In addition to Zara which accounted for 66percent of the group’s turnover in 2005, Inditex owns seven other clothing chains: Kiddy’s Class (children’s fashion), Pull and Bear (youth casual clothes), Massimo Dutti (quality and conventional fashion), Bershka (avant-garde clothing), Stradivarius (trendy garments for young woman), Oysho (undergarment chain) and Zara Home (household textiles). The Zara Concept Zara’s aim, according to Amancio Ortega, founder of Inditex, is to democratise fashion by offering the latest fashion in medium quality at affordable prices.
What differentiates Zara’s business model from that of its competitors is the turnaround time and the store as a source of information. Zara’s vertical integration of design, just-in-time manufacturing system, delivery and sales; flexible structure, low inventory rule; quick response policy and advanced information technology all combined to enable quick response to customer’s changing demands (Castellano, 1993; 2002). A completely new piece of clothing can be designed, manufactured and delivered in less than four weeks.
Changes of an existing garment can be put on display within two weeks, much faster than the competition (The Economist, 2005). Zara internally manufactures its ? live collections? , the most receptive garments to fashion, which account for almost half of its production, internally and outsourcers 5 those that are not subject to seasonal variation. About 11,000 new items are launched every year (Ghemawat and Nueno, 2003). The store acts not only as a point of sale but also influences the design and speed of production. It is the end and starting point of the business system. Zara? production cycle starts with customers? judgements on the new designs of clothes and the information collected by staff members who travel to fashion cities, observing people on the streets, publications and visiting the venues that are frequented by their potential customers (Fabrega, 2004). What distinguishes Zara from its competitors is the feedback that Zara’s managers get from the customers at the point of sales about new garments or new products that they are interested in. Store managers report the demands of customers and the sales trends to the headquarters on a daily basis.
The design group will use the feedback to create new articles or modifications to the existing goods and then deliver the items to the stores (Martinez, 1997). Every store receives small batches of products twice a week, avoiding large inventory and creating a “climate of scarcity and opportunity” (Crawford, 2000). Around 60 percent of its products are permanent and the remaining 40percent varies continually. The company estimates that customers visit a Zara store 17 times a year on an average, as compared to merely four visits for other fashion firms (Castro, 2003).
The outlets are situated in main commercial areas, the interiors are designed to create a unique atmosphere and with attractive window displays. The firm spends only 0. 3 percent of its annual turnover on advertising (Ghemawat and Nueno, 2003), normally at the beginning of sales season or the occasions of new store opening. The store is considered its most effective communication tool. 6 The two key factors in the Zara’s business model, the time factor and the store as a source of information, demonstrate the company’s customer-orientation.
Zara continuously adapts to market demands, aiming to deliver a unique service to the customer. The quality of customer service and other variables like the music, temperature and layout are evaluated by using the mystery shopper (Monllor, 2001). . Zara follows a market-based pricing strategy which determines the target prices that the buyer is willing to pay. The budget for the cost of the material, production and suppliers is fixed according to the target price and the profit margin that the management department wants to achieve with that item (Bonache and Cervino, 1996; Mazaira, et al. 2003). Over the past 30 years, Inditex has built a brand portfolio (see Table III for details) through brand acquisition -`Massimo Dutti? in 1991 and `Stradivarius? in the year 1999-; and brand development by using a multi-brand strategy and an extension strategy. In line with the multi-brand strategy `Zara? was created in 1975, `Pull & Bear? in 1991, `Kiddy’s Class? in 1993, `Bershka? in 1998 and `Oysho? in the year 2001. The extension strategy was applied to `Zara Home?. Inditex used the name of the existing brand `Zara? o take advantage of the transfer of associations between the flagship product and the extended one, `Zara Home?. (Insert Table III here). All these brands were built within the domestic market and then launched to international markets. This multi-brand portfolio has allowed Inditex to target at different segments more effectively. However, the cost of maintaining several brands and the hazard of cannibalisation are the major drawbacks of this strategy. Inditex has 7 tackled cannibalisation by differentiating the brands mainly through the product, target market, presentation and retail image (Fabrega, 2004).
The success of the Zara concept is also reflected in the impact that the company has created in the fashion industry that brought changes in the organisational methods of other clothing retailers, namely Benetton and Mango (Cinco Dias, 2003), and has even obliged luxury fashion brands like Gucci and Burberry to increase the rotation of their goods and develop sister brands to expand their customer base (Fernie, et al. , 1997; Foroohar, 2005). INTERNATIONALISATION OF ZARA Zara, the most internationalised chain of Inditex, opened its first store in 1975 in La Coruna, north-west Spain.
During the 1980s, Zara expanded within the domestic market, opening stores in all Spanish cities with population greater than 100,000 inhabitants (Ghemawat and Nueno, 2003). The second involved the international expansion of Zara with the opening of a store in Oporto (Portugal) in 1988. By the end of January 2006, Zara was operating in 59 countries with 852 stores: 664 stores were located in Europe (259 in Spain), 112 in America, 45 in Middle-East and Africa and 31 in Asia. International sales accounted for 69 percent of its total turnover in 2005, with Europe being its largest market by far.
This section will discuss the internationalisation process of Zara focusing on three issues: motivation, market selection and entry options. (Insert Figure I here) Motivations For Internationalisation 8 Jose Maria Castellano, former CEO of Inditex, recalls in an interview that the main reason why the company decided to launch an international expansion was the saturation in the domestic market, “Of course before opening the first store in the host market, we had the feeling and then we knew for certain that the Spanish fashion and design market was on the verge of saturation”. Martinez, 1997) Therefore, the limited market growth opportunities R home was the key influence on Zara’s decision to expand internationally. Most of the previous literature has classified the motives for retail internationalisation into push and pull factors. Push factors are those that encourage the organization to search for international opportunities. Pull factors involve attractive conditions in the host market. (Alexander, 1995b). Hence the internationalisation of Zara is a reactive response to the domestic market maturity.
According to Castellano, there were other push factors related to economic conditions behind the internationalisation: “At the end of the 1980s, the Spanish economy pointed toward a decrease in consumption in general terms. In our sector -fashion clothes in a good quality at affordable pricesthe consumption showed a slow pace of growth” (Martinez, 1997). Furthermore, a change in the Spanish consumer behaviour was taking place during that time; they started to spend more on spare time, travelling and education, and less on clothes.
The key pull factors that explain the internationalisation of Zara include Spain’s entry into the European Union in 1986, the globalisation of the economy and thus potential economies of scale, the homogenisation of consumption patterns across countries -Zara’s belief is that “national frontiers are no impediment to sharing a single fashion 9 culture”-, the abolition of barriers to export and the development of the information technology.
McGoldrick (1995, 2002) provides a third group of factors related to the organisation, the facilitators or enabling factors. The expansion of Zara in New York (1989), Paris (1990) and Milan (2001) was justified by image and status reasons (Castellano, 2002; Ortega and Blanco, 2004) as mentioned earlier. These three cities are considered fashion capitals that are highly competitive. The USA offered Zara the opportunity to learn first hand about its American competitor Gap and consumers in a large market with an interest in fashion.
The USA was perceived to be a high risk market and it was proven correct (Martinez, 1997). Ortega wrote in his 1998 annual report regarding the learning experience: “International expansion is the objective that cannot be delayed and will allow us to enrich our culture and vision of the market”. Last but not least, the internationalisation involved the spreading of cost and risk into different markets. Table II summarizes the factors influencing the decision to internationalise.
Adopting Alexander’s (1995a) classification of different locations of retailers in the international market (autochthonic, reactive, expansive and proactive), since 1988 Zara has moved smoothly from a reactive position at the beginning of internationalisation, where the maturity of the domestic market was behind of its decision to internationalise and the inhibitors were hampering the process, to a proactive position where the pull factors are more significant and the company has large growth opportunities internationally. (Insert Table II here) Market Selection 10 Zara’s internationalisation has passed through several phases.
The `stages? notion has been supported by Johanson and Wiedersheim-Paul (1975), Bilkey and Tesar (1977), Cavusgil (1980) and Treadgold (1990) whose model identifies three stages of international development. Zara has moved through a learning curve during these phases (Treadgold, 1990). With the firm’s experience gained in similar markets, the perceived risk, associated with the internationalisation process (Burt, 1993), was reduced. These phases, applied to Zara, are as follows: • Reluctance and trial: 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 realised that it had to adjust its business model to suit the new markets (Bonache and Cervino, 1996; Fabrega, 2004). • 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, adding one or two countries per year to its market portfolio.
In 1990 Zara started operating in France (Paris) a geographically contiguous country, a fashion capital and a starting point for the later expansion in Northern Europe -Belgium and Sweden, in 1994 (Bonache and Cervino, 1996). Mexico was added in 1992. This market, though geographically distant, is culturally close to the home country Spain, and provided with a reference of the South American market. Greece was the next in 1993, and followed by Malta and Cyprus in 1995 and 1996 respectively. The exception of this stage is the opening of a store in 1989 in 1 New York, a distant and very competitive market. It was a strategic decision by Zara to build brand awareness and international prestige and to get close to the fashion trends (Bonache and Cervino, 1996; Martinez, 1997). • Aggressive expansion (1997-2004):. The experience gained in the international environment made Zara more determined and intended on a rapid global expansion, regardless of cultural or geographical proximity. Zara started this stage by opening a store in Israel in 1997.
One year later, 1998, Zara entered eight countries, consolidating its presence in Middle East (Argentina, Venezuela, Great Britain, Japan, Turkey, Kuwait, Lebanon, United Arab Emirates) and nine countries in 1999 (Germany, The Netherlands, Poland, Canada, Chile, Brazil, Uruguay, Saudi Arabia, Bahrain). Between 2000 and 2003 Zara reinforced its situation in the European market rather than adding more countries. The enlargement of the European Union in 2004 justifies the considerable number of European countries that were incorporated that year. Costa Rica, Monaco, Philippines and Indonesia were added to the market portfolio in 2005.
At the beginning of 2006 Zara was operating in 59 countries with 852 stores with plans for more stores in the existing markets in Europe (France, Italy, Germany and Great Britain) and Asia as the centrepieces of its international operation (Fabrega, 2004). Market Entry Strategies While Zara owns a majority of its stores in Spain, the investment in stores in the international markets has been undertaken through three entry modes: • Own subsidiaries: This direct investment strategy is the most expensive mode of entry and involves high levels of control and risk in case the firm exits the 12 market.
Zara has adopted this strategy for most European and South American countries that were perceived to have high growth potential and low business risk (Flavian and Polo, 2000). It. • Joint ventures: This is a co-operative strategy in which the manufacturing facilities and know how of the local company are combined with the expertise of the foreign firm in the market, especially in large, major and competitive markets where it is difficult to acquire property to set up retail outlets or where there are other kinds of obstacles that require the co-operation with a local company (Camunas, 2003).
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. The administrative barriers in Italy wherein local traders decided whether an international brand can operate in a specific city and the astronomical amounts of money required for the transfer of the stores (Expansion, 2001) led Zara to link with Gruppo Percassi, a successful firm in the property sector, in 2001.
The experience of Biti in the clothing sector together with its knowledge of the property market encouraged Zara to sign an agreement with this company to enter Japan in 1998 (Castro, 2003). In Germany and Japan the deal was on a 50-50 joint venture. In Italy Inditex held a 51percent investment in Zara. However, Zara has recently increased its ownership to 78percent in Germany, 80percent in Italy and 100percent in Japan. • 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 (Flavian and Polo, 2000).
Zara’s franchisees follow the same business model as the own subsidiaries regarding 13 the product, store location, interior design, logistic, human resources, etc. However, they are responsible for investing in fixed assets and recruiting the staff. Zara gives franchisees the chance of returning merchandise and exclusivity in their geographic area, although Zara has the right to open its own stores in the same location (Castellano, 2002). Table I presents details of the market entry strategy in each country. Zara owns 90percent of its stores.
Since Zara gained the management control of the stores located in Japan, Germany and Italy, such sites have been incorporated in the group of own stores (Ghemawat and Nueno, 2003). (Insert Table I here) After selecting a market entry strategy for a particular country, Zara follows a pattern of expansion known in the company as “oil stain” (Castellano, 2002): Zara opens its first store, the so-called flagship store, in a strategic area with the purpose of getting information about the market and acquiring expertise. The experience guides Zara in the following phases of expansion in that country (Blanco and Salgado, 2004).
International Marketing Strategies At the early stages of internationalisation, the management at Zara was following an ethnocentric orientation Alexander and Myers (2000) whereby the “subsidiary companies had to be a replication of the Spanish stores” (Bonache and Cervino, 1996). However, this approach encountered unexpected difficulties in some countries due to the cultural differences. Therefore, Zara decided to move towards a geocentric orientation, allowing the company to adopt in some cases local solutions rather than merely replicate the home market.
Zara sells a largely homogeneous product for a 14 global market (Flavian and Polo, 2000). However, there are some adjustments in its marketing mix because of the customer’s size differences in Asian countries (Monllor, 2001), laws issued that require for example the availability of garments for youths in all sizes in Buenos Aires (La Opinion de La Coruna, 2006), cultural differences in Arab countries where some garments cannot be sold (Nash, 2006) and the different season in the southern hemisphere (Euromonitor, 2002a).
The information gathered by the store guide the decisions of the design department that finally produces those garments that can be sold in all the markets where Zara operates (Bonache and Cervino, 1996). Each store manager, based on the customer’s remarks on the products, decides the specific garments that will put on display in the store to meet the customer’s taste in that area. Thus it is unlikely to find the same items in all the outlets (Fabrega, 2004). Zara’s promotion strategy is the same in the domestic and foreign markets. Advertisement campaigns are carried out only at the start of sales or a new store opening.
Zara relies on the store as its main promotional tool. The prices of Zara’s garments differ between countries with the Spanish market being offered the lowest prices (D? Andrea and Arnold, 2003). Prices are set centrally following a marketoriented strategy. Prices in international markets are generally higher due to longer distribution channels (Ghemawat and Nueno, 2003). As in the domestic market, the store location is a critical factor in the international markets. All Zara’s shops are situated at prime locations. This decision is based on an analysis of the local market environment that identifies the niche opportunities for Zara? products in those markets, the price of competitors’ products and the 15 recommended price to achieve a maximum level of profitability (Bonache and Cervino, 1996). The shop window display and interior design are prototyped centrally and then replicated in all the international shops by professional store decorators. Hence Zara standardises the key strategic elements, namely the location, window display, interior design, store layout, store display rotation, customer service, information systems and logistics. The rest of the elements are customised to the market to suit local preferences (Fabrega, 2004).
Once the location for the store is identified, the next stage is the recruitment and selection of the company personnel. Initially Zara was sending Spanish managers to replicate the management procedure used in Spain (Fabrega, 2004). Difficulties arose in countries like Mexico and France (Bonache and Cervino, 1996) which made Zara to change to a practice of recruiting employees locally to get a better understanding of the local market preferences (Martinez, 1997). Zara makes a great effort to transfer the know-how in order to share the same corporate values. The Head Office in Spain controls the subsidiaries to maintain Zara? concept across its international markets (Bonache and Cervino, 1996). Branding Considerations Zara, Inditex’s bastion brand, has transformed itself from a local brand, to a global brand in less than 20 years time. Its image and positioning strategy are global but adapted to the conditions of each country (Fabrega, 2004) since consumers perceive fashion products as culture-bond. Zara brand was ranked 77th in the list of the world’s 100 best known brands created every year by Interbrand and has overtaken fashion brands like Hermes, Prada and Armani. All Zara’s products are labelled following a 6 dualithic brand-name strategy (Riezebos, 2003). The company uses the name of the firm and a unique brand name for the same product group. Examples of these subbrands are `Zara Woman? , `Zara Basic? and `Zara Trafaluc?. Zara aims to target a broad market, a young segment sensitive to fashion. Amancio Ortega wrote in his 1999 Annual Report that the aim of Zara was to democratise fashion. In line with the objective, Zara filled a niche in the Spanish market that was neglected by the department stores (Martinez, 1997) by offering the latest fashion in a medium quality at attractive prices.
This segment had been already identified in the USA with Gap, in Germany with C & A and in the UK with Next (Bonache and Cervino, 1996). Zara’s positioning strategy is based upon design, quality and price. In order to communicate its benefits, in some cases Zara has had to educate the market and influence consumers shopping habits (Blanco and Salgado, 2004). The fact that the prices of Zara’s garments are higher in the international market affects its positioning in those countries and therefore its brand image (Ghemawat and Nueno, 2003).
Country-Of-Origin Effect The country-of-origin effect is considered an attribute associated to the brand’s image that provides value to the company (Keegan and Green, 2005) and generates secondary associations (Keller, 1998). According to the Fashion Global Plan, a report done by the Spanish Treasury Department (2006), the Spanish fashion sector shows several weaknesses that have an adverse effect on its image. It includes a lack of knowledge of the country-of-origin of many Spanish brands that are operating internationally.
The Bozell/Gallup international survey 1995 (cited in Noya, 2002, page 189) indicated that around 40percent of consumers did not recognize Spanish 17 products. The Fashion Global Plan also mentions the weak image of Spain as an international reference point in the fashion sector and an absence of an international strategic positioning. The fact that Italy is identified with fashion and design has led some Spanish brands to adopt Italian names in order to benefit from the positive attributes of the “made in Italy effect” (Foro de Marcas Renombradas Espanolas, 2003).
This is the case of the acquired Inditex’s brand, Massimo Dutti. IUOG-96 survey (cited in Noya, 2002, page 191) concluded that the Spanish production was linked with food products. However, a most recent survey carried out between 2002 and 2003 by the Foro de Marcas Renombradas Espanolas (2003) (Forum of Spain’s top brand) showed that the image of the Spanish fashion sector is improving at a steady pace over the last few years. Spain is linked with fashion and design products and not only with food products.
The country is also playing a more significant role internationally which is helping the “made in Spain effect” become more positive. In the same study the results indicated that Zara is a very well-recognized brand although it is not associated with its country-of-origin. Another survey undertaken by the fashion magazine Vogue showed that French consumers regarded Zara as being of French origin (Blanco and Salgado, 2004). This is the aim of Zara: the consumer should consider Zara to be a retailer whose origin is of the same country where the consumer is buying the garment (Fabrega, 2004).
H outsources its production from 700 suppliers of clothes. The location of its stores, flexibility of its production and low prices can be identified as the key factors behind H’s success. H&M hires celebrity designers like Karl Lagerfeld and Stella McCartney to democratise fashion and catch consumer’s attention. The firm churns out 500 new designs every year that can be purchased from its 1193 retail outlets located across 22 countries and also via mail order or through its website for the Nordic countries. Insert Figure 2 here) The growth of H&M has been marked by the addition of cosmetics and accessories to the apparel line in 1975, the incorporation of new countries to its market portfolio and the development of the catalogue and e-commerce, available in the Nordic countries. Compared to Inditex and Gap, H&M is much more internationalised with over 90 percent of its turnover coming from overseas in 2005, Germany being its largest market with 27 percent of the company total revenue. Its expansion has been at a moderate pace articularly during the early stages. H&M has been able to consolidate its position in each of the international markets. Having operated in the domestic market for 17 years, H&M followed the same expansion pattern as Zara and Gap Inc by selecting international markets based first on physical and cultural distance to the domestic market and then on economic indicators such as purchasing power, employment rate and purchasing behaviour. Local information about competitors, demand and accessibility is also considered. 19 A combination of market saturation and entrepreneurial ambition” what led the company to emback on the internationalistion which had two distinctive phases in the early stages Laulajainen (1991): the first one focused in Scandinavia and the second one aimed at Germanic Europe. H&M launched its international expansion first into neighbouring countries, Norway in 1964 and Denmark in 1967. Both of them together with Sweden are markets belonging to the zone of cultural similarities labelled as `Nordic Europe?. The second phase was initiated in 1976 with the opening of a store in the UK and later on in Switzerland, 1978 and Germany, 1980.
These three markets share cultural affinities and are grouped in the `Anglo-German? cluster by Kasper and Bloemer (1995). The mix of cultures in Switzerland (German, French and Italian cultures) made this market a reference point for its further expansion in those adjoining countries (Laulajainen, 1991). During the end of the 1980s and the early 1990s other Germanic countries such as The Netherlands, Belgium, Austria and Luxembourg were entered. The experience gained over the first stage drove H&M to embark on a second phase of international expansion.
This period has been marked by the quick expansion into distant and different markets like the USA, Canada, Southern (France, Spain, Portugal, Italy) and Eastern Europe (Poland, Czech Republic, Slovenia, Hungary) at the beginning of the 21st century, adding at least two more countries per year. H&M’s expansion has been mainly through its own subsidiaries. Its plan of opening stores in Dubai and Kuwait in the near future has led H to sign a franchise agreement, giving the management control to the Swedish company to keep H concept across countries.
The store location is a key factor in H’s business model regardless of the market, establishing new outlets only in the best shopping areas. The 20 interior design is prototyped allowing some customized solutions. In 1997 the former Managing Director of H&M, Stefan Persson, stated in his Annual Report that “When we expand, it is important to listen carefully to the local market. We need to adapt but not at the expense of losing what makes us who we are”. Hence H&M’s strategy resembles that of Zara: replication of the same concept with some local adaptations.
Gap Inc Created in San Francisco in 1969, Gap Inc is the world’s largest specialist clothing retailer with 3,053 stores in 5 countries: United States, Canada, the United Kingdom, France and Japan. This holding company sells clothing, accessories and personal care products for men, women and children. Like Inditex, Gap Inc operates several clothing brands: `Gap? , `Banana Republic? , `Old Navy? and ? `Forth & Towne?. Gap Inc outsources all its production from 1,100 suppliers located in the United States and abroad. Gap Inc? market growth was based on four strategies: International expansion, diversification into accessories and personal care articles, creation of new brands and development of other channel of sales like electronic commerce, launched in 1997 to increase its market share and reach a broader consumer base in the US. Gap Inc internationalisation process has been steady and focused on a few countries. After operating in the home market for almost twenty years, Gap Inc opened its first store in the UK and Canada in 1987 and 1989 respectively.
They are both close markets given their cultural proximity and Canada is an adjoining country to the US. During the second phase of its internationalisation Gap Inc expanded into France, 1993 and Japan, 1995 despite their geographical and cultural distance. The experience acquired earlier and the attractiveness of these two markets were the main driving forces. After operating in the German market for ten years, the unsatisfactory results 21 in sales led Gap Inc to withdraw from that market in August 2004 (Wells and Raabe, 2005). Gap? future expansion markets have been identified in Asia and the Middle East. International sales accounted for 15 percent of the firm’s total turnover in 2005. The own subsidiaries has always been the mode of entry adopted to operate in the host markets. However, its willingness to establish itself in five markets in the Middle East (United Arab Emirates, Kuwait, Qatar, Bahrain and Oman) and in Singapore and Malaysia in the near future, has led Gap Inc to consider franchising as the strategy to expand into these smaller, culturally distant and high business risk countries.
Comparisons between Zara and its competitors Table IV presents detailed comparisons between Zara and its two competitors. The main distinctions are as follows: • While Zara controls its entire production chain, Gap Inc and H outsource all their production. Zara’s vertical integration enables the firm to have a faster turnaround than its competitors. • Product and geographic diversification has been used by the three clothing brands as their main directions for growth. Gap Inc and H&M have also developed new channels of sale.