Zara offers low prices, but also low wages: Increasing competition and the economic downturn have fuelled a shift to value, increased emphasis on lowering prices and undercutting the competition. Faced with such a situation what can and should managers and organizations do?

Fashion is no glamour anymore.. Zara is a copymachine

Previously, the fashion firms issued fall and spring collections, but now Zara had imitations available in mid-season. This forced the fashion firms to issue new mid-season designs to differentiate themselves from Zara, leaving them with more excess inventory mid-season. Consequently, they were forced to dump this inventory on discount channels.  In the past, buyers got last season’ designs in the discount channels, but now they buy current season designs at lower prices than originally intended. This further eroded their image at a time when they needed to distinguish themselves from Zara.

The fashion industry is being transformed as valuable brands find themselves increasingly commoditized.  Leading the charge is the Spanish retailer Zara, owned by Inditex. In Europe Zara uses new mass production processes and sourcing strategies to offer imitations of designer products at a low price shortly after their release.  In contrast, in the United States Zara is positioned as a mid-priced retailer reflecting the costs of exporting goods from Spain. Zara now has 1,341 stores in 73 countries. Korea, Ukraine and Montenegro are recent additions to Zara’s seemingly unstoppable expansion.

On European Main Streets, the arrival of Zara with its combination of high fashion and low prices first puts pressure on mass market and mid-priced competitors. They have to compete directly.  But as the middle price point brands change their strategies, the effect ripples to the very top designers, forcing everyone in the industry to shape a response.

Working conditions in Zara are not the best

Zarafication is an example of a commoditization phenomenon that goes alongt with low wages, production in Bangladesh and not very high quality. Zara is part of a Fashion deterioration caused by a competitor at the low end of the market who creates a dominant low price and benefit position that expands the market share of the low end of the market. Like a stellar black hole, the low-end competitor creates such a dominant price-benefit position that it literally swallows up positions around it. We have seen this with the emergence of value retailers such as Wal-Mart and no-frills airlines such as Southwest or Ryanair in Europe. They are such a force to be reckoned with that everyone else has to compete on their terms.

Zara changed the whole busines modell

What Zara is doing is simply the latest disruptive move in an industry where business models are constantly being innovated. To fully understand the world of fashion you need to go back to the 1960s when French and Italian haute couture fashion houses transformed what was a local boutique industry into a global market. Seeking a broader market, these houses created ready-to-wear fashions at high prices positioned slightly lower than their haute couture lines. Fashion shifted from fine art to an industrial activity—usually produced in small batches in job shops. Later, they addressed the opportunities created by ready-to-wear for the growing upper middle market. Haute couture designers rolled up their silk sleeves, and created upper middle price range “diffusion brands” that translated their high-end images to broader markets.

By the early 1990s, some of the mass marketers were moving up to the lower middle price range market. H&M (from Sweden) and Benetton (from Italy) extended some of their lines to push a number of their products up to the lower middle price range. Retailers such as Replay and Diesel emerged in Europe using “bridge” brands. These bridge brands were characterized by brand names with distinctive and fashionable images that were not marketed with any attachment to a specific designer. The brand, not the designer, was the identity of the company. And their products were produced in large numbers.

And then came fast fashion, as exemplified by Zara, which opened its first store in La Coruna, Spain back in 1975.  This threatened mass and middle market brands. Zara uses superior production technologies and supply chain management to imitate ready to wear fashion. This competes with the mass, bridge and diffusion brands in better quality and style but at lower prices. Zara created a time compressed production process that became the subject of business school case studies. Zara stores receive two deliveries a week and each delivery includes new models to ensure what the stores offer is constantly changing.  With over 200 designers of its own, Zara identifies the trends of haute couture and ready-to-wear. It can then move these fashions to the middle market in about four weeks, compared to six months using old technology and processes.

 

How can and should companies respond to deterioration?

There are three strategies:

  • Escape the Trap: Sidestep the Discounter

In a battle with a dominant low-end discounter, sometimes discretion is the better part of valor. Some companies can shift their positions to sidestep the market power of the low-end discounter, by making its power irrelevant or by avoiding its power. For instance some fashion firms have conceded the low- and mid-ends of the market and are moving upscale or away from the parts of the market where Zara has the most market power.

In this way, the haute couture and ready-to-wear companies hope to perform a neat sidestep by moving into other high-end areas to keep their exclusivity. Some companies, such as Hermes, avoided the low-end threat by focusing entirely on high-end luxury goods that are classics, not seasonal or annual fashion statements. Hermes reduced the number of its licensees and the stores carrying its goods to increase its exclusivity. Diesel and Chanel pursued a similar strategy.

Others are choosing unique materials to sidestep Zara, such as Diesel’s focus on building expertise and dominance in denim products. Some high-end brands are also using rare fibers such as “baby cashmere” which comes from the first combing of a young goat, requiring about 20 goats to make a single sweater. This is a place where mass-producing low-end players cannot follow.

The silk industry in Italy – responsible for over 90 percent of European silk production- successfully competed against low-cost Chinese rivals by concentrating on high value- added positions. As a result, during one period of eight months, exports of Italian silk to China increased by 155 percent, despite the availability of low-cost silk from China.

Part of the secret of success in Italian silk making has been several initiatives to move upscale and redefine benefits for customers. Small Italian silk makers in the northern Italian city of Como, for example, joined together to create a new brand that gave them the scale and marketing to compete more effectively in global markets. These companies also co- invested in new technologies to produce higher-quality fabrics that don’t tear, irritate skin or stain.

  • Destroy the Trap: Undermine the Discounter 

The second way to beat a deterioration trap is to attack it. Undermining the market power of the low-end discounter can be achieved by eroding its power from below by offering even lower costs and benefits, through a reinvented value chain that still generates profits at the same time. Alternatively, this can be achieved by redefining the way customers see price.

In the fashion industry some companies are using celebrities and advertising to raise their image and directly undermine the value proposition of discount players. European mass retailer H&M is trying to neutralize Zara’s model of designer-less fast fashion imitations by offering equally low-priced products while using stars such as Madonna and guest designers such as Karl Lagerfeld, Stella McCartney, and Roberto Cavalli to raise H&M’s image.

The goal is to undermine Zara by offering more for a lower or same price. In addition H&M store formats are being recreated to look more attractive than Zara’s stores in Europe. H&M uses better presentation on shiny steel racks to look more upscale, rather than in boxes and bins where you have to search for the clothes, as you often find in European Zara stores. So H&M is trying to undermine Zara’s value proposition of offering a cool in-store experience by providing a more upscale atmosphere (as well as designer clothes) for about the same price as Zara, or at H&M’s typical lower price level.

Firms using this approach don’t run away from Zara. They try to make themselves fast enough to partially neutralize Zara’s advantage by making imitation more difficult. They now issue eight collections per year compared to two seasons. Gucci Groupe (owned by PPR, a French conglomerate) is repositioning its collection of brands (Gucci, YSL, Bottega Veneta, Alexander McQueen, Stella McCartney, and Balenciaga) to get more consistency and to clarify each brand’s image and target market.

Another potential way to undermine Zara’s value proposition is through selling used clothing. While high fashion houses are fighting for new clothing, there has been a rapid expansion of the market for used clothing. In the US, the small, unorganized stores in this sector are being replaced with more organized chains. For example, “pre-owned” clothing chain Buffalo Exchange, with 34 stores nationally, did $56 million in revenue in 2008.

  • Turn the Trap to your Advantage: Contain and Control the Discounter

The third way to beat a deterioration trap is to turn it to your advantage. In this strategy, companies work to contain the market power of the discounter to a limited part of the market.

For example, companies can use a geographic brand of containment. D&G is expanding the number of its company-owned boutiques around the world to compete better against companies such as Zara. By taking back control from licensees, D&G hopes to be able to execute its strategies against the discounter more quickly and forcefully. United Colors of Benetton expanded its network of 5,500 stores and increased its fashion cycles to four per year while reworking its image through advertising and new store design to try to contain the threat of Zara to the low end. At the same time, H&M is also beginning to contain Zara to its customer niche by introducing a series of specialized stores targeting different segments, such as children’s, accessories, and lingerie, to surround Zara.

Some diffusion brands such as Roberto Cavalli’s Just Cavalli and Gianfranco Ferre’s GF Ferre are reducing their prices to contain Zara as well. At the same time, Chloe offered lower prices through its new C brand.

  • Fight or Flight? You Choose

Ultimately, the key decision about market power management strategies is whether to fight or to take flight. Like any schoolyard fight-or-flight decision, the choice is based on the relative strengths of the rivals (whether you think you can win the fight) and the opportunities for flight (if there is an escape route). Winning the fight depends on the resources you have to throw at the battle relative to the low-end competitor. If you are hopelessly outmatched, then the choice may be to flee if a sidestepping move is feasible. If you are evenly matched or have an advantage, then containing or undermining the discounter become more possible.  It is not just your own resources that count, but also the resources of partners that you can pull into the fray.

As Zara gained market power in fashion, using its profits to expand rapidly, it has been harder for rivals to stop Zara, or even to keep up. Fear of retaliation may also affect whether rivals choose to confront or contain the low-end player. In brief, companies caught in the deterioration trap need to assess the balance of power between themselves and the low-end discounter.