Identification of the Strategic Issues and Problems

The purpose of this memo is to highlight and tackle the growth obstacles faced by Zara, a leading
fast-fashion brand, and to contribute recommendations that will help them combat this. The
primary issue identified is that Zara needs to increase their profitability and growth while facing
intense rivalry from other fast-fashion brands, affordable fashion brands, and online apparel
retailers. Fast-fashion brands like H&M, GAP, Uniqlo, and Missguided are not only affecting
Zara’s profitability and growth but also their overall market share, customer acquisition, and
brand recognition (Rizaldy et al., 2023). The secondary issues that are affecting them are their
negative brand image due to unethical labor practices, lack of sustainability initiatives, and the
changing preferences of consumers.

In the fast-fashion industry, Zara faces intense competition from many brands such as H&M,
GAP, Uniqlo, and Missguided, as well as global Forever 21 and Topshop, and online retailers
like Shein and ASOS. Zara’s primary competitor H&M’s key brand attributes are its strong
global presence, affordable clothing choices, and easy accessibility to customers to shop via their
stores or website/APP. Simultaneously, Uniqlo is also one of Zara’s top competitors which is a
well-known fashion brand that provides customers with high-quality apparel and competes
directly with Zara for customer attention (Rizaldy et al., 2023). Beyond fast fashion, Zara also
faces competition from other global brands such as Forever 21 and Topshop, each an ideal choice
for customers in their own unique ways. Subsequently, online retail has boomed in the past
decade making it difficult for brands like Zara to survive in this industry. E-commerce leaders
like ASOS, Boohoo, and Amazon offer convenient shopping experiences to consumers these
days. Although Zara has been able to establish a strong brand presence in many regions, there
have been concerns raised by customers and media regarding their unethical labor practices. Zara
is owned by the Inditex Group, which has had many allegations of their using unethical labor
practices. In 2011, they were accused of providing their factory workers in Brazil with extremely
low wages and an unhealthy work environment which in turn massively affected their sales and
brand reputation, as well as being boycotted by conscious consumers (Yerramilli de Rege, 2022).
Another key factor to consider is Zara’s lack of sustainability initiatives. Zara has done some
initiatives such as introducing a sustainable program called “Closing the Loop” where they
encourage customers to drop their used clothing into their stores where they will be re-purposed
or recycled (Jha, 2021). Although this is a great initiative there are green areas where they are
lacking such as being transparent about reducing waste produced by textile manufacturing and
minimizing greenhouse gas emissions produced from various segments in their supply chain and
operations.

Analysis and Evaluation

To analyze and get to the core of the significant issues Zara has been facing, Porter’s Five
Forces and Porter’s Value Chain Analysis frameworks would be very insightful. Porter’s Five
Forces will help us understand the competitive nature of the fashion industry and how it affects
profitability with the help of five key components - intense segment rivalry, the threat of
potential entrants, the threat of substitutes, the threat of buyers growing bargaining power and the
threat of suppliers’ growing bargaining power (Rizaldy et al., 2023). In terms of industry rivalry,
the fast fashion industry specifically has five main giant corporations which are the Inditex
group (ZARA, Bershka, Pull&Bear, Massimo Dutti, and Oysho), the Fast Retailing Co. Ltd
(Uniqlo, PLST, Theory, J Brand and GU), Gap Inc. (GAP, Athleta, Old Navy, and Banana
Republic), Hennes & Mauritz AB (H&M, WEEKDAY, Arket, COS, and Cheap Monday) and,
Urban Outfitters Inc. (Urban Outfitters, Anthropologie, Free People, FP Movement, and
BHLDN) (Rizaldy et al., 2023). These brands sell similar products that are fiercely competitive
to capture the market. The threat of potential entries to this market is relatively low due to the
presence of these large corporations, and the high capital investments required to survive. and
operational costs as major barriers (Rizaldy et al., 2023). In terms of substitutes for this industry,
the threat is at a moderate level. Although there are substitutes available such as vintage clothing,
sportswear, etc. they cannot entirely substitute the products made available by fast-fashion
brands. Subsequently, the bargaining power of buyers in this industry is quite high as consumers
have the power to switch and choose from a wide variety of brands both in-store and online.
Consumers mainly choose based on the quality of the products and their affordability (Bhatia,
2023). The bargaining power of suppliers, on the other hand, is moderate to low as brands in this
industry have many suppliers to choose from based on cost and efficiency. As the fast-fashion
industry requires apparel to be produced and sold quickly, companies tend to put pressure on
suppliers to get things done faster and cheaper, which has significantly reduced their bargaining
power (Rizaldy et al., 2023). These five forces reveal how tight the competitive nature of the
fashion industry is, how it is relatively difficult for more competitors to barge in, and how brands
like Zara need to keep up with trends and consumers’ changing preferences to strive and survive.

In addition to understanding the fashion industry through the five forces, we need to delve deeper
into Zara’s operations and its current chain to be able to help them better. Porter’s Value Chain
Analysis will allow us to assess Zara’s primary activities which are inbound logistics, operations,
outbound logistics, marketing and sales, and service as well as secondary supporting activities
which are procurement, technology development, human resource management, and firm
infrastructure, that create value, help reduce costs, and maintain a competitive advantage
(EDrawMax Online, n.d.). In terms of inbound logistics, Zara has strong control over its supply
chain, with the majority of their products being manufactured in Spain. While they purchase raw
materials in bulk from trusted suppliers in Italy, Spain, Portugal, and Greece, their main clothing
designing and manufacturing takes place in their factories itself. Raw materials and finished
goods are shipped in trucks between factories and store outlets (Nguyen, 2020). About 50% of
Zara’s day-to-day operations run at their main headquarters in Spain, 26% percent in the rest of
Europe, and 24% percent in Asia and Africa (Hugos, 2023). Their design team is at the head of
their operations systems as they design trendy clothing and accessories while keeping consumer
preferences in mind. These operations are highly dependent on about 3,000 workers in their
factories. Zara’s Global distribution center “The Cube” (outbound logistics) is a key part of their
supply chain that ensures seamless distribution of the manufactured to their end customers.
Figure 1 of the Appendix, showcases how this integrated distribution center “The Cube” located
in Spain operates and is directly connected to other 11 Zara factories within a 10-mile radius
with the help of underground tunnels (Dossa, 2015). These tunnels are constructed strong enough
to transport heavy racks, palettes, and boxes. Additionally, they have also implemented the
famous ‘Just-in-time’ inventory management system that enables them to streamline their
operations and produce items in small batches based on seasonality and to create a sense of
providing “exclusivity” to customers (Dossa, 2015). In terms of their marketing and sales, Zara
engages in short-term promotional sales, in-store advertising, and creating a unique ambiance for
customers. They are also present on many social media platforms like Instagram, Facebook,
TikTok, YouTube, Twitter, and Pinterest, where they engage with their followers with trendy
outfit ideas, new collection launch announcements to create buzz, etc (EDrawMax Online, n.d.).
Zara provides excellent customer service to their customers both in-store and online to assist
customers with any queries, purchases, returns or exchanges, and complaints (EDrawMax
Online, n.d.). These frameworks have enabled us to see Zara’s commitment to providing
customers with high-quality clothing and the different systems they have implemented to create
small inventories to avoid mounting a stack of unsold inventory is what sets them apart from
their competitors. However, research also shows that Zara is not as transparent about allegations
on their operations and sustainability. This is a big hindrance to their growth in the fast-fashion
industry.
Recommendations
Based on the thorough analysis and evaluation of Zara’s growth and profitability issues, there are
several ways for them to tackle this. The first recommendation is for Zara to adopt the
differentiation strategy and work on overall brand enhancement, specifically focusing on
highlighting their dedication to conducting ethical labor practices as well as being sustainable
through their operations and actions. By doing so they can stand out among other competitors in
the fast-fashion industry and improve their brand reputation and trust in the eyes of conscious
consumers. The second recommendation would be for them to invest more in their e-commerce
platform and provide an omnichannel experience to customers. As customers today shop for
convenience, providing a seamless e-commerce shopping platform would enhance their overall
purchase journey and entice them to keep coming back. Some ideas to implement into the
e-commerce platform would be to provide the option of AI-generated fitting rooms or try-on
features where customers can see how they would look in different types of clothing and
accessories. Zara could also implement a loyalty program to increase their customer's lifetime
value or a referral program with incentives for them to spread the word amongst their friends and
family. Lastly, another addition to the recommendations would be for Zara to use market
research to understand and keep up with trends that people love to follow like “hourglass
silhouette”, “Dystopian cyber styles”, “crochet outfits”, etc (YPulse, 2023).

The best recommendation for Zara would be to work on differentiation and brand enhancement.
They have had many allegations previously on their lack of ethical labor and sustainability
practices and they have not openly responded to these. These setbacks eventually will negatively
impact their brand reputation, and profitability and give their competitors a higher edge in the
market. They can be more vocal about the allegations and work on improving their labor
practices. In terms of sustainability, they can work towards incorporating not just sustainable raw
materials for their products but also reducing the greenhouse gas emissions produced by their
factories and distribution trucks (Hillman, 2022). To achieve this there are several tactics they
can implement. Firstly, they can ensure regular inspection of suppliers and their factories to
ensure ethical labor practices and that their operations are running in a sustainable manner. They
can also partner up with associations like the Ethical Trade Forum Association (EFTA) or the
Business Social Compliance Initiative (BSCI) that help businesses protect the health, rights, and
safety of their staff, supply, and value chain (CBI, 2022). Another tactic would be for them to be
transparent about their practices through PR campaigns to provide consumers with insights and
information on Zara’s factories, operations, and initiatives. They also host sustainability events
like repair or upcycling workshops to generate awareness amongst consumers by teaching them
ways to mend their ripped/damaged clothes and increase their lifespan, or how they can upcycle
their old clothes by creating new pieces out of them.

A successful company that has been transparent about its labor practices and sustainability
initiatives is Ten Tree. Ten Tree has showcased its commitment to planting ten trees for every
piece of clothing customers purchase from them (TenTree, n.d.). Additionally, they also provide
in-depth information to their customers on how they produce their sustainable clothes through
ethical manufacturing. Along with these amazing initiatives, Ten Tree also rewards its customers
with points for every tree that is planted from their purchase. They also give customers access to
see how many trees have been planted through their purchases and where those trees have been
planted through an interactive map (TenTree, n.d.). Following the footprints (carbon and
differentiation) of a successful company like Ten Tree, Zara can also build their brand reputation
and make their customers feel connected to their brand - bringing in more profits and surpassing
their competitors in the fast-fashion industry.
References

Rizaldy, A., Supiansyah. (2023). Recognize The Fierce Competition in The Fast Fashion
Industry. International Research Journal of Business Studies, 16(1), 1-10
https://doi.org/10.21632/irjbs.16.1.1-10
Jha, S.K., Veeramani, S. (2021). Sorting Responsible Business Practices in Fast Fashion:
A Case Study of Zara. Journal of Management & Public Policy. 12(2), 54-58
https://doi.org/10.47914/jmpp.2021.v12i2.004
Yerramilli de Rege, Menaka. (2022) Zara and the Uyghur Crisis: Is there Forced Labour
in Inditex’s Supply Chains? Governing Forced Labour in Chains by McMaster
University
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Zara Value Chain Analysis | EDrawMax Online. (n.d.). Edrawsoft.
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Hugos, M. (2023). Zara Clothing Company supply chain | SCM Globe. SCM Globe.
https://www.scmglobe.com/zara-clothing-company-supply-chain/
Dossa, Natasha (2015) Zara: a Retailing Force to Be Reckoned With - Technology and
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Bhatia, T. (2023). Five forces analysis of the fashion retail industry. Times of India Blog.
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Appendix

Figure 1: The Cube - Zara’s Global Distribution Center

Source:
https://d3.harvard.edu/platform-rctom/submission/zara-a-retailing-force-to-be-reckoned-with/