful global expansion. The decision criteria is operational costs and effectiveness of operations.

Shortage of Store Managers

Store managers are key people in retail stores. They manage the personnel and search for ways to expand the sales. Zara encourages its managers to analyse customer’s tastes and decide which products to order. Although the company uses various rewards for motivating its executives, it might still lack these team members due to the fast rates of expansion. The recommendation is to create an international education program to seek and train talented people from different countries. The possible themes of a program are tools for analysing customer demand and interacting with customers and co-workers (Seshanna 2015). Apart from attracting talented people, the education program will increase brand awareness in other countries. For example, presenting internships in universities would allow the company to attract target customers. This solution follows Zara’s advertising strategy based on low investments in promotion. Additionally, the education program will help to collect information about specific tastes of local customers and create a positive image of Zara.

However, the education program involves several potential threats. First, the company should offer interesting career opportunities to attract people to the program (Seshanna 2015). Second, searching and educating talented people takes time so the company would not be able to see the results of their initiative immediately. Therefore, the company needs an effective educational program to prevent possible shortages of store managers. The decision criteria include opportunities for finding new store managers and risks associated with future expansion.

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Conclusion

In conclusion, Inditex needs to concentrate on making investments into the existing six chains, especially Zara. Moreover, the company should continue expansion across the world. The most attractive market is the American one due to the high income of its customers and their interest in shopping. Zara should start with online sales in the U.S. to analyse the specific needs of local customers. Besides, the fashion retailer should open a second distribution center. It is reasonable to build the center in Mexico. The success of each store depends on its store manager, so Zara should start an international educational program to prepare people for new stores. In addition, an intensive education program would help to raise awareness about the brand and research the local tastes around the world.

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