Open Zara Store in Suzhou Zara Project Report Yang Cao Kalele Perreira Hunan Lei Nicholas Case Business 201, Section 1 Professor Eli Berniker May 20, 2007 Table of Contents Introduction to the project: p. 3 Intro to Zara: p. 3—4 Business Vision: p. 4 Location: p. 4—7 Target Market: p. 7—8 Business Start—up and Operation: p. 8—14 Future Growth: p. 14—15 Invest Recommendation: p. 15—16 Why we choose Bank of China to get our initial fund? p. 16 References: p. 17 This report is a comprehensive plan to open a Zara clothing in Suzhou, China Introduction to Zara Zara was founded by Amancio Ortega in 1963.
The business began as a small outfit producing lingerie items. The first Zara retail store opened in 1975, and was known for selling low-priced imitations of more up market fashion trends. Today Zara accounts for approximately 80% of the total sales of its parent company, Inditex Group. (Brand Watch Zara, 2004, p. 2). There are 4 main processes within Zara’s value creation: designing, sourcing and manufacturing, distributing, and retailing. Zara has several competitive strengths, such as a quick inventory response time. Most apparel retailers receive weekly shipments of new inventory; however Zara stores receive shipments biweekly. Brand Watch Zara, 2004, p. 4) Zara is also able to respond to emerging fashion trends very rapidly and as a result in some respects Zara is a leader in the fashion industry. Many believe that if you want to know today’s fashion trends, just go look at the window displays of a Zara store. The window displays at Zara stores are another aspect of the business that makes it unique. Zara spends almost nothing on conventional advertising, as all of its marketing is found in its stores. Zara designers create prominent window displays that are visual attracting to consumers.
The company carefully selects sites for new stores so that the window displays are positioned in the most visible location possible. (Zara Reconstruye el Imperio Espanol, 2003). Another factor that has contributed to the success of Zara is a large amount of word-of-mouth advertising between existing and potential customers. Zara stores feature a wide variety of different clothing items and styles, but usually have a limited quantity of each item. When shopping in a Zara store consumers develop a sense of urgency, as a product they like in the store right now might not be there next time they visit.
As a result, customers of Zara are less hesitant to make purchases. Business Vision The Zara store in Suzhou will bring individuality to the market, just as Zara has done in other markets throughout the world. Zara is a unique store and with a unique business model and that will be continued with the store in Suzhou. The success of the store will be built on the past experiences of other Zara stores worldwide. Zara has proved that a business can still be successful even if it gives little or no effort to traditional advertising. Envisioned in this business will be a continued ability to restock and respond to customer needs within days.
Doing so gives Zara a competitive advantage over the competition, as the industry average allows for weeks or even months for new products to be released. The business will always be operated with the following mission statement in mind: ZARA is committed to satisfying the desires of our customers. As a result we pledge to continuously innovate our business to improve your shopping experience. We promise to provide our customers with new designs that are affordable, made from quality materials, and follow the latest fashion trends. Location
The new store will be opened in Suzhou, China. Suzhou is large metropolitan area roughly 3,500 square miles in size and located approximately 55 miles east of Shanghai. The population is about 11 million, of which 5 million have come from other places to work in Suzhou. The average age of these immigrated workers is between 20 and 30, most of whom have large disposable incomes and therefore high purchasing power. Zara has four stores operating in China. There is one store in Beijing, and three in Shanghai, two of which are what Zara considers flagship store.
The proximity between Suzhou and Shanghai is beneficial because information transmits quickly between these two cities. As a result of this many residents of Suzhou already know of and are familiar with the Zara brand. Suzhou is located in the Yangtze River Economic Belt, which is the fastest growing economic region in China. Suzhou’s economy is the fourth largest in China. In 2006 the GDP of Suzhou was 450 billion RMB (58. 2 billion USD). (http://www. sztjj. gov. cn/, 2006). Income per capital in 2006 was approximately $10,000. |February 2007 Individual Income Average |3,324. 6 RMB | |Disposable Income |3,117. 36 RMB | |Amount of Disposable Income Spent |1,490. 35 RMB | |Food |676. 00 RMB | |Clothes |148. 26 RMB (10%) | |Utility Bills |67. 1 RMB | |Home Items |49. 35 RMB | |Medical Insurance |89. 28 RMB | |Transportation |272. 52 RMB | |Education and Entertainment |128. 41 RMB | |Other Products and Services |58. 62 RMB |
Figure 1 (http://www. sztjj. gov. cn/, 2006, p. 15) There are over 10,000 foreign companies with business operations in Suzhou. Many of these companies are located in the China-Singapore Industrial Park, which is the most famous industry area in Suzhou. Approximately 40,000 to 50,000 foreigners live and work in Suzhou. These are high-income members of the workforce. Almost all of them live with their families, and many of them come from Europe so they are already familiar with Zara. “A very great and noble city . . . it has 1600 stone bridges under which galley may pass”–Marco Polo.
Tourism is also large part of the Suzhou economy. Over 100,000 tourists visited Suzhou in February 2007 (Suzhou Government, 2007, p. 12). Tourists are generally known for having high purchasing power and usually enjoy shopping wherever they visit. The Matro Mall is located on the Guanqian Shopping Street and is the location for the new store. Suzhou Guanqian Shopping Street has a long history, and it is the most popular shopping district in Suzhou. Matro Mall is operated by the Suzhou Function Group. Its revenue topped 400 Million RMB in 2003 and grew to 900 Million RMB in 2006.
This is an example of the rapid growth and development that the mall continues to experience. In 2006, the mall introduced many name brand retailers, such as Gucci, Channel, Estee Lauder, Swiss Watch and MNG (European Competitor to Zara). Operating a business inside the mall is highly competitive and a retailer simply paying their rent does not guarantee their spot in the mall. A prospective tenant of a retail space inside the Matro Mall must be able to prove they can generate sufficient revenue. Additionally, the amount of rent a retailer pays is based on the amount of revenue their business generates.
The new store will sell exclusively women’s clothes and therefore will be located on second floor of the mall. The second floor is comprised entirely of women’s apparel retailers. The size of store will be approximately 1,600 square feet. This size was determined after comparing the size of other retailers in the mall like Gucci and MNG. While this size is smaller than a usual Zara store, it is what best fits in the location and has the potential to create a sense of exclusivity. Target Markets The main target market for the store is middle class women aged 16 to 50.
The store’s location inside the Matro Mall allows us to reach our entire target market as the mall attracts consumers aged 16 to 60. When the mall initially opened it attracted a greater number of consumers age 25 to 40, but it has since broadened the age group that it attracts. Within our general target market, those who are 25 to 50 years old would be the most desirable, as they are likely to have the highest disposable income. While initially the target market includes only women, the possibility of a larger second store would allow the expansion of the target market to include men.
In addition to the residents of Suzhou, the target market also includes tourists and foreign employees. A large number of tourists and foreign employees are from Europe and have existing knowledge of the Zara brand. With the high rate of inventory turnover present in all Zara stores, these customers are likely to know that they will find something new and different in the Suzhou Zara store than in the Zara store in their hometown. Furthermore, both tourists and foreign employees tend to belong to the upper middle class, which, as a result of their high disposable incomes, makes them very appealing consumers.
Business Start-up and Operation In order to open a ZARA store in Suzhou many different factors must be considered. The initial fixed expenses for this business is estimated to be $100,000. This would cover the interior designs such as clothing racks, painting, flooring, lighting and decorations. It would also include store computers and PDA’s, and the purchase of initial inventory. The store will require about 20 different sized clothing racks. Each clothing rack would be estimated to about $100. 00 each. The clothing racks would be this expensive because of their quality.
Zara demands the best quality for its image and costumers. The estimated cost for all 20 clothing racks would be about $2,000. 00. At this point $98,000 of initial start-up funds remains. The interior design will be conducted with supervision from Zara in Spain. However, Zara has some characteristics that are present in the interior design of all its stores. The walls we need to be painted with light, neutral tones as to not take away from the look of the clothes. The flooring has already be determined by the Matro Mall, as there is only one type of light wood flooring allowed in all of the stores.
Professional painting and flooring is estimated to cost $10,000. At this point $88,000 of initial start-up funds remains. The store will also need all kinds of decorations to make the store look more appealing. Additionally manikins will be needed to display the different clothing styles inside the store and in the window displays. Mirrors will be placed throughout the store to give costumers more opportunities to see how the clothes look on them. Ideally the store will be presented in the best way possible, with the top quality and best type of decorations.
Total cost of the interior decorations is estimated to be $7,000. At this point $81,000 of initial start-up funds remains Lighting is another thing we wanted to put in our store to make it look a little more presentable. The lighting in our store would give the store more character to it. We are probably looking at white, red and blue baffles as display lighting. We are estimating purchasing about 2 of each color. The baffles will be placed to hit different clear spaces on the walls. The baffles are estimated to be about $1,500 each. The total amount for the baffles would be $6,000. 0. Also we are adding nice regular lighting to our store. This is estimated to $3,000. This would leave us with $70,000 left. We would also need two desktop dell computers with PDA ordering systems. The desktop dell computers would act as our register and keep track of the inventory. We also want a PDA ordering system to automatically order stock when we are out. The estimated price for two desktop computers with PDA would be $20,000. This leaves us with $50,000 left from our starting cost. The most crucial initial start up costs will be an initial inventory purchase.
This will be ordered from ZARA in Spain and is estimated to be approximately $35,000. This will be enough to open the store, but we will need to continually reorder to maintain (at minimum) a basic stock. The most important part of operating a business is the management of your human resources. As a result the ZARA Shuzou franchise will utilize a thorough training program that will allow its employees to be as effective as possible. The Shuzou franchise plans to employ four sales associates and one manager. The training program will be based upon the following principals.
Perhaps one of the most important is to educate the employee on the ZARA culture and its core business values. It will be the job of the owners to make presentations to all employees that reflect and teach these values. ZARA prides itself on being on the cutting edge in the fashion industry and as result our employees will be required to remain up to date on the latest trends. They will be provided with fashion magazines and other media sources of popular culture where they can research and determine emerging trends. Another very important value for our employees to project on our customers is our commitment to customer service.
This is important in any business, and ZARA is highly committed to its customers as evident by its ability to react to the customer’s wants and needs. This is important to note as the service skills of the average Shuzou resident are not very well developed, and therefore employing sales associates with these desired skills will come at a premium. Employees will also need to be trained in more technical areas, such as ZARA Point of Sale and PDA Ordering systems. New inventory will needed to be stocked frequently, partly because of ZARA’s high turnover rate and also because of the smaller sales space compared to other ZARA stores.
The average ZARA customer goes to a ZARA store 17 times per year, which is a much higher rate than the 3-4 visits per year of the average customers at other retailers. This is proof of the high stocking volume that employees will be doing and as a result they need to be trained accordingly. The store manager will need to be able to perform all of the duties and possess the necessary skills as mentioned above for the sales associates, but will have a lot have more extensive duties as well. As a result, more money will be allocated for recruitment and training the store manager.
Once hired, the store manger will be sent to the ZARA store in Shanghai so that he/she may learn from the manager’s of a successful operation. Furthermore, in the future the manger may be sent on business trips to the ZARA headquarters in Spain so that she can further understand the ZARA business culture. The most important duty of the manager is to be able to manage the sales associates and review their performance. The average retail sales/customer service position in Suzhou pays approximately 800 RMB/month ($110).
The sales associates that will be employed at ZARA Suzhou will have a higher skill set than the average worker and thus will be paid a salary 1,000 RMB/month ($150). Sales associates will also have an inventive/bonus program. If the day’s sales are above average, then an employee will receive ten percent of any revenue on merchandise sold above the store’s average daily sales (this figure will be developed in a later section). Because the store manager has more duties and is required to possess more skills than the sales associates, they will command a higher salary of $3000 RMB/month.
Manger bonuses will be determined on the condition that the store continually meets or exceeds the sales expectations set by the owners. In an attempt to keep start up costs low, training costs will be minimized. It is estimated that the training wages will be approximately $500 for the sales associates and $300 for the manager. These costs are kept low by owner involvement in training and by adopting a “learning while doing” philosophy in which the employees are still being trained once the store opens and is generating revenue.
Initial start up costs will be covered under a $100,000 bank loan. The following is an explanation of interest rates and the total annual repayment expense. Interest rate: Bank of China Loan Interest Rate Short term 6-monthinterest rate 5. 67%6-12monthinterest rate 6. 39% Long term 1-3yearsinterest rate 6. 57%3-5yearsinterest rate 6. 75% Loan from Bank of China – can reduce the interest rate to 6% by 5-year terms. $100,000amount, 6% interest rate, 5 years. Every month should pay $1933 in 60 month (5 years) Annual loan payments = $23,200
Annual Government taxes are estimated under the following parameters. Government taxes: Four main: 1. Import tax: already include in the price of import goods), don’t need calculate it. 2. The commercial retail is tax 4% in China:(like sale tax, include in the price of good, so retail will pay it to government) =(price of good/1. 04*0. 04) Monthly tax of this option is: $6500*30*4%=$7800 Annually: $7,800 x 12 = 93,600 3. The earning tax is 25% in China (net revenue x 0. 25) $873,250 x 0. 25 = $218,313 (annually) 4.
The value increase in good tax is 5% in China= (the current price of good-the price when you get the good)*13% Monthly tax of this option is: (6500*30-6500*30*30%)*13%=$17745 $17,745 x 12 = $212,940 (annually) 5. Other taxes are estimated to be 3% of net revenue 873,250 x 0. 03 = $26,200 (annually) Total annual taxes = 93,600 + 218,313 + 212,940 + 26,200 = $551,000 We choose 5 years term for the loan because this term is long enough for our business, more important, the interest of 5 years loan is the same as 3 and 4 years loan, but much cheap than 6years’term(3-5years’ interest rate=6% 6-7years’=7. 5%). The estimated average daily gross sales of the ZARA Shuzou store are $6,500, which equates to $2,372,000 annually. These figures have been determined using the performance figures of other Shuzou stores in similar Chinese markets. Both Shanghai and Beijing have similar market conditions, as both metropolitan areas have a substantial population and a high number of residents with large disposable incomes. The Shanghai ZARA store does the equivalent of $80,000 of sales on an average day in a retail ocation that is approximately 20,000 sq ft, while the Beijing ZARA store sells on average $90,000 per day and utilizes 15,000 sq ft or retail space. This leads to a selling rate of $4. 00/sq ft and $6. 00/sq ft for the Shanghai and Beijing stores respectively. Therefore, by averaging those two rates a reasonable selling rate can be estimated for ZARA Shuzou. This rate is $5. 00/ sq ft. With the proposed site being 1300 sq ft, the estimated daily sales of ZARA Shuzou are $6,500 ($2,372,000 annually).
The average mark-up of each clothing item will have to be more accurately determined, and will based upon the cost of the clothing that is supplied by ZARA from Spain. A general industry trend in upper end fashion retailers is that mark-up usually accounts for approximately fifty percent of the selling price. As a result, the estimated daily sales will generate average daily gross revenue of $3,250. That equates to $97,500 per month and $1,186,250 in gross revenue per year. The rent expense for the store inside the Matro Mall is determined by the amount of revenue generated in the business.
The Matro Mall requires twenty percent of all gross revenue to be paid as rent. Because ZARA Suzhou will be renting a display window on an exterior wall as well, this number has been increased to twenty three percent. As a result estimated rent expenses will equal 22,500 per month and total $272,800 per year. Subtracting employee yearly salaries (estimated at $7,000 total for all five employees), interest expense and loan repayment ($23,200 annually), and other miscellaneous costs (estimated at $10,000 annually), gives annual net revenue of $873,250 before taxes.
Total taxes are estimated to equal $551,000 thus resulting in a final net profit of $322,250 annually. Future Growth The growth potential for ZARA in Suzhou is significant. The relatively high average income of Suzhou residents makes it very likely for a Zara store to be successful. Furthermore, the large population will allow the Suzhou market to easily support two stores without cannibalizing each other. While the large market size could likely handle a multitude of individual Zara stores, the element of exclusivity is part of what attracts people to
Zara and thus it is wise to restrict growth to two stores for the immediate future. Ideally the second store would be much larger than the first, with its size to be similar to the Zara stores in Shanghai and Beijing (20,000 and 15,000 sq ft respectively). The larger size store would allow for the projected high demand to be met, but still keep the sense of exclusivity that Zara desires. Kunshan is currently the most likely site for the potential development of a second store in Suzhou. Kunshan is a country-level city in Suzhou, and is ranked as the most economically successful county in China.
The Kunshan region has one of the highest rates of international investment in all of China. It has attracted investment from 54 countries, therefore increasing the potential of the European oriented Zara brand. Growth outside of Suzhou is also possible, as the high rate of economic growth in China makes the metropolitan areas in the country perfect markets. With disposable incomes steadily rising, consumers will need an outlet to spend their increased wealth. Zara is the perfect option, with appealing European designer trends at reasonable prices.
Possible development outside of Suzhou will be studied in the future and compared with the potential of the Kunshan site. Investment Recommendations We would definitely buy this business. We think that it is in a good location in China where a lot of people would notice it. Also since this is a European business it is a new style for the Chinese people. They would want to purchases our goods since it is something different. As of now we are only planning on opening one store, and maybe throughout the years decide to open another one in another city in China.
We think that putting our time, energy and money into this business would lead it to become successful. The more money we spend on the business the more it will get the consumers attention. The more time and energy we put into this business the more satisfying it will be for the customers. To make this business successful and pleasant to our customers we are going to put all our time, energy and money into this ZARA. Why we choose Bank of China to get our initial fund?
Because Bank of China has a special loan which is only for those big and famous company which want to expand their business in China in the world, Bank of China will help these companies not only give their low interest loan, but also offer these companies financial consultation in order to make these companies just concentrate on their business. ZARA completely meet their requirement. References Brand Watch Zara. (2003). Retrieved May 13, 2007, from http://www. 3isite. com/articles/Deconstructing_Zara_handout_version. pdf. Harvard Business School. (2003). Zara: Fast Fashion [Multimediamedia Case].
Su Tong, Ma Lulu, and Huang Su. (2007). 2006 Suzhou Economy Report. Retrieved May 13, 2007, from http://www. sztj. sz. js. cn/news/2007/1/30/tjj/1. htm. Suzhou Government. (2007). Traveling Statistics Report. Retrieved May 12, 2007, from http://www. sztjj. gov. cn/ydtj/200702. htm#12. Suzhou Government (2007). Suzhouness Life Report in 2007. 2. Retrieved May 12, 2007, from http://www. sztjj. gov. cn/ydtj/200702. htm#15. Zara reconstruye el imperio espanol (2003). Retrieved May 12, 2007, from http://www. wharton. universia. net/index. cfm? fa=viewfeature&id=565&language=englis&language=english. &language=english.