Cost Analysis Within The Zara Company Marketing Essay

Describe how Zara uses technology to improve operational responsiveness to customer expectations, and at the same time to reduce costs in certain areas.

Zara’s main strategy is to give a quick answer to end consumer demands and anticipate consumer trends through information technology and human resources. It operates on the basis of heavy backward vertical integration, working its way from the end consumer all the way back to the manufacturing and distribution. It ensures a very tight control of production through simple and effective IT systems as well as a high tech distribution center (DC.) It realizes cost optimization on its basic items for production and also time optimization in terms of speed to market of its fashion items making use of technology. Zara adapted to trends and differences across markets by interacting regularly with the store managers using the PDA and phone systems to get updates on customer feedback, fashion sense etc. The Point of Sale system (POS) in the store computers also provided valuable sales data to the distribution center which had a mobile tracking system that docked hanging garments in appropriate bar coded areas. The various garments were given Stock Keeping Units (SKU’s) and orders were placed from the hand-held computers in the stores twice a week or more, to the distribution center where if particular items were in short supply, allocation decisions were made on the basis of historical sales levels and other considerations. After the orders were approved, the warehouse issued lists for delivery to the stores. Zara design teams tracked customer preferences and used sales information such as sales analysis, store trends and product life cycle information from the store managers, based on a consumption information system to transmit repeat orders and new designs to internal/external suppliers and the DC. The design teams thereby bridged merchandising and the backend of the production process and they developed the right products within the season to meet consumer demands. Zara’s product development teams attended high fashion fares and exhibitions to translate the latest seasonal trends into the designs. Hence, a super fast rate of operational responsiveness to customers was maintained and the DC was more of a place to merchandise than merely for storage.

Technology also helped keep Zara’s costs under control. By using the POS systems in store computers, handheld PDA devices for store managers and phone systems, accurate information regarding orders required were transmitted to the DC. The SKU’s ensured accuracy in terms of which products needed to be produced and in what quantities and the DC’s could use all this information and feedback from the design teams to make orders of the right quantity of each kind of product. Thus, inventory costs were very low, runs were limited and production costs were maintained at very manageable levels in spite of the large number of new items that are continuously produced. Zara’s factories were also heavily automated, specialized by garment type and focused on the capital intensive parts of the production process, like pattern design and cutting as well as final finishing and inspection. A ‘Just-in-time’ system was installed in collaboration with Toyota in these factories and this helped in faster completion of work and controlling of costs through continuous improvement processes.

Management Information System technology plays a crucial role in Zara’s customer responsiveness and cost control measures.

From what you see in the case, does Zara price to market or on the basis of other factors?

Zara always followed a market based pricing method. In each country, Zara always placed more focus on the market prices (local pricing levels) rather than on its own costs to forecast prices of items in particular markets. These forecasts were later overlaid on cost estimates that included all considerations such as distance, tariffs, and taxes and so on to see whether the potential market could achieve profitability in a year or two of opening the first store. Zara followed a different pricing strategy in each country, for example, in Italy and Paris the focus was more quality oriented and so the price of the same items were much higher, however, in Germany where consumers are price sensitive the items were lesser priced. This figured in the different marketing strategy followed in each country. Zara controlled its costs through its production and distribution processes and was positioned in many countries as high fashion at affordable prices which though were centrally determined, much lower than competitor prices for comparable products in its major markets. Percentage margins still held up, this was possible because of the direct efficiencies of short, vertically integrated supply chain, reduced advertising costs, and markdown requirements. Thus Zara competed at reasonable prices through a cost leadership strategy, completing Porter’s generic strategy through differentiated products and broad segmentation.

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Zara’s customers in many countries bore the extra costs of supplying the items from Spain though the prices were market based, for example, prices were 40% higher in Northern Europe and 70% higher in the Americas than in Spain. This could be seen on the garment’s price tag which was an ‘atlas’ to the customers. These higher prices outside Spain affected Zara’s positioning overseas as high end instead of mid market range products to better validate the price differences. Like in Mexico where the target consumer base is narrow, it is geared towards the upper and middle class that knows fashion. Moreover, as in Europe, the ‘artificial scarcity’ that Zara creates of its products in its stores urge the customers to pay the price and buy rather than wait it out. Markdowns are very low for Zara in Europe and elsewhere, 15-20% of its sales as compared to 30-40% for its European peers. Zara does not completely compete on basis of price as the usual Zara customer is not that price sensitive; instead, it competes on fashion and its quick response capability.

Zara (2010) has just launched an on-line, e-retail distribution service.   For an apparel retailer what are the advantages and disadvantages of online distribution?  Can Zara make it work?

Inditex has long used the internet to promote its various lines and corporate image and is also popular on Facebook, where it has 4.5m fans. Its Smartphone application, launched about a year ago, has been downloaded by 2m people. Zara can very easily make its online e-retail distribution service work successfully. Familiarity with the Zara stores thus provides name recognition for the online retail site, and the combination of customer data gathered by the store and the online retail site (through Google Analytics, for example) could lead to substantial personalized marketing efforts, using various channels. With Zara’s policy of a lean advertising budget, an online retail portal will add greatly in terms of branding and awareness.

Zara had initially decided not to sell clothes on the internet since the returns rates were too high. However, as of September 2010, Inditex put Zara branded products online for its customers, waiting for online demand to build. Customers can choose from the usual range of paying methods and opt either for a free store pick-up or paid-for postal delivery. The online return and exchange policy is identical to the store system, with shoppers given 30 days to change their minds. iPhone and iPad applications that allowed purchasing will soon be available and online sales will help Zara reach potential customers who have no easy access to physical stores.

For an apparel retailer, the advantages of online distribution would be providing convenience to the shoppers to buy from the comfort of their home, save on travel time and costs and have easy access to the products. Customers will have 24 hour access to the shopping platform online and make better buying decisions through online chat and discussion. Researchers’ identify convenience as a ‘fundamental objective’ related to online shopping (Schaupp & Belanger, 2005). This is relevant to 72% of online shoppers’ claim that they would rather surf online than go to retail store to attain information about a product (Lokken et al., 2003). Costs on human resources (Vendors, shop assistants, managers) can be saved by the retailer and customers can make relaxed wise buy decisions without pressure from vendors. ‘Infinite shelf space’ will be available in that, products available at all store locations and around the world without geographical boundaries, to the customers to choose from. Comparison shopping in terms of styles and prices will be easier on the online portal than in the store for the consumer.

Boston Consulting Group analysts Evans and Wurster theorize that the three main strategic draws of online retail are reach, affiliation and richness. Reach is defined as “access and connection: how many customers a business can access and how many products it can offer.” Moreover, a retailer’s range of product offerings was traditionally limited by the size of its stores and the cost of carrying inventory while online retailers as intermediaries between customers and suppliers need not necessarily have an inventory at all, only a catalog, often transparent to the customer. Affiliation refers to whose interests are represented by the online retailer who can treat the products from their various vendors more objectively, providing more objective information and better product comparisons for their customers. Richness refers to “the depth and detail of information, about products and about customers.” Evans and Wurster argue that traditional retailers still are at an advantage to supply expert information about products to their customers, and that they also are still in a better position to gather information about product sales and customer profiles and buying patterns. Online retailers are quickly catching up, however, gathering data about customer browsing behavior, purchasing history, and demographics. Online retailers are subsequently able to use this data to provide their customers with a fully customized online shopping environment, including individualized web pages, targeted ads and offers, and specific product suggestions, something traditional retailers cannot effectively do at their retail outlets.

Some of the disadvantages of online retail would be the difficulty to gather trend information, product sales and customer suggestions. Zara could remedy this by using analytics and customer feedback forms online that are user friendly and attractive. The experience of shopping in a Zara store would be lost, but Zara would need to make its retail platform very interactive and spellbinding. Zara’s prime store locations cost a lot of investment, and the advent of online shopping could mean cannibalization of its retail outlet sales and a waste of upkeep costs, this could put Zara into a fix. Customers will not be able to touch and try the product like they can in an actual store, “[t]he likelihood of purchasing on the Internet decreases with increases in product risk” (Bhatnagar, Misra, & Rao, 20000, p. 100). Apparels in particular had negative rating in online shopping because of it is difficult to feel and see the texture of colour online that is incomparable to going to a retail store. The biggest drawback itself would be the concept of ‘infinite shelf space’ that an online distribution will bring, for Zara. Being a company that thrives on the creation of ‘artificial scarcity’ of its products, the online distribution channel will have to be very carefully controlled to ensure that customers buy the products with the same fervour as when they visit the store, knowing that it might not be available the following week. Zara can remedy this situation by advertising only a limited number of units of each product online so customers will know if the numbers are dwindling and that they need to act fast in order to acquire the product just as in the case of the actual store.