17 Oct 2016

How Zara is Tackling India and China

Zara has been described as “possibly the most innovative and devastating retailer in the world”.

Spanish clothes retailer Zara is a huge global phenomenon and it seems to have bold ambitions to grow in the major emerging markets of India and China. But the retailer is taking a very pragmatic approach to how it is tackling each of these very different markets.

The number of Zara stores in China grew 60 percent every year between 2007 and 2012, compared with only 3% in the United Kingdom.

What are they getting right in PRC? And how is the chain fairing in India, where there’s a less welcoming environment for foreign companies?

In its quest for international expansion, Zara takes a pragmatic approach to each market and selects an entry mode that will work best. It has used different approaches including forming JVs, franchising and running its own subsidiaries according to what it thinks is the best method for each new market. This means the brand’s approached India and China very differently based on what it thinks is the winning strategy for each location.

Part of Zara’s success has to be attributed to its mastery of the supply chain. Zara retains control over many of the components in its supply chain. This means it not only designs but often also makes and distributes its own product. It’s a very short supply cycle, with new trends coming to store shelves within 15 days of being designed. Competitors can take as long as 6 months to complete this feat.

Zara’s ‘fast fashion’ approach means that customers tend to visit stores more regularly.

According to Forbes, European customers visit the stores 17 times a year but will typically visit another fashion retailer only 3 times a year. Zara’s strong feedback mechanism helps it to run a lean operation, so there’s less wastage. Inventory optimization excellence helps the retailer sell 85% of its stock at full price, whilst rivals typically only manage 60-70%.

Zara in China

After its Spanish home market, PRC is Zara’s most important market. After its initial opening of a Shanghai flagship store in 2006, the brand took off quickly and had 120 stores by 2011. It now has over 500 and it thought to be planning another 60 store openings in 2016. However, Zara faces stiff competition from other global brands keen to snatch market share in this important region. Key competitors here include H&M and Uniqlo.

Zara’s using local manufacturing to keep the supply chain short and maintain its cost leadership strategy in PRC.

It’s focused on differentiation, a wise move in a market jostling with rivals. Despite fears of an economic slump in this market, Chinese consumers are expected to increase their spending on clothing in the foreseeable future. In the first three quarters of 2016, Zara has already reported a rise in sales of 16% with profits up 20% to €2.02bn.

Zara’s also chasing the homewares spend, opening more Zara Home outlets across the country. After opening the first Chinese Zara Home store in Shanghai in 2011, more quickly followed with more openings in major Chinese cities. These are typically located in either fashionable locations or classy department stores. Again, Zara’s taking a ‘fast fashion’ approach, offering customers the chance to refresh the look of their home on a regular basis with constant updates to its collections.

With its Zara Home chain, the brand is chasing female customers with a sense of style. With the property market in PRC cooling, and talk of a price crash, this could prove a risky strategy. The stores offer advice and ideas on creating a stylish home as well as incentives and membership schemes. Whilst there are local competitors in the homewares field, the feeling is these are often better at manufacturing than they are at design and marketing. Although there are concerns about the housing market locally, Zara is certainly playing to its strengths by offering a stylish lifestyle for Chinese customers who are looking for ideas.

Zara in India

Market regulation requires that foreign brands find a majority partner to operate in India. Zara partnered with retail giant Tata Group to approach the Indian market in a 51:49 minority partnership. Opening new stores was a significant challenge and expansion was slow, partly because of regulatory constraints that are hostile to foreign-owned business acquiring property and expanding. General lack of retail space is also constraining expansion: there are few new malls for Zara to open sleek new stores in, making it difficult to decide where to cite new locations.

Where Zara was able to open stores in major cities, the brand combined western and local clothing styles to offer a variety of lines to all customer tastes.

India’s considered a challenging market for this brand for a variety of reasons.

Firstly, the majority of people wear traditional clothing and have less experience with the concept of rapidly-changing fashion. Secondly, the clothes market isn’t as affected by seasonal change, with many parts of India not really experiencing a cold season. Thirdly, Zara’s restrained colour palette is somewhat at odds with colourful Indian tastes.

Zara applied its feedback loop approach to the Indian stores, making sure that store managers were reporting back on progress. The brand also regularly updated storefronts and window displays to lure customers in regularly. After seeing an initial strong performance after their entry into India in 2010, growth between 2009 and 2013 was better than that seen in China at around 6% compared to around 5% in PRC. But things are cooling slightly. In 2015 Zara saw CAGR of around 24%, but around 17% growth in the first quarter of 2015.

Zara now has 18 outlets in India, and the lack of commercial property suggests that adding more stores may be a struggle.

More are planned, however it’s very unlikely that Zara will achieve the same growth in stores as it has achieved in China. At the same time, old rivals such as Gap and H&M have now entered the market. This adds to competition for available retail space, as well as share of the customer attention and wallet. Zara’s clearly optimistic though. It was recently announced that the retailer has taken the bold step of opening a huge flagship store in a prime part of Mumbai, paying an astronomical rent.

In both India and China, Zara finds itself taking a defensive position against major rivals. Clearly the brand’s strategy is working so far despite the constraints it faces, including a lack of property to expand into in India. With China’s property market looking at risk, there could be trouble ahead for the brand if it relies heavily on its homewares line. But so far the brand’s fast fashion approach and command of its supply chain seem to have translated well into the new locations.



 
 

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