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Introduction

In the fashion industry, the trend of SPA(Specialty store retailer of Private label Apparel) is the main stream in global brand. The representative brands in fast fashion are Zara, H&M, Uniqlo and Gap which Korean are familiar. For this paper, our group team will focus on the Spanish retail giant, Zara as “known for its fast, affordable fashion” and how its largest retail chain ZARA has been so successful through its simple business model of speed, flexibility, and high fashion in international market as well as Korea. And we will see how they can keep their competitive advantages in the international market as well as Korea in very competitive situation

â… . About ZARA

Fashion giant, Zara, forms part of the retail group ‘Grupo Inditex’ which Mintel (2007) acknowledges as one of the “largest, fastest growing and successful” clothing retailers across Europe. Zara brand is the flagship chain store of ‘Grupo Inditex’ owned by Spanish tycoon Amancio Ortega, who also owns brands such as Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius,Bershka and Zara home. The first Zara store opened to the public in1975 in A Coruña, Spain, the headquarter of inditex, where the Group stated business and where it has its central office. Today, Zara operates in 82 markets with a network of more than 1,830 stores ideally [1] found in all the world’s major cities, always in the main shopping districts. Its international presence clearly shows that national borders are no impediment to a Zara’s success story begins by offering a product range capable of catering for men, women and children, providing affordable and stylish clothes whatever the season. Coupled with this, is their keen eye for discovering new fashion trends and translating these trends from the catwalk to the high street, both quickly and affordably.

â…¡. ZARA International Business Strategy

1. Timeline of Zara’s entry into international markets

The first ZARA store opened to the public in Spain in 1975. Over the following decade it continued to open new stores throught Spain. In 1988 it debuted in Portugal, and in the next few years, the first stores were opened outside the Iberian Peninsula, in New York(1989) and Paris(1990). This was the beginning of a proceed leading up to the current presence in 82 countries in Europe, the Americas, Asia and Africa. It success among people, cultures and generations which, despite their differences, all share a special feeling for fashion lies in the conviction that national frontiers are no impediment to sharing a single fashion culture. (Appendix 1)

The usual way of entering a new market is to a start with a small members of stores, which can explore the possibilities of a specific country in order to gain a critical mass of customers. The new formats incorporated into the Group since 1991 share the same international approach as ZARA – in fact, that is one of their fundamental characteristics. As a result, all of them have grown simultaneously in Spain and in other countries. In most cases, ZARA has been the first chain to break into new countries, accumulating experience which has helped the later implementation of the rest of the concepts. This accumulated experience has also allowed the accelerated international expansion of the most recently created chains.

2. Internationalization process of ZARA

ZARA 2006 2005

Zara is the most internationalized chain of INDETEX. The internationalization of Zara seems to follow the classic “stage model” by firstly entering geographically or culturally close markets before taking opportunities in more distant markets. During the 1980s, Zara expanded within the domestic market, opening stores in all Spanish cities with population greater than 100,000 inhabitants. In 2010, Zara was operating in 74 countries with more than 1 900 stores. International sales accounted for 66 percent of its total turnover in 2009, with Europe being its largest market by far.

As the domestic market of Zara became mature, the company decided to internationalize its products. In the sector of fashion clothes in a good quality at affordable prices, the consumption showed a slow pace of growth. A change in the Spanish consumer behavior was taking place in the 1980s. In fact, they started to spend more on spare time, travelling and education, and less on clothes.

After Spain joined European Union in 1986, Zara could internationalize more easily its products. Thanks to the globalization of the economy, the homogenization of consumption patterns across countries, the abolition of barriers to export and the development of the information technology. Zara believed that “national frontiers are no impediment to sharing a single fashion culture”.

Zara opened stores in three big cities that are considered fashion capitals and highly competitive such as New York (1989), Paris (1990) and Milan (2001). We cannot be denied that the USA market was a real opportunity for Zara to learn about American competitors such as Gap and also about consumers of this market. The USA was perceived to be a high risk market and it was proven correct. Internationalize its activities permitted to Zara to enrich its culture and vision of the market.

1) Market Selection

Zara’s internationalization has passed through several phases. Three stages have been identified. During these phases, the firm gained experience in the perceived risk, internationalization process. These phases are as follows:

First step: Between 1975 and 1988 Zara focused its expansion in the domestic market. The maturity of the Spanish market led Zara to search for international opportunities in 1988. Portugal was an attractive and familiar market due to its geographical and cultural proximity to Spain. By opening a store in Oporto, Zara acquired experience and knowledge and realized that it had to adjust its business model to suit the new.

Cautious expansion (1989-1996): During this stage Zara expanded into markets geographically and/or psychologically proximate and with a minimum level of socio-economic development (Paris, Belgium and Sweden). Gradually, Zara try to expand in market geographically distant but culturally close to Spain and became like that a reference of the South American market. In the Zara’s strategy, the opening of a store in 1989 in New-York permitted to have an international prestige and to get close to the fashion trends.

Aggressive expansion (1997-2011): Zara made a rapid global expansion thanks to its experience on the international environment. Between 2000 and 2003 Zara reinforced its situation in the European market rather than adding more countries. Costa Rica, Monaco, Philippines and Indonesia were added to the market portfolio in 2005. In 2010 Zara entered Indian market and expects that the Indian market will turn in to the company’s most vital market regarding to its population size, number of big cities. At the beginning of 2010 Zara was operating in 74 countries with 1900 stores with plans for more stores in the existing markets in Europe (France, Italy, Germany and Great Britain) and Asia.

2) Market Entry Strategies

The entrance on international market has been undertaken through three entry modes:

Own subsidiaries: This expensive strategy was adopted in Europe and in South America because there is a high growth potential and low business risk of these countries.

2. Joint ventures: If Zara do not know about the market well, it prefers to use Joint ventures approach in order to make synergy with the local companies. For example, in 1999 Zara entered into a joint venture with the German firm Otto Versand and benefited from the latter’s experience in the distribution sector and knowledge of one of the largest markets in Europe.

3. Franchising: This strategy is chosen for high-risk countries which are culturally distant or have small markets with low sales forecast like Saudi Arabia, Kuwait, Andorra or Malaysia. Zara´s franchisees follow the same business model regarding the product, store location, interior design, logistic, human resources, etc.

After selecting a market entry strategy for a particular country, Zara follows a pattern of expansion known in the company as “oil stain”. In simple terms, Zara follows ‘oil stain’ pattern when moving into a new market. This involves opening one ‘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. “The most important thing for Zara to enter a new market is the existence of potential customers: People sensible to fashion phenomenon.

3. The Company strategy of Zara

1) Responsive Supply Chain Strategy

Zara’s key competitive advantages is the vertical integration which means that Zara control the entire production process from design, production to logistics. (Appendix 2) . Through the vertical integration, Zara make it possible to have a better communication within its different units (headquarters, factories and stores) and meet the customer’s needs. In Zara’s supply chain management through vertical integration, Zara makes product available in to the market within 15 days by collaboration with Zara designers who seek customer needs and fashion trends fast, producing 60% products through in-house system and ensuring store are stocked with just what they need. In addition to the fast product, this supply chain model can prevent possible product errors and delivery delays. And Zara makes 40 percent of its own fabric and purchases most of its dyes from its own subsidiary

2) Promotional Mix and product strategy

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First, Zara stick to produce various but small amounts of fashion products. They produce 100,000 ~ 350,000 quantity per one item. This helps to create the scarcity value of each item. And keep their fashionable brand identity and increase brand value among customers. From company perspective, it can reduce the inventory stocks and minimize profit loss owing to additional discount for inventory managements.

Secondly, Zara has chosen not to do any promotion through advertisements. Whereas H&M promotes through important promotion campaigns (4% of its turnover), Zara gives priority to the place of their stores (only 0, 4% of its turnover). Indeed Zara’s stores are localized in the city centers of important cities. Zara only spends 0.3% of sales on advertising, while Zara’s rivals spend 3% to 4% of sales on it. This almost zero advertising is another peculiar strategy of Zara’s management since they believe that the reason for not spending money on publicity is that it doesn’t bring any added value to our customers. So they would rather concentrate on our offering more in terms of design, prices, rapid turn-around of stock and the store experience instead of advertisements.

3) SWOT Analysis

In summary, we are going to start SWOT analysis of Zara Company.

Strengths: Zara’s strength is very well known and well positioned in the market. Zara has fashionable and qualified products with reasonable price. As a leader of fast fashion, zara have an ability to design and produce the product within 6 weeks. This key attribute will be described in the SCM session.

Weakness: Zara have a centralized distribution system from Spain. Even if they have a fast adoption and production, they may be vulnerable to distribution to the global market. And even if they have a strong brand power, the market is very competitive market and the follower’s activities are very strong. So the very low advertisement may weaken the Zara’s brand images relatively.

Internal factor analysis

External factor analysis

Strengths

Opportunities

Fast delivery of new products

Design and trend

Value chain management

Brand image ( fashionable )

Potential global markets

Online market Weaknesses

Weaknesses

Threats

Lack of advertisements

Centralized distribution system

Lots of competitors in local and global

â…¢ ZARA’s Korea Entry Strategy

1. Overview of Korea Fashion Market

Korean fashion market in the past was not that large enough, and also department store was a mainstream with the high margin policy; for this reason, the Korean fashion market was regarded as hard circumstances for SPA brands to achieve success. In addition, there were additional difficulties to develop distribution network, such as restriction of commercial supremacy for SPA and expensive cost of real estate in downtown. However, there are spreading thoughts that Korea is very important hub for targeting Asian market due to the rapid growth of emerging market and “Korean Wave” in East Asia. For example, Zara’s designers visit once a month for getting an idea about product planning from the survey of Korean consumers although they enter Japan and China first. Swedish SPA brand, H&M also designated Seoul as a base for Asian market. Besides above advantage, Korean market is attractive for global SPA brands. 50 million people are packed in small region, Korea, and most of them are so sensitive to fashion that consumers tend to purchase clothes relatively compared to other country. Furthermore, they have much more purchasing power than European country; Portugal and Poland. A variety of clothes are essential to live Korea which has distinctive four seasons.

What Zara Launched in Korea triggers fever of SPA, and they are rapidly encroaching on domestic fashion market. Zara in Myeong-dong, Korea recorded average 1.8 billion won for a month from 2009. Obviously, global SPA brands impact on domestic market, moreover, their strategy is influence on behavior of Korean consumers.

2. Korea Market Entry Strategy

1) Market Entry mode

The entrance on international market has been undertaken through three entry modes: owning subsidiaries, joint ventures and franchising. Among these three, Zara selected the entry mode of joint ventures in Korea. Based on previous cumulated Zara’s experience of entering new market, Zara chose Joint venture approach since they don’t have enough knowledge about Korea Market and the local joint venture approach make synergy with them like latter’s experiences with German firm Otto Versand in Europe.

In 2007, a Spain company Inditex established Zara Retail Korea with Lotte Shopping, and they enter Korean market as open a store at Myeong-dong and COEX on April in 2008. The configuration of the equity joint venture with Lotte Shopping 20% 80% Inditex. Initially, Hyundai Corporation signed MOU for introduction of Zara brand in 2004, but finally Lotte took this deal instead of Hyundai since Hyundai abandoned this deal.

2) Store Strategy

Since the expansion of store is main route for sales growth, Zara also is striving to open big stores. There are various form, such as department store, big shopping mall and road shop, however, their partner Lotte distribution network is not utilized that much. Zara is trying to overcome cannibalization as focusing on downtown; for example, they set up 3 stores in Myeong-dong within 1km. Even if Lotte Shopping has minority equity, they do not like to open Zara stores out of their boundary, other department store and shopping mall. Particularly, Zara had agreement with that they only can enter Lotte department store among ‘Big 3’ department stores, that is, Lotte, Shinsegae and Hyundai.

Zara has a rule that Korean store should be operated based on the same manual. They cost a lot for interior design of stores; specifically, all materials are from Spain directly for more luxurious atmosphere. Indeed, Korea is the first market to enter luxurious department stores because usual shopping mall is hard to found relatively.

3) Products Mix & Marketing Strategy

Small quantity batch production strategy is one of the characteristic of Zara. Prompt replacement cycle of new products is very attractive advantage for consumers who need new trend and scarcity. Zara changes their clothes twice a week; for example, Monday afternoon, air plane from Spain arrives at Incheon, and their clothes from the plane are spread out to all stores in Korea for selling on Tuesday. 3days later, the same cycle happens. Especially, Korean market can digest all items from Headquarter due to the fast response of consumers. Fast replacement cycle of new products has another effect on Korean consumers that “This is the only time to buy it”

4) Price Strategy in Korea

At launch, Zara’s price was relatively high in Korea compared to Europe market due to transport cost. This can be an obstacle for SPA brands, aiming ‘cheap with great design and quality’. For this reason, Zara has been reduced the price up to 30% since 2009 to secure price competitiveness in Korea, promising market. They should catch both fashionable image and price competitiveness, aiming their standardized global marketing strategy “cheap with great design and quality”

5) Competitor Analysis

Three major SPA brand in Korea is Uniqlo, Zara and H&M. Uniqlo is the leading SPA brand in Korea. So we did competitor analysis with uniqulo.

　

UNIQLO

ZARA

Birth of Brand

1984

1975

Enter number of countries

7

73

Entry point

Sep. 2005

Apr. 2008

Method of Entry

JV with Lotte Shopping

JV with Lotte Shopping

Company name

FRL Korea

Zara Retail Korea

The number of stores in Korea

59(as of 2010)

27(as of2011)

Modes of operation

Direct management

Direct management

Sales [2] 

328 billion won

167.3 billion won

Products & Characteristic

High quality Basic Casual

Non-age Unisex Casual

Jeans

Large quantity but a few type

Female, Male, Kids, Basic

Trendy design

New products twice a week

Small quantity batch production

Price

T-shirts : 20,000

Jeans : 50,000

Jacket : 60,000

Coat : 80,000

T-shirts : 20,000~60,000

Jeans : 60,000~80,000

Jacket : 60,000~100,000

Coat : 210,000~320,000

Supply

Made in China (90%)

Made in Spain (60~65%)

Target customers

10~50 year-old

20~30 year-old

Planning & Design

Internal design team + Artist

Design team

Type of SPA

Retail

Maker

7) HR Structure

Lotte personnel are not involved in configuration of Zara Retail Korea, probably because Lotte Shopping, a joint venture partner, has 20% of ownership. Representative and management are Korean people, but they are not Lotte Shopping personnel. Exactly proportional to the number of Board ownership (about 1 in 5) of the Lotte officers are involved.

8) Outcome

With a strong brand power, Zara is getting popular as drove the boom of SPA in Korea. In 2011, Zara has 27 stores in Korea, and the annual sales are approximately 167.3 billion won

IV. Suggestion for future international business strategy

1. What is the possible problem to expand the market continuously and what are the recommendations for the Zara’s international business strategy for sustainable growth?

Zara is the largest leading the brand in SPA , followed by Gap As the previous, almost 60% product are made from Spain and they all manage distribution. As of now, it works well. However, Zara’s strategy is the continuous expansion of store and countries. This continuous growth strategy to the global market may occur the possible distribution and logistics issues as the y expand. They have to consider the regional center distribution center for the risk managements for the future. When they consider the regional distribution center, they make people train and adopt their well established system.

In addition, Zara need to secure better staffing policy as a global company. Recently Zara had exploited Brazilian workers. In addition to the news, there is conflicts of JV when they entering to the Korean market. Zara show ethnocentric approach for human resource management. Therefore, Zara need to understand culture difference between countries and select right people from the local team with their global expansion strategy.

2. How can they secure the competitiveness advantage in Korea?

Recently, the Korean fashion market is so competitive. Samsung announced that they launch new SPA brand with 30% lower price of Zara. That means that Zara is still high price compare to other SPA competitor brands. To keep advantage in the market, we suggest the price reduction and have more stores for customer to reach and visit to their fashion trends. In addition, Korean customer are very sensitive to the fashion and brand power, they need innovative, customized marketing mixture instead of standardized marketing strategy

(APPENDIX)

Exhibit 1. ZARA International Achievement (ref. Grupo Inditex press dossier)

Exhibit 2.

Sources: Christopher, 1998: 155-57; Burt, Dawson and Larke,2003; Retail Week 21 Nov 2003: 16-17.