1.1 Overall Introduction
Zara is a Spanish-based clothing chain that is part of the largest apparel group in the world, Inditex (Jha and Veeramani, 2021). Zara Japan started in 1997 after a partnership with BIGI group in Japan (Jetro, 2009). Japan is an important market for Zara since the country is known to set fashion trends, and the store can observe these trends (Jetro, 2009). The paper aims to conduct a market analysis for Zara and identify the strengths, weaknesses, opportunities, and threats it faces.
1.2 Company Background
Zara was founded in 1975 by Armando Ortega Gaona in La Coruna as one of the six stores that formed his retailer group Inditex (Jha and Veeramani, 2021)). It was Ortega’s need for improvement of the manufacturing and retail interface that led to the founding of Zara (Jha and Veeramani, 2021). Zara has experienced steady growth over the last 30 years, opening up stores worldwide, including in Japan in 1998 (Jetro, 2009). Japan now has 41 Zara stores making it one of the main markets in the Asia-Pacific region. (Jetro, 2009).
1.2.1 Company Profile
Zara is a clothing fashion retailer selling medium-quality clothing at reasonable prices that acts as Inditex’s flagship chain store (The Business of Fashion, 2021). Zara has over 2200 stores in 96 countries, including Japan, owing its growth to its expertise in fast fashion based on a highly responsive supply chain (Jha and Veeramani, 2021). Zara’s founder Armando Ortega has always put the customer’s needs at the heart of the business has a unique model, which includes design, production, distribution, and sales through the company’s retail network (The Business of Fashion, 2021).
1.2.2 Company Corporate Value
Zara has four core values that act as guiding principles in its operations, and the core values are beauty, functionality, clarity, and sustainability (Zara Mission Statements, 2021). Zara leans on these values to remain updated on the latest fashion trends and keep up with the customer’s needs (Zara Mission Statements, 2021). Zara uses these core values as guiding principles that ensure it keeps up with tradition while at the same time being alert to the progressive nature of fashion. (Zara Mission Statements, 2021).
1.2.3 Company Shared Value
Zara’s vision statement is to contribute to the sustainable development of society and that of the environment with which we interact (Zara Mission Statements, 2021). Zara Mission Statement states that the company aims to protect the environment from its operations, whether in production or during disposal. The company is also part of a couple of environmental programs as part of its vision of taking care of the environment (Zara Mission Statements, 2021).
1.2.4 Awards
Zara has been included in the Forbes World’s Most Valuable Brand for over two decades now, holding position 41 for the 2020 list (Zara F, 2021).
2.0 External Analysis
2.2 Porter’s Five Forces Model
2.2.1 Competitive Rivalry
Rivalry among competitors in the same industry shows the companies the best way to prepare the strategic plan by showing them how the competition works (Dobbs, 2014). The main competitors for Zara are Hennes and Mauritz(H&M), The Gap, and Uniqlo (Su, 2020). The fast fashion industry is one of the largest industries in the fashion market, and the competition among these rivals is very high. Financial statements before the COVID pandemic showed at least ten companies made sales of over one billion US dollars (Su, 2020). Zara, and its three main competitors, have control of over 60% of the fast fashion market and control most of the factors in the industry (Su, 2020).
2.2.2 Threat of Substitutes
Customers love to try new products that come into any market. Substitutes incentivize the company to improve its product to keep up with the alternatives (Dobbs, 2014). The threat of substitutes for fast fashion, which are higher quality goods, is always high. Zara has found a way to counter this threat by ensuring mass production of its products and competitive prices to keep its customer base happy (Jetro, 2009).
2.2.3 The Threat of New Entrants
The regulation of the entry of new potential companies to the retail industry market is one of the threats facing Zara (Dobbs, 2014). The threat of new entrants in the market is low since the competitors in the industry, led by Zara, have already established a stranglehold in the market (Su, 2020).
2.2.4 The Bargaining Power of the Buyers
Buyers shape a company’s business strategy by using tactics to get the seller to either lower the price or improve the quality of its products (Dobbs, 2014). The bargaining power of buyers is high since they have different options in the market to choose from. Consumers have the bargaining power because they set the trends of products the companies in the industry should sell. Zara is particularly keen on the opinions of its customers as that is the company’s way of maintaining a competitive advantage over its competition (Su, 2020).
2.2.5 The Bargaining Power of Suppliers
Suppliers determine the retailer’s price and the price the buyer will pay for the end product (Dobbs, 2014). Suppliers in the fast fashion industry have low bargaining power due to their sheer number in the market. A large number of suppliers means they do not have absolute power to dictate the market forces in the industry (Su, 2020).
4.0 Internal Analysis Finance
4.1 Introduction
A company’s internal finance analysis gives it a clear view of its position financially and what it must do to improve the various sectors letting it down. The company needs to analyse the different ratios that will prove how much the company is improving.
4.2 Finance Calculation
All values are listed in millions of Euros unless stated. Values derived from Zara’s statements of finance. (ZARA Financial Statements, 2021)
Returns on Capital Employed
ROCE is used to compare a company’s profitability to its investments. It is calculated by dividing Earnings Before Interest and Tax (EBIT) by capital employed which is;
=EBIT/Capital Employed
ROCE for 2020 = -17.64/147.37 = -0.12
Average Settlement Period for Receivables
The period is calculated by dividing 366 days in the year 2020 by receivable turnover.
2020 = 366/11.33 = 32.22
Average Settlement Period for Payables
Calculated by dividing 365/6 days in a year by payable turnover.
2020 =366/5.23 =69.79
Quick Ratio
Calculated by dividing current assets minus inventory over current liabilities.
Current Assets= 190.56
Inventory= 1.39
Current Liabilities= 43.9
190.56-1.39/43.9= 4.31
Current Ratio
Calculated by dividing current assets by current liabilities
Current Assets= 190.56
Current Liabilities= 43.9
190.56/43.9 = 4.34
Financial Gearing
Calculated by dividing total debt over total equity then multiplying by 100%.
Total Debt = 18.18
Total Equity = 141.64
(18.18/141.64) *100= 12.83%
| 2020 | 2019 | |
| Profitability Ratios | ||
| Gross Profit | -5.29 | 18.5 |
| Net Profit | -14.1 | 5.92 |
| Returns on Capital Employed | -0.12 | 0.05 |
| Efficiency Ratios | ||
| Average settlement period for Receivables | 32 days | 20 days |
| Average settlement period for Payables | 70 days | 178 days |
| Liquidity Ratios | ||
| Current Ratio | 4.34 | 11.17 |
| Quick Ratio | 4.31 | 11.08 |
| Gearing | ||
| Financial Gearing | 12.83% | 9.26% |
Table 1: Zara financial ratios for 2019 and 2020
4.2.1 Key Findings from the Calculation
Zara had to shut its doors down in 2020 to ensure the safety of its customers and employees, which led to losses as compared to the profits made in 2019. The return on capital employed of -0.12 shows a clear drop in Zara’s performance. A current ratio of more than two shows that the company is in a good place, but the drop from 11 to four indicates a dwindling performance for Zara in 2020. The quick ratio of 4.31 shows that the company has more assets than liabilities; therefore, the company is okay on that front. The drop-off from 11.08 is in keeping with the theme that 2020 was disastrous for Zara. A gearing ratio of 12% shows that Zara is at low risk of bankruptcy and is controlling its debts. The growth from 8% in 2019 is a red flag for the company’s financial position, however. Zara’s average collection period of receivables increased from 20 days to 32 days, pointing to a drop in the urgency of collecting debts. The reduction in dates of the payable collection shows that Zara’s creditors were collecting their debts faster in 2020 than in 2019.
5.2 CSR Initiatives
5.2.1 Positive Aspects
The Corporate Social Responsibility that Zara is involved in is for taking care of the environment. The company is actively pushing for practices that ensure it does its part in environmental conservation (Zara Z, 2021). Zara’s CSR initiatives include using ecological-friendly fabrics for its products free from pesticides, using non-degradable bags that are not harmful to the environment, and increasing environmental safety awareness among its employees (Zara Z, 2021). Zara’s enforcement of its CSR initiative improves the company’s relationships with its customers, as it improves their perception of the company. (Jahn and Bruhl, 2019).
5.2.2 Negative Aspects
Zara faces some negative impacts during the implementation of its CSR initiative (Jahn and Bruhl, 2019). The labor force Zara uses for production is mistreated and underpaid (Dockrill, 2020). Zara’s CSR initiative talks about the animal policy, but the company still sells clothes made from wool, leather, and animal hair (Dockrill, 2020). Zara’s production of clothing from animal products, even though it is one of its initiatives to improve the environment, creates mistrust with its customers (Einwiller et.al., 2019).
7.0 IFAS EFAS Analysis
7.1 Introduction
Zara carries out an analysis of the internal and external factors that shape its strategy. The internal factor analysis summary is concerned with the strengths and weaknesses of Zara and how the management of the company can exploit its strengths and improve on its weakness to help keep the company competitive (GURL, 2017). The external factor analysis focuses on the threats and opportunities Zara might encounter from the market and how it will take advantage of the opportunities and minimize threats to its growth (Nurrahamat and Sunindyo, 2019).
7.2 Internal Factor Analysis Summary (IFAS)
7.2.1 Strengths
The analysis of the internal factors of Zara ensures that its strengths are well defined. Zara’s main strengths lie in its mission to serve the needs of its customers, where the products it sells to the market are the trendiest (Zara Mission Statements, 2021). Zara prides itself in listening to customers’ specifications on the type of product they want and producing it to market (Zara Mission Statements, 2021). Zara’s other main strength involves its worldwide reach to various countries. With over 2200 stores worldwide, it is the clothing retail chain with the most stores maximizing its market potential. (Jetro, 2009)
7.2.2 Weaknesses
Zara’s main weakness is the fact that it is only involved in the fast fashion industry. Since its launch in 1975, Zara has been a mainstay in the fast fashion industry without expanding its horizons towards better-quality products (Jha and Veeramani, 2021). Zara has faced criticism over the harsh labor conditions it subjects its workers to in the factories, with stories of the payment of low wages for its employees being a particular weakness the company needs to address (Dockrill, 2020).
7.3 External Factor Analysis Summary
7.3.1 Opportunities
The main opportunity available to Zara that can aid its growth and help it achieve its targets is its decision to improve its online shopping presence (Li, 2021). The company needs to venture into the online presence to combat the effects of lack of physical customers due to lockdowns and restrictions in different countries because of the pandemic. Zara should aim to reach out to the younger generation by digitalizing the Zara brand and helping the company keep up better with the trends in the market (Li, 2021).
7.3.2 Threats
2020 saw the biggest threat to the retail industry in recent times, with the surge of the COVID 19 pandemic forcing the closure of physical stores and bringing businesses to a standstill. Zara was affected by the pandemic, with more than 60% of customers preferring to buy essential items rather than trendy clothing items (Shabir & AlBishri, 2021). The company faced the threat of locking down its stores from physical shopping, which led to a drop in sales and drop in profits, with the company making a loss in the year 2020. Zara was able to bounce back from these setbacks with a clear strategy to combat these threats in the future.
