Zara Company’s Multi-Brand Strategy and Risks

Introduction

The fashion apparel industry has experienced a significant evolution process over the last few decades. It especially concerns the so-called “fast fashion” retailers mostly encouraged by globalization of the market and the internationalization of companies. In this report, we are going to evaluate the strategies business model deployed by Zara company, which is globally known and acknowledged for its apparel, accessories, home goods, and cosmetics. We will evaluate the model that is the best representative of Zara’s internationalization as a part of Inditex group and discuss the competitive strategies used by Gap Inc. and H&M.

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We will explore the multi-brand strategy used by Zara and try to differentiate the apparent benefits and shortcomings of using such strategy. It is true that Zara deploys a high-risk and high-reward model; among the risks the company has to face is the risk of some of its brands being cannibalized by the others. We will discuss whether Zara is successful in dealing with these risk and give an explanation. Also, we are going to evaluate the possible strong points and weak points of Zara’s going into a joint venture with Tata group, India. We suppose that the psychic distance paradox has a significant role in jeopardizing the Zara’s enterprise at that.

Background

In 1975, Amancio Ortega and Rosalía Mera founded Zara company as a chain store belonging to the Inditex group. Inditex is the global fast fashion retailer that incorporates such brands as Zara (including Zara Kids and Zara Home), Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, and Uterqüe. The portfolio of their products is extensive, comprising apparel and accessories for men, women, and children; also, Zara Home specializes particularly on home accessories.

A significant point of understanding Zara’s popularity all over the world is the way it picks up the current trends and makes it possible to renew its collections approximately twice a month. Such rapid chance is possible due to a unique strategy of gathering trend data in the field. Consequently, the production is based directly on the consumers’ demand. Also, considering that the production occurs mainly in Spain, which is Zara’s homeland, the materials can be delivered quickly, and the fresh loads of apparel and other products are available within as little as two days after the company has put the order (Tokatli 2008).

It is worth once again mentioning that Zara has developed a remarkable technology of gathering data on current trends and disclosing the strategy itself. First and foremost, Zara employs special agents which are usually young persons for whom Zara offers the first chance of a job. The agents are gathering data in places of public interests and watch for the latest trends in fashion. Then the data they have gathered is sketched and sent to factories: the design is changed according to the agents’ evaluation of what will make up for better sales.

The headquarters are situated in Spain, where there is an extensible system of production and all the factory machinery. Zara makes considerable investments into labor, which is by no means cheap, since it is primarily focused on the best result in the shortest possible time. Remarkably, though, Zara does not put that much effort in advertising. The company, probably, has set their priorities correctly, because its popularity all over the world is astounding.

As for the logistics, Zara outsources its products almost entirely locally, with only 25% coming from abroad. The reason to it lies in the quickness of further transporting the end products to the stores. Besides, the suppliers from Italy, Greece, and Spain are obliged to deliver the raw materials to Zara’s factory in Spain within less than a weeks’ time. The time period between the new collection order and the deliveries to the stores is reduced to a minimum.

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Thus, Zara has made the speed of production their credo. However, to understand the key to Zara’s competencies, it is worth answering several questions concerning its business strategies as opposed to those of its competitors’.

Zara’s internationalization model

It is stated that the demand for international services is created by trade (Ghauri & Cateora 2014). Consequently, the Uppsala model as part of the Incremental Internationalization can be regarded as the very type of Zara’s internationalization. The reason might be that Zara has relied on the U-model so far to invade the international market. Zara has successfully outreached its transactional activity within its home market and is constantly expanding. The prices are demand-based, and the production mechanism is very sensitive to the customers’ demands as well (Michelle & Byoungho 2014). Indeed, in the case study, it is stated that if a product does not trade well, it will be withdrawn from the stores within a week.

Also, the market trends will be pursued to replace the gap. As to the pricing, Zara relies mostly on the quality of the product, the accessibility of subsidiary products, the consumers’ socio-economical background and the level of income. These can be considered as the main factor of price-setting. Thus, Zara can apply the same strategies for expanding into global markets with greater psychic distance than its own. It can account for the demand of the international market and use the cost that can leave the consumers satisfied. It just bases the costs on the demand. As to the revenue, it can be used for further expansion and decision-making and logistics, i.e., on the subject of new apparel stores, materials purchase, etc. Considering that Zara, like other fast fashion companies, is designed for instant response to the consumers’ needs, it can alter the whole landscape of retail while entering the foreign markets, if needed (Choi 2013).

Competitive strategies

The doubtless front-runners on the global scale are Zara, Gap Inc., and H&M. The strategy that allows Zara compete with the latter two is that it focuses on trend-setting at fair price; the quality is closer to medium – since Inditex already has Massimo Dutti for higher-quality products. Also, the short time that Zara sets to design and produce new apparel and deliver it directly to the stores is an important advantage.

The “live collections” that are manufactured on the inner scale prove the most sensitive to the current trends. The “live” apparel sums up for the better half of the whole range of Zara’s products and marks the start of Zara’s production cycle. At the beginning of this cycle are the consumers, with their needs and preferences. The budget is set according to the raw material price, the target price of the end product and the desired profits.

Just like Inditex does, the Gap Inc. also uses the multi-brand strategy under such names as Gap, Banana Republic, Old Navy, etc. Headquartered in the US, Gap outsources its apparel and accessories mostly from its homeland, although simultaneously deploying foreign suppliers for the outsourcing. Gap Inc. is also an internationalized retailer, having a multitude of stores in the UK, Canada, France, Japan, etc. Currently, it is entering the Middle Eastern and Asian market where it mostly relies on its own subsidiaries.

As to H&M, it has made use of offering both the latest fashion and the best quality at a low price. The target consumer audience includes men, women, teenagers, and children. H&M’s suppliers count up to 700, and this company has better success in internationalization. The reasons may be that the stores are located conveniently, the collections are frequently renewed, and the prices are kept as low as possible, in the circumstances.

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With its “quick response” concept as a key strategy, Zara has the chance of overpowering the H&M and the Gap Inc. since the company internationalizes quickly and goes in accordance with the changing dynamics of the international apparel industry (Bhardwaj, Eickman & Runyan 2011).

Multi-brand strategy

Multi-brand refers to a marketing strategy with the companies producing two or more products simultaneously and under different brand names. Zara is well-known globally for incorporating such brands as Pull&Bear, Oysho, Massimo Dutti, Bershka, etc. These brands have become global and result in significant revenue, yearly. By using parallel brands, the company can expand its target market.

For example, while Massimo Dutti and Oysho fill the quality gap, Bershka and Pull&Bear fill the price gap, enlarging the amount of target consumers by directly addressing their needs. The main advantage of it is, of course, the increased profit. The disadvantage is that the distribution system becomes a gateway to possible threats, since a sudden problem on one of the distribution branches could affect the center – and all other branches (Gabrielsson 2005). Besides, there is always a risk that brands will eventually cannibalize each other.

The Cannibalization risk

The multi-brand strategy is deployed not only by Zara, but by most of the world’s leading apparel retailers (Mo 2015). This strategy is rather dangerous since it can result in less sales and revenue for each of the brands. Indeed, the appearance of one brand moves other brands aside and metaphorically eats them alive. Zara successfully avoids these unpleasant results since Zara’s brands were first launched on the domestic premises and then applied to all other markets. Besides, Zara has put an emphasis at distinguishing the brands by their target consumer audience, e.g., the products under diverse brand names differ in design, price and quality. Thus, the brands are evenly distributed within the market. Also, Zara promotes the product rather than the brand, emphasizing the diversity of the products. Thus, Zara has overcome the risk of cannibalization and keeps the constant supply of each brand at its highest (Mo 2015).

Indian joint venture

Zara has gone into a joint venture with Tata Group in 2009, which marked the beginning of Zara’s stores setup in India. Tata is one of the largest conglomerates in India, and it holds a 49%-share as the collaboration proceeds. One of the advantages of such collaboration is the size and power that Tata has in India, which allows Zara instantly integrate into the Indian market. Another advantage is that India has more than 1.1 billion of population, further extending Zara’s consumer audience – and the sales. Also, the venturing firms can benefit if the joint firm countries have a growing GDP, which means the local economy is developing (Keegan & Green 2011).

As to the disadvantages, there are more of them, and they are well worth consideration. Firstly, the psychic distance between Zara’s culture and the culture of India is too big. The ethics and values are diverse both on the business level and on common level. Consequently, the dynamics of the working process might get jammed by the diversity, resulting in profit decrease. Secondly, Tata Group might put Zara’s intellectual property under threat since the percentage of shares Tata has is quite drastic.

Which is why, Tata might get hold of domination and vulnerabilize Zara’s corporate secrets. In addition, despite the fact that the population is dense in India, it has its own apparel and accessories market – and a rather extensive one, at that. Clothing industries are not only well-developed but are also well-adapted to the local consumers’ needs and demand. Besides, in spite of the high GDP, the level of income per capita is rather low, making Zara clothes practically inaccessible to an average Indian consumer.

Thus, most Indian people prefer wearing local products, with only those having a higher socio-economic status being able to actually buy from Zara. At that, we should return to the psychic difference, but this time the difference lies not between Zara and Tata as business partners, but between European and Indian clothing cultures. The cultures are so diverse and specific in their own way that a clash is likely to occur, with the more traditionalized Indian population refusing to wear European apparel. All this can result in the decrease of sales, the loss of intellectual property and corporate secrets, and the increased vulnerability of Zara’s distribution center (Keegan & Green 2011).

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Conclusion

To sum it up, the evolution experienced by the fashion apparel industry over the last few decades has proved rather drastic. The “fast fashion” retailers such as Zara, Gap Inc., and H&M are the most concerned. They gradually get globalized and expand their markets, invading both local and international ones. In this report, we have estimated that Zara company, which is the global producer of apparel, accessories, home goods, and cosmetics, deploys an Uppsala model of internationalization since it bases the priced on the demand and expands into the international market.

The competitive strategies used by Gap Inc. and H&M make them strong competitors – especially the H&M which has the lowest prices of all three and the biggest number of suppliers, making the company the most globalized between the three. As to the multi-brand strategy utilized by Zara, we can assess that the brands it has on offer are yet to gobble up each other. The high-risk and high-reward model actually works for Zara since its brands are capable of filling all the gaps in the market, i.e., the price gap and the quality gap, which means that Zara – and its sub-brands – literally has something for any type of consumer. On the other hand, Zara’s joint venture with Tata Group, India, seems to be less successful due to several reasons. The main reason is the psychic distance, which means, when dealing with the Indian market, Zara is under constant jeopardy, despite its apparent popularity elsewhere.

References

Bhardwaj, V, Eickman, M & Runyan, RC 2011, ‘A case study on the internationalization process of a ‘born-global’ fashion retailer’, The International Review of Retail, Distribution and Consumer Research, vol. 21, no. 3, pp. 293-307.

Choi, T 2013, Fast Fashion Systems: Theories and Applications, CRC Press, Boca Raton, FL.

Gabrielsson, M 2005, ‘Branding Strategies of Born Globals’, Journal of International Entrepreneurship, vol. 3, no. 3, pp. 199-222.

Ghauri, PN & Cateora, PR 2014, International Marketing 4th edn, McGraw-Hill Education, New York, NY.

Keegan, WJ & Green, MC 2011, Global Marketing 6th edn, Pearson Education, London, UK.

Michelle, LC & Byoungho, J 2014 ‘Is Uppsala model valid to fashion retailers? An analysis from internationalization patterns of fast fashion retailers’, Journal of Fashion Marketing and Management, vol. 18, no. 1, pp.36-51.

Mo, Z 2015, ‘Internationalization Process of Fast Fashion Retailers: Evidence of H&M and Zara’, International Journal of Business and Management, vol. 10, no. 3, pp. 217-236.

Tokatli, N 2008, ‘Global sourcing: insights from the global clothing industry—the case of Zara, a fast fashion retailer’, Journal of Economic Geography, vol. 8, no. 1, pp. 21-38.

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StudyCorgi. (2021, January 6). Zara Company's Multi-Brand Strategy and Risks. Retrieved from https://studycorgi.com/zara-companys-multi-brand-strategy-and-risks/

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