Analysis of Zara inditex and their issues opportunities in the Apparel Retailing industry in 2003
... 0 Industry Environment Analysis 4 3. ... 0 Sources of Competitive Advantage for Zara 8 4.1 Industry Success and Survival Factors 8 4. ... 0 Concluding Issues Confronting Zara 12 6. ... 0 Executive Summary This report analyses the strategic position of Zara in the apparel industry with the aim to advise company management of the main challenges and opportunities confronting their firm over the next four years. The report finds that the company operates in an industry with weak supplier and buyer power and low barriers to entry leading to a highly competitive environment. Competition is mainly concentrated around cost and differentiation of apparel with customers becoming increasingly brand based, allowing retailers to establish themselves in niches. The future of the industry finds the forces within to intensify, buyers and suppliers will become weaker and barriers to entry will remain low leading to fiercer competition. The sources of competitive advantage for Zara are identified to be from short cycle times due to vertical integration, the continuous assessment of instore products and fashion trends, and retailing strategies reducing the need for marketing. The high focus of fashion in Zara’s niche segment will result in Zara maintaining its success in the short term. However high priority issues/opportunities arise in the sustainability of some of its competitive advantages, the expansion of the brand in Europe and the extent of higher prices on a global scale due to transportation costs from Spain. ... 1 The Brief Inditex of Spain, the owner of Zara, had rapid profitable growth and posted net income of €340 million in its fiscal year 2001. ... 2 Terms of Reference The managers of Inditex, have commissioned this report to analyse the future of the apparel industry and evaluate the main challenges and opportunities confronting the firm over the next four years. ... 3 Methodology The following section analyses the industry environment by looking at the past, present and future of the apparel industry. ... 0 evaluates Zara’s competitive advantage and the survival factors of the industry. Zara’s value chain is analysed for any distinctive elements and this evaluation leads to some key issues regarding the firm’s future. ... 0 Industry Environment 3.1 Past and Present The apparel industry at present can be characterised as relatively concentrated downstream where in the 1990s “chains accounted for 85% of retail sales in the US and about 70% in Western Europe” . However the high threat of entry to set up apparel retail shops has prevented large retailers gaining considerable market share, where a more global description shows that four of the leading international retailers managed revenues of €25. ... 79% of a global industry worth €900bn in 2001. This could evaluate the apparel industry as “only slightly better than those typical of perfectly competitive markets” with no oligopolies present. The consolidation of the market in the 1990s can be explained where leading apparel retailers have been able to achieve efficiency advantage over emerging or smaller retailers through: - Fast cycle times resulting from Quick Response (QR): able to meet demands faster than retailers working with traditional policies. - Low inventory storage has allowed retailers to reduce wastage/overheads of non-selling apparel. ... Although downstream (retailers) the apparel market is concentrated, upstream (manufacturers) the industry is very fragmented. This factor along with apparel suppliers “unable to differentiate its product or engender switching costs that lock in buyers” has led to low supplier power. Apparel retailers imported 30% of world apparel with 50% originating from developing countries. ... As apparel retailers turned to less expensive producers abroad, this factor further shifted the power of bargaining in favour of the retailers at the expense of the suppliers. This force however, was less influential by the Multi Fiber Arrangement (MFA), restricting apparel imports. ... However this factor lost weight where relatively concentrated cross-border intermediaries gained differentiation advantage from apparel production/resale by adding value such as market research for retailers. This increased competition abroad, counteracted the influence of the MFA while differentiating apparel strengthened supplier power to a degree. Although the apparel industry is very broad (global), there is low homogeneity with variation in preferences even within a region. ... 9 percent five-year gross margins versus as industry average of around 33 percent in 2000. These statistics conclude that in a differentiation and cost driven industry the power of buyers is medium to low. With the retailing industry continuing to consolidate and no oligopolies present, with no industry substitute, coupled with the fact that innovation of technology to cut cycle times is becoming more important to meet fashion needs, suggests the industry is still in growth.