ITC3046R Fashion Retail Buying

Case Study: ZARA

Li Wun Ying (17047282D)

Michael Adebanjo (17101688X)

Chow Chin Kiu Abigail (17040667D)

Choi Wing(17000579D)

Lo Mei Chi(17026943D)

Chan Wing Yin (16029449D)

Part A: Brand Analysis

“Bringing attractive and responsible fashion, and improve the quality of customer service, are Zara's priorities”

Begins with its mission statement, Zara is one of the famous fashion brands which is originally from Arteixo, Galicia in

Spain. The company was founded by Amanciio Ortega & Rosalia Mera in 1975. Inditex, the world’s largest fashion group

was incorporated as a holding company in 1985, which laid the foundations for a distribution system to react with the rapid

shifting market trends quickly. Today, Zara has stores in over 88 countries with over 6500 outlets across the globe. The Zara

brand offers men, women and children clothing, shoes and accessories. Its products are supplied majorly based on consumer

trends. With its “fast fashion” retail approach, Zara aims at responding instinctively to customers’ changing needs, reacting

to the latest trends and constant feedback received across its collections in order to deliver up-to-date ideas in the right place

at the right moment. It’s competitors are H&M, Uniqlo and Gap due their similar price range, distribution as well as their

brand image.

Customers : When it comes to Zara’s target, it targets customers with mid to lower range income due to its market strategy

of offering cutting edge fashion at affordable prices, it also targets most women who comprise that largest part of its target

segment. Besides, men also comprise a smaller segment of its target market and the smallest segment is that of the kids.

Among its target market, women are more than half of it while men and kids are 40% of its target market (Harbott, 2011).

Typical Zara customers are highly sensitive to the latest fashion trends, they want their fashion affordable but also

‘straight-off-the-runway’. Moreover, buying behavior of Zara customers is different from the regular one, for example,

typical Zara customers visit store approximately 17 times a year while the regular one with 3 times per year due to the fast

fashion concept, customers have to keep track to see what’s new. These show that Zara customers tend to be impulsive and

more likely to purchase products to prevent them going out-of-stock.

Strength : (1) Strong presence: Zara have more than 2000 stores all over 88 countries in the world. and it has not stopped

expanding its presence worldwide quickly. In the recent years, like-for-like sales have grown by 17pc and it is opening stores

in more than sixty countries in each year (Ruddick, 2014) . (2) Fast-changing design: Zara products are produced at

competitive price with the creative and fashionable designs with fast delivery. Rather than producing more quantities per

style, Zara produces more styles, roughly 12,000 a year. As a result, customers have to keep track with Zara often to see what

is new in store, more choices and higher chance of getting it right with consumer can lead to the growing profit. (3)

Well-developed supply chain with short lead time: Zara has a highly responsive and vertically integrated supply chain which

enables products to be shipped to the stores twice a week. The total time from design stage to the sales floor is around 10- 15

days, which enables the delivery of new fashion at a very rapid rate to further cater customers ‘needs (Petro, 2012).

Moreover, vertically integrated manufacturing helps reducing supply chain management costs and improve efficiencies by

decreasing transportation expenses. (4) Low advertising cost: Zara does not advertise. Yet, it relies more on building its own

image by global network of shopper-feedback to tweak their designs (THOMPSON, 2012), which is why Zara has a very

low operation cost and a high margins. It spends most of its profits on backward integration and supply chain rather than

spending it on advertising. (5) Minimal inventory: Due to fast fashion approach, it keeps Zara low inventory level to ensure

that it is based on the demand and creates a sense of exclusivity. Moreover, minimal level of inventory also prevents excess

inventory and dead stock to avoid losses or discounting surplus items.

Weakness : (1) Limited advertising: Since Zara does not advertise, it can also be a disadvantage. Although it may lead to a

lower cost, lack of advertising can be a weakness of Zara, since it can double the profits and turnover by promoting its image

to even more customers. (2) Resist outsourcing: Zara does not rely on external service supplier, it manages the design,

logistics and distribution by itself, plus having its own huge warehouse, Zara spends much higher cost on each operations

and higher labor cost since it requires more human resources to in charge of and monitor each process. (3) Low safety stock:

Maintaining a low level of inventory is one of the strategies for Zara in order to create a sense of urgency for customers.

However, at the same time, if the demand of a particular style gets much higher than expected, the sale will not reach its

potential since there is no safety stock for that style. (4) Lack of specialized products: Zara does not specialize in anything, it

can be a reason why customers are shifting to the competitors when the competitor just focus on one thing, which can be

shirts, patterns or whatever it can be.

Opportunity : There are more markets in the world that Zara can explore, such as fast-growing demand from Asian market.

Online marketing, m-commerce as well as e-commerce are getting more and more important through the globe, Zara should

always keep up with the latest technology development to further satisfy customers. Moreover, Zara can consider using

outsourcing approach when necessary in order to further lower the costs.

Threats : (1) Economic downturn: Economic condition is one of the key factors that affects apparel industry, for example,

economic recession can lead to low consumer income which indirectly result in a decrease in spending on clothes. (2) Image

of imitation: Zara is known of their products are imitating from some of the luxury brands, it can affect the reputation of the

brand then decline the sale and hurt the business in long term. (3) Rivalry among competitors: There are a significant

number of international apparel retailers approaching fast-fashion model, like H&M, which can be a threat to Zara to attract

the same group of customers.

Part B: Brand Business Analysis

Brands Combo & Category Mix

Zara is an example of private labels retailer in the fashion industry which mean Zara only sell their own products. Apart from

this, products of Zara also only sold under their brand name. Therefore, brands combo does not exist in Zara.

For Zara, it mainly offers 3 product lines which is for Menswear, Womenswear and Childrenswear. Plus, there are various

types of category in Zara that Zara retail shops offers clothes, bags, shoes, cosmetics and accessories for their target market.

Whats’more, Zara’s products are suitable for many people who from various background with different taste.

Product Life Cycle

The left hand side is normal product life cycle curve. Although Zara’s

product life cycle also follows the four main stages, it is different from

normal one which is the right one image. As we all know that Zara is in fast

fashion industry, they can produce their products from design to retail within

2 weeks in order to catch the tail of the fashion trend which mean they can

produce their products immediately after the fashion trend occurs. Thus, Zara

can already have an amount of customers at the first stage. After that, the

trend has been spreading for a time, so they will get more customers at the

growth, this is also the highest peak period in their product life cycle.

However, the trend will end soon. Thus, at the maturity stage, product sales

will be greatly reduced. Finally, the life of the trend is of maximum 5 to 6

weeks. Everyone bought what they want, plus the next trend may be about

to appear, sales volume has entered the trough of product life cycle, which is in the decline stage.

Inventory Property: Replenishment Rate

Mostly, Zara’s replenishment rate is high, as it is in a fast fashion industry. Fast fashion is about a fashion retailer to apply

their inexpensive designs in making the garment quickly from their designs to retail store in order to meet new trends.

According to the data from internet, Zara replenishes its inventories multiple times a week, generally twice a week. Zara has

short lead time, because it designs, produces and distributes by themselves. Due to fast and flexible supply chain system of

Zara, from design to sale, their products can be completed within 15 days. Thus, the whole processes for replenishment can

be very fast and efficient. However, everything has exceptions. Sometimes Zara’s replenishment rate maybe low, because

Zara have to consider whether or not to reorder more stocks upon a trend or keep their inventories to a limited based on their

latest sales data about each of the trend. If the sales of goods are not good, Zara may not replenish its stocks so as not to

cause more deadstocks. For Zara, small and regular products are supposed to keep its inventory scarce, so that customers will

buy urgently. It can also make people have more demand for their products.

One-Time-Buy

There are generally two types of item in Zara, Classic and Seasonal Items. Seasonal items is for One-Time-Purchase which

mean zara may not even replenish.

Best sellers and worst sellers

The best sellers of Zara should be those products with off-shoulder details and bomber jackets. According to observations in

the past year, the products with off-shoulder details and bomber jacket are very famous in Hong Kong. And we can see that

Zara offered different types of garment with off-shoulder style to consumers including off-shoulder top, dress and sweater.

Plus, most of the colors are white and blue and sometimes with flower pattern. In addition, Zara also sold bomber jacket with

different material and prints pattern such as floral and animal pattern. Since these products are hot, Zara then keeps on

launching various styles and details on the same product as they hope to earn more profit in this fashion trend.

A data on the internet showing that there are two types of worst sellers of Zara.

First, is Printed Dress with Gathered Front. Zara target market is 18-40 years old. However, this dress’s loose cut design and

an old-fashioned pattern obviously can not catch their target customer preferences. Second, is Belted Ribbed Trousers. The

design of this loose pants is different from the general one. We can see that after the model wearing this trousers, the position

of this product on the body is a bit strange. It also looks too big for anyone and makes our body shape worse.

SKU in HK

Extracted data from hk zara online store on 25 March. There is assumption that all style has 5 sizes and 4 colors assortments.

Competitors’ pricing strategies and its best or worst sellers

The key competitor of Zara is H&M. In pricing aspect, H&M applies more aggressive pricing strategy than Zara. H&M has

higher rate and level of mark down while Zara conducts lower level of discounting. As there is a much higher rate of new

discounts, consumers of H&M tend to seek out promotions.

In contrast, Zara sells more items at full price because of the market positioning. It has 85 percent of the full price on its

clothes, while the industry average is 60 to 70 percent. Unsold items account for less than 10 percent of its stock, compared

with an industry average of 17 to 20 percent (Andrew, Sirkin & Butman, 2007). Therefore, Zara’s total cost is minimized

because merchandise that is marked down is reduced dramatically when compared to H&M.

For the price range, H&M has a wider price range but a lower median price compare to Zara. H&M price range from €0.7-

216 while Zara price range from €4- 239. H&M’s average price point is half of the Zara’s (Capon, N., & Go, M.,2017).

H&M provides more price options in one category in order to attract more potential consumers from various market segment.

However, Zara focus heavily on one price point especially in key categories like tops and jeans.

H&M’s best sellers should be the designer collaboration with famous labels such as the collection from London-based label

Erdem in Oct 17. H&M x Erdem, this kind of product translates luxury ready-to-wear into garment that look great and also

affordable. It can fulfill consumers’ requirement to catch up fashion trend and pay little. Besides, t-shirts, basic jumpers,

layered tops and sleeved jersey dresses are also the core categories that contribute profit for H&M.

Potential categories to grow or fade out

Although Zara added category of activewear in 2016, it was much slower than other competitors for entering this market.

Therefore, this category still have room to grow and thus gain the market share. The activewear collections of Zara contain

sports bras, hoodies, leggings, yoga pants and even swimwear.

The athleisure trend is a new form of causalwear and has greatly impact on the fashion industry. As the line between what is

an athletic item and a casual wear continues to blur and there is not any hints to stop, fashion brands and retailers have to

follow the trend and make sure to offer enough stock of activewear for fulfilling consumers’ want.

Part C: Buy Plan Proposal

The trend of Zara in FW2018

Zara is evidently one of the most fashion forward retailers in the world , so with that being said we have to stay current by

researching new trends for future collections . Zara’s trend for FW 2018 menswear is extremely diverse compared to

womenswear . Zara’s mens collection have gone for a more street edge and the women's collection have gone for

sophisticated classy with a dash of sassy . We feel this will be very successful when this collection drops due to us catering

more the the younger generation .

Market competition in merchandise supply

Zara has a better performance in merchandising supplying market. In order to get a quick respond to react into the fast

fashion industry, Zara has built up an excellent cooperation between business and operation strategy. Vertical integrations

have applied to achieve the diversification growth to fulfil the speed to market.

This is a great challenge to match different styles with different customers. However, Zara can solve this problem by “just in

time“, great control and strict integrate process. A huge quality production in the Zara’s factories, thus can be flexible to

handle in stock quality, rate of recurrence and trendy items. 85 percent containment stand by to deal with the next season

stock requirement. To fulfil the future trend, Zara offers 15 to 25 percent to the season’s line and at the beginning of the

season it will be increased to 25 to 30 percent. The left 50 percent will be used in the middle of the season to produce

designed clothes.

Store managers get feedbacks from customers about the newcomer street style, designers design the new key items during

the trend is moving upper. Zara can offer extra capacity to deal with key items develops and changes, then shipping to the

shop. Because of the items is exclusive and scarce, Zara offers their products on full price, compare with other competitions

is higher than 15 percent. Zara total mark down cost on merchandise which is lower than other competitor, it creates a

competition advantage in merchandise supply. The strategy help Zara’s unsold items keep less than 10 percent. The extra

money spends on the labor and frequency shipping.

Zara adopt inventory optimization models deal with each store reorder stock quality in every 2 weeks. A tightly limited

requirement need to fulfil to ensure each store had not over order. Zara centralize logistic receive the order twice a week on

time. A regular rhythm help employee understand the timeline and extend to their customer.

Zara cross-functional operations strategy cooperation with vertical integrated supply chain is successful.

SKU needs in this season

Total: 3567

SKU: 3567 x 5sizes x 4 colour = 71340

As we will focus on the women’s wear, According to the

information list on Part B, it shows that the Women’ s

wear,stock keep units is 73560 on 25 March 2018. As Zara

has their own merchandise supply on a regularly re-ordered

timetable. Thus, the SKU do not need to keep at a high level

which allows the product to be kept at selling price and reduce

the chance of having dead stocks. Therefore, the SKU we have

designed aims to reduce the items that will not be suitable for

the Fall/Winter, such as the Shirts/tops, Skirts, Beachwear in

FW 2018 for Womenswear, stock keep units is 71340. On the other hand, Zara is using private labels and as a retailer,

category mix investment split would be adopted.

Cost/Retail Price Assumption, Gross Margin, Mark-up, Discount rate/promotional plan, Sales projection

Merchandise plan:

For the six merchandise plan, the period is October 2018 to March 2019, A/W buying plan will be planned. The total budget

for the planned months is $7500000.9, and the budget will use for buying 15 items. And the purchase cost for one quantity is

between $39.8 to $99.8. For example, the average cost of outerwear for one unit is $66.5, and the planned quantities for the

A/W 18/19 is 4169 units, therefore, out of the total budget, the total cost for outerwear is $66.5 x 4169 units = $277,238.5.

Based on the markup and the total buying quantities, the prediction total income of the planned six months is $28309106, and

the gross margin is $28309106 - $7500000.9 (cost of goods sold) = $ 20,809,105.1. With the application of markup method,

Zara is literally embodying the idea of “fast fashion” that the markup percentage is higher in the fashion industry. The

markup percentage for each item between 0.6 to 0.8. In the price assumption, based on the markup, for example, the markup

percentage of outerwear is 0.8 which is the highest markup of Zara, the average nominal price is $499, because of the

markdown and the promotion, the average retail price of outerwear is $332.7 in the planned six months. Furthermore, there

are dissimilar discount rate for different selling period, in October which is the goods first launched the market, the nominal

price will be the selling price. And there are total four to five times discounts to avoid the deadstock, for example, the selling

price of checked coat is $799 at the beginning, after one month selling, it will has 10% discount to stimulate the product

sales. After five times discount, the retail price will be $479 which is 40% discount rate.

Thus, in November to January which is the peak period of the A/W, there fixed promotional event for celebrating Christmas

and Chinese New Year with seasonal sales. The demand will be increased in the promotions. And the promotional sales

discount about 30 to 40%. Meanwhile, promotional products will focus on seasonal products with matching the seasonal

trends. And the sales projection, compare with 2017, in A/W 18/19 the net profit will be increase 5 to 10% in Central store.

OTB Plan

The function of the Open-To-Buy planning is helping buyers to determine the profits by the lowest markdown, also, the OTB

plan can help Zara to cognisance the business environment. The planned buying budget for these six months is $7,500,000.9,

Thus, The total planned sales of the planned period is $28309106, with different sales promotion and discount, the prediction

income of each month is different. With calculate the Open-To-Buy planning, planned reduction is needed to determine. It

was found that there are different markdown with different, the markdown value in October is $0 which is the first launched

period of the goods. After that, because of the promotions, the markdown is formed. In November is $131,746.7, in

december is $13400. However, the markdown is not pretty high because Zara’s concept is “Fast fashion” that the in-store

inventory at the end of the month (EOM) around 25% - 30% for the sales. In addition, we should minus the beginning of

month inventory. For example, at the beginning of launching the newest A/W items is October, the planned sales is

$4249894, the EOM is $1,415,455, the markdown is $0, and the beginning of month inventory is $1,400,000, therefore, the

open-to-buy of October is: $4,249,894 + $1,415,455 +$0 - $$1,400,000 = $4,265,349.

In the key sales period, Zara have the promotional discounts for Christmas and Chinese New Year, it can stimulate the

consumptions from customers. Therefore, the planned sales will be increase and around 6.5 millions. Thus, we found out the

open to buy volumes, for example, in December which is the best selling month in the year, the count open to buy of goods is

$6747199.2. However, after the seasonal promotional, in February, the demand of buying garments will be decreased.

Therefore, Zara do not need to buy too much inventory to fulfill the demand in the market. Thus, March is the last month of

selling A/W garment, therefore, Central store can buy more goods for holding the need of the final seasonal discount.

Key investment category/item(Why)

Zara has gone for mixed key items for menswear and womenswear FW 2018. As we have carried out a world wide survey

and endless amounts of research , this has led us to our future FW collection. We definitely paid more attention to our

consumers between the age of 20-40 mainly because these are the people that buy our merchandise the most . The women's

range can appeal to a more higher age bracket based on the sophisticated aesthetic, where as the men's collection will appeal

to a younger generation due to the collection being more “hip” . These key investments were based on customer feedback

carried throughout 2017.

Any item/Category that need to drop/decrease investment and why

In A/W 18/19, Zara need to decrease investment for buying beachwear that consumers will decrease their demand for

beachwear in autumn winter season. Because of the cold weather, consumers seldom go to beach, if Zara buy too much

beachwear for the A/W season, it may cause higher inventory cost. Hence, deadstock may happen if we take too much stock

for beachwear. Second, the investment for jumpsuit need to decrease. When wearers wear jumpsuit, they look trendy and

casual. However, the target customers of Central store is mature and office ladies, they more prefer the formal dress, skirt,

coat, etc for their daily outfit. Thus, we should focus on the need of target customers, open to buy for the needed items.

Part D

Finding in our analysis

Zara’s flagship store in central sells and holds the highest volume of merchandise, therefore, SKU predicted is 130000 units,

which is relatively higher than the average SKU in Hong Kong stores, which is 71340 units.

But overall SKU is still lower than most of the stores from other brands since it allows the product to be kept at selling price

and reduce the chance of having dead stocks.

Apart from that, overall inventory management is quite similar to Zara’s original approach, which are high replenishment

rate and short lead time in order to match supply and demand more effectively than the competitors, respond quickly to the

changing fashion trend thus increase profits of the company.

Brand continue profitable or not

Zara can be profitable continuously as it can have a quick reaction of the trend with offering limited quantity of their stock

and having an outstand merchandise supply to reduce unnecessary cost, such as storage cost, and these costs have been put

into supply chain. Zara has built up a strong relationship between customer and Zara because it has carried out the sense of

originality and exclusivity to their customers. Comparing with the high fashion designers, Zara’s products look like high

fashion with lower price, it provides an opportunity to permit Zara general higher sales and profit amounts.

Further changes on FW19 Buy

The demand from Asia is getting higher and higher, yet Zara centralizes all its distribution centres in Europe, most of the

goods require more than 72 hours to arrive in the new market in Asia. In order to cope the challenge, Zara will have to open a

new distribution centre and factories in Asian countries to further improve the delivery time. E-commerce will be more

important because the consumers are more willing to search on the internet to generate information. E-commerce may shift

to social commerce as consumers will exchange their information with each other via the social media. Therefore, Zara

should pay more effort on the online shop and social commerce development.

According to the e-commerce, the automation commerce will rise in 2019, such as Nike, Amazon etc. The AI will help the

customers to find the wanted category more convenient by shortening the time from making orders to receiving the product.

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