Navigating The Fast Fashion Landscape

Zara is a fashion retailer originally made in Spain and a Subsidiary of the Inditex group-the world’s biggest retailer. They sell clothing for men, woman, and children as well as home furniture. Whilst being one of the largest international fashion companies, Zara has been able to flourish and continue to dominate the fast fashion industry. They’ve done this by reinforcing their parent companies’ strategy of “design, manufacture, distribution and retail”. They’re most well known for their ability to rapidly meet new trends and distribute it to stores. Zara’s recent financial performance has shown that in the fiscal year of 2018 they managed to make a revenue of .9 billion. Their recent marketing performance has shown with their subtle and minimal advertising they’re still able to fiercely compete in the fashion industry. Zara dominates whilst being the most valuable Spanish brand with a value of .8 billion (Wang at Kantar 2019). Furthermore, their recent marketing activity has shown that they plan to merge Zara and Zara home to capitalise the synergies between the two businesses (Mintel 2019).

I will be exploring how the external environment can have an impact on Zara’s performance. I will be using PESTLE to analyse a variety of factors that could potentially effect Zara.

Political:

The UK’s political state surrounding Brexit has caused mass uncertainty. With potential new legal requirements, the fashion industry is cautious on how to react. Zara particularly, as they're based in Spain, are vigilant of their moves now as the UK is one of their largest markets. Considering Zara operates in the fast fashion industry, its ability to react to trends may be difficult because of this. For example, their distribution channel may be affected as trade deals may change which may cause Zara to pay additional tariffs, which increase Zara’s costs. This specifically will impact Zara as they operate in a vertical integration manner. Their very own distribution centre based in Spain had given Zara a competitive advantage but now may be adverse for them. As a result, it may mean that Zara will have to pass this cost onto the customers. This may lead to an attack on Zara’s brand image of affordable prices for luxurious items. Furthermore, their model is essentially based on their rapid ability to meet new consumer trends and distribute them to their stores aided by their fast supply chain. However, this may be in danger.

Economic Factors:

Economic instability can cause a profound impact on consumer confidence. A change in the economic cycle can have a domino effect on things like costs of living, disposable income and interest rates. This means Zara’s profit will fall as their products are seen as semi-luxury as consumers are less likely to spend their money there and go to competitors such as Primark. Furthermore, Zara is sensitive to fluctuating exchange rates as a majority of half their sales are currencies outside the Euro. Inflation is also a factor to take into consideration as even though Zara is affordable but it’s still expensive compared to Primark or New Look. Zara is known to have a large internal presence as they ‘re selling their products in 202 different markets. However, growing markets like Brazil and India provide retailers an opportunity to diversify their risk and grow.

Social Factors:

Another factor to take into consideration is when moving into new markets, research needs to be done comprehensively. This is because each market may differ in age, disposable income, geographical area, tastes or attuites. In addition, as Zara operates in a diverse range of countries, they have to make sure it’s suitable for the culture and is respectful. This is because each market is different and consumers from different geographical area may have different tastes and needs. For example, Zara had produced a lungi-like skirt which is known to be worn by Asian men. Consequently, they had faced criticism for cultural appropriation. Also, it’s important that major fast fashion retailers be able to meet the changes in social trends, specifically for Zara’s target market for 20-30-year olds. Employee diversity is also important in society today, which Zara and Inditex strongly reinforce. Zara’s parent company claims their “171,839 people represent 97 different nationalities, speak 54 languages and have different profiles, cultures, origins and experiences” (Inditex 2017).This gives them fresh ideas from different perspectives and cultures, which is good as they market to many countries as they may have the relevant knowledge.

Technological advancements have meant fashion retailers have changed from what it was once before. It allows them to be innovative and responsive to customer needs. It also means the fast fashion industry is more competitive due to the availability of data and how fast information travels. This why Zara has to incorporate cutting-edge technology into its business to be able to be function efficiently. For example, Zara has integrated a system called RFID, which allows employees to track stock in store and other branches. Moreover, the rise of social media has meant that retailers have alternative ways to find out what the latest trending clothing is or connecting to customers. Technology has also impacted the way retailers are able to sell and reach customers. Websites and social media are able to raise awareness of their clothing and reach more markets without opening physical stores, which is an advantage for retailers as e-commerce sales have become increasingly risen.

Legal Factors:

The fashion industry is subjected to many laws and strict regulations. The impact legal obligations have on retailers are profound as they can affect their brand image and their costs. Companies that have been known to not comply with the law have a bad reputation. As a result of negative publicity, customer trust may diminish and rather go to competitors. Therefore, it’s essential for retailers to abide by laws such as copyright, legal wages or any other matter.

Environmental Factors:

Consumers and companies are increasingly aware of the impact they all can have on the environment. Zara’s target market specifically ’20-’40s is more educated and conscious about their carbon footprint and have how climate change is a significant issue that can impact us. Consumers are knowledgeable about how businesses can impact the environment in terms of waste, sweatshops and pollution. Whilst being one of the largest retailers in the world and with their global presence, companies like Zara have a bigger responsibility to be accountable for their actions. Companies that are associated with being socially responsible more likely to have a better reputation than those who don’t and do not face the risk of being reprimanded. For example, Zara is committed to being sustainable by making all their stores eco-friendly by 2020.

Industry level analysis

Bargaining Power of Buyer

The power of buyers in this industry is moderately high due to the large variety and availability of retailers. Customers also are able to find even more alternatives online and maybe even cheaper as the market is highly saturated. Fast fashion retailer’s business models are fundamentally based on customers tastes, which means retailers sell clothing that is similar. However, Zara does sell luxurious clothing for an affordable price that may not be able to be replicated by other competitors for the same pricing and style. Additionally, the bargaining power of the buyer is dependent on the region where the buyer is. For instance, in Europe, America Zara is situated as more affordable but in developing countries like China, Philippines or Thailand are seen as more expensive, and in turn will be more price sensitive, which allows their ability to bargain to be limited.

Bargaining Power of Suppliers

Suppliers have low bargaining power. This is because of the large availability of suppliers decreases their value. As a result, suppliers are inflexible with the prices. Also, many suppliers depend on one main client because there are so many suppliers, which results in companies that are well known or ordering a large quantity to have more bargaining power where they achieve economies of scale. Considering the raw materials like fabric are relatively cheap, buyers are easily able to find other suppliers that sell the materials for a better value, allowing them to have better profit margins. Zara being a part of the Inditex group, the largest retail company in the world, gives them a competitive advantage of economies of scale. As Zara operates as a vertical integration model where they manufacture and distribute their inventory themselves, they will likely have more knowledge about the materials needed, giving them an advantage over their competitors who outsource.

Threat of substitute

The threat for substitutes is high especially in the retail industry. Competitors replicate the same type of clothing or style and charge lower prices for it. This is because the apparel industry operates on the basis of meeting current trends that happen seasonally and produce them. So, it’s logical why all the competitors do the same thing and produce similar products. If consumers do not find stores like Zara that have the latest design or style they may go to competitors or they find that the clothing and range, they produce is stagnant. However, Zara has established a strong relationship with their customers where loyalty is evident by repeat purchases.

Threat of competitors

The apparel industry has a high threat of competitors due to the saturated nature of the market. This means with access to many different brands; retailers may have to compete on price. The internet has given online retailers the ability to compete along with high street brands like H&M. The sheer availability of brands means that businesses need to compete with competitors with pricing, quality or brand image. Also operating in the apparel industry requires high investment in assets as fixed costs are high. As their capital is tied up, businesses are often reluctant to leave even if they’re not making much profit. Businesses need to differentiate themselves and their products in order to stand out. Which is why Zara has created a synergy with Zara homes to distinguish themselves from their competitors and diversify their risk.

Barriers to Entry/Threat of New Entrant

Barriers are relatively high for those just entering the market. It takes many years to establish themselves as customer loyalty takes years of trust to form as customers are already brand loyal to established companies. Also, it’s challenging for new small brands to achieve economies of scales as they are unlikely to operate and require large orders like brands such as Zara or Gap who are already established. This gives larger brands a competitive advantage over them. Additionally, there are high start-up costs that are required for producing clothing or buying spaces to set up their store.

Strategic Positioning

Strength:

Zara’s main strength revolves around the fact they’re able to meet trends very quickly. Their ability to do this has largely contributed to why Zara has been so successful. Zara has been able to do this because of its vertically integrated model. As Zara does not outsource their manufacturing elsewhere, they’re able to control pricing and keep costs low. Therefore, Zara is able to swiftly produce new items within 2 weeks whereas other retailers take 2 months. Another strength is their brand image is very powerful. They have been able to establish a loyal customer base, which has allowed them to use minimal advertising yet be one of the strongest players in the industry. It also means customers are less price sensitive because they trust Zara as a brand. Zara produces more designs than all its rivals. Zara produces around 12,000 styles per year compared to the retail average of 3,000 (harbott 2011). They also strategically place their locations in places that fit their brand image and are in prime real estate.

Weakness

One of the largest weakness Zara has is their lack of advertising. Although this has made their profit margins high, Zara would greatly benefit from marketing their stores more. It would raise awareness and draw more customers and in turn increase their revenue. The lack of advertising may give their competitors H&M and Gap a competitive advantage over Zara. Secondly, Zara keeps limited buffer stock which means they can’t meet unexpected surges in demand or have to extra in case of emergencies if the stock was damaged.

Opportunities

One major opportunity for Zara is to enter more new markets in developing countries like India, China or Brazil. For example, the middle class is increasing in Asia, in India alone have 330 million people in this social class. With increasing disposable income, Zara will be able to increase their profit as well as creating a stronger global presence. Furthermore, Zara could produce flagship designs of their stores. Instead of having to have all their inventory newly made every 2 weeks, Zara will be able to have some clothing or designs that are always available. This will differentiate Zara from their competitors and give them the opportunity to build a stronger individual identity.

Threat

The biggest threat Zara currently faces is Brexit. It has caused great uncertainty within the industry and businesses are unsure how they should prepare for the effects of it. If Brexit were to put tariffs on imports and exports Zara would be immensely impacted. This is because Zara is vertically integrated where they produce and distribute their clothing, which 50% of it is made in Spain. Therefore, costs will increase significantly when exporting to the UK.

Product:

Zara’s product range is targeted towards men, woman and children. The products vary from jeans, shirts, dresses, shoes and accessories. They segment their product line by women’s (60%), men’s (25%) and the fast-growing children’s (15%) department (Harbott 2011). These products are mostly aimed for a younger demographic who are able to afford semi-premium items. Zara sends their stores new designs every 2 weeks, giving consumers fresh and trendy items quickly. This is because Zara is customer orientated. Therefore, Zara does their research extensively on what consumers currently like and do not. “Rather than relying on one product range per season – like competitors such as M&S– the retailer will enjoy four or five waves of new products after the initial seasonal launch” (Ruddick, 2014). This gives customers a variety of products to choose from. However, Zara purposely produces a limited amount of stock because they will be able to turn over the stock when a new trend will arise.

Place:

Zara’s reach is extensively large with 2251 stores operating in 96 markets and 46 online markets (Inditex 2017). Zara has strategically placed its stores in locations that are high end or know where their target market usually shops around. Their online website has also expanded into new markets like India, Malaysia and Vietnam. Zara has expanded into new markets through franchises and joint ventures.

Price:

Primarily, Zara price aims to please a suitable price for items that are fashionable but still affordable. The company is able to this because their money spent on advertising is very minimal. Zara’s pricing strategy is dependent on the customers buying power in each market. For instance, prices will be higher in Europe and America than countries in Eastern Asia. This is because they generally have a lower disposable income than Western countries.

Promotion:

Zara is known to spend an insignificant amount of money on advertising compared to their competitors. This could be a reflection of the companies’ owner, Amancio Ortega, who is notoriously private and guarded, indicating his essence of mystery has translated into Zara’s lack of press. Rather than using traditional methods of marketing, Zara relies on their social media reach to grab consumers attention. They also market themselves by strategically placing themselves in prime locations and having eye-catching displays which is illustrated in figure 3. Their decision to not spend a lot of money on advertising is due to the fact new designs come out every two weeks and would rather spend their costs saved on opening up new stores.

Zara and its parent group Inditex have shown a strong commitment towards positively impacting and furthering causes other than their own. Their social initiatives are predominantly focused on social welfare, education and humanitarian aid (Zara 2019). For example, they have built a partnership with the MSF programme. They have supported Syrian refugees by contributing 1 million euros which provide healthcare. They believe that with their global presence they are able to support people who are in need (Inditex 2019).

They also have collaborated with water.org where they help provide clean water and better sanitation for communities in need. Zara has invested millions of euros into social initiatives and entrepreneurship schemes to support those who are less fortunate. They’re very aware of their presence and impact they have on those around them and therefore choose to be more socially responsible. This why by 2020 the company wants to operate all stores under an eco-efficiency plan, saving 20% on energy and 50% on water (Howland 2018). Their efforts towards being socially responsible is sufficient considering they have spent over million on schemes, initiatives and programmes to help the less fortunate which is shown in figure 4.

Overall, Zara’s future prospects look quite promising as their sales increased 41% in online sales which helped drive higher sales and profits last year (BBC 2018). Therefore, they will be expanding into more and new markets through the internet. Zara and Inditex may have to alter their business strategies in order to remain competitive in the UK market. However, considering they have a loyal customer base