Zara is one of the largest clothing and apparel retailers in the world in terms of sales. It is also one of the more prominent fast-fashion brands and one of the largest clothing and apparel brands in the world based on reach with more than 2200 stores across 88 countries. This article analyzes its industry and competitive positions using the Five Forces model of Michael E. Porter.
An Analysis of Zara Based on Porter’s Five Forces Framework: Understanding Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
The competition in the market in which Zara operates is intense. Competitive rivalry is a strong force for the company. This comes from the presence of direct product alternatives from different clothing and apparel brands and even specific substitute products.
Zara manages this force through its fast-fashion model that allows it to produce and distribute products in high volumes. It focuses on product development, pricing, and distribution channels. However, competition remains intense due to the following factors:
• High Number of Firms and Low Market Growth Rate: Zara competes with other prominent fast-fashion companies such as H&M and Shein, as well as traditional clothing and apparel brands with a global or more specific local presence. The abundance of brands means minimal opportunity for a company to grow its market share.
• Low Brand Loyalty Across the Broader Market: Consumers falling under the low-to-middle-income brackets represent a substantial portion of the clothing and apparel market. Most of these consumers tend to be less loyal to a particular brand and the overall pool of consumers has high bargaining power.
• High Level of Differentiation Among Competing Brands: Zara is known for designs leaning toward formal and semi-formal styles. H&M is geared toward casualwear. There are other formalwear brands. Some brands focus on specific segments. Nike, Adidas, Lacoste, and Ralph Lauren are sportswear brands.
• High Degree of Strategic and Marketing Aggressiveness: Top clothing and apparel brands have aggressive marketing activities. Most spend millions of dollars each year on advertisements and other promotional activities while others focus on improving specific aspects of their value chains to create a competitive advantage.
2. Threat of Substitutes
Clothing and apparel brands bank on creating and communicating unique value propositions. This has created product substitutes in the broader market. The threat of substitutes is a strong force for Zara because of the presence of substitute brands and their products.
The company addresses this force by sticking to its core principle of fashion-forward designs based on formal and semi-formal styles, as well as by experimenting with casualwear, streetwear, and even sportswear. This force remains strong because of the following:
• High Availability of Substitute Brands and Products: H&M is its biggest competitor and it focuses on casualwear and streetwear. There are brands known for sportswear such as Nike and Adidas. Other casualwear brands can be considered substitutes because their designs are more relaxed or suitable for certain situations.
• Moderate Switching Costs to Choose Substitutes: The switching cost can be low to moderate because fast-fashion brands are affordable by default. Other fast-fashion brands with substitute products are also cheaper. The presence of other casualwear brands and even presence lower further the cost of switching to substitutes.
• High Propensity to Substitute and Ease of Substitution: Adding to low switching costs is the high propensity of consumers to switch to substitutes and the availability of market information that makes substitution easier. Consumers would choose substitutes depending on their current needs or particular situations.
• High Level of Differentiation Across Substitute Products: Part of the reason why consumers would choose substitute products is their value propositions or product differentiation. Remember that Nike and Adidas are known as sportswear brands while H&M and Shein are known for their casual but affordable products.
3. Threat of New Entrants
Another force that impacts the industry and competitive positions of Zara is the threat of new entrants. The arrival of other fast-fashion companies such as Shein and Zaful demonstrates the relative ease to enter the clothing and apparel market.
This threat is a moderate force for the company. However, it tries to keep this threat in check by remaining true to its fast-fashion model and fashion-forward philosophy to keep its product affordable and attractive. The following are the specific factors:
• High Level of Brand Awareness But Low Brand Loyalty: A key entry barrier to the clothing and apparel market is brand awareness and brand equity. However, because of digital channels for brand development and marketing, brand loyalty tends to be low because consumers are always in the look for newer brands.
• Low Cost of Production and High Ease of Starting: Outsourcing manufacturing capabilities makes production more cost-efficient. Furthermore, starting a clothing and apparel business has become easier due to the availability of suppliers, as well as online distribution channels or electronic commerce.
• High Dependence on Scale and Competitive Advantage: The threat of new entrants is moderated by the existing economies of scale of established brands. These brands have grown large enough to achieve and sustain the cost benefits of having scaled-up business operations such as better supply chains and distribution networks.
4. Bargaining Power of Buyers
The presence of alternative and substitute products in the broader clothing and apparel market allows consumers to have higher bargaining power over firms and their respective brands. There is an abundance of options to choose from. This is a strong force for Zara.
Nevertheless, as part of its attempt to manage the influence of its consumers and the overall target market, the company strives to innovate and differentiate as far as its designs and product portfolio are concerned. Below are the factors affecting the impact of this force:
• High Availability of Alternative and Substitute Products: The reason why consumers have a high bargaining power is the availability of options. Formalwear brands force Zara to keep up with the latest fashion trends while casualwear, streetwear, and sportswear brands have forced it to enter these market segments.
• Low Switching Costs and High Availability of Information: Consumers can readily switch from one brand to another, regardless if it is an alternative or substitute brand. The switching cost is low due to the availability of low-priced options. The availability of market information enables informed purchasing decisions.
• High Price Sensitive of Clothing and Apparel Consumers: The market has a significant population of consumers that are sensitive to price. This works to the advantage of Zara but take note that there are other fast-fashion brands. There are also other inexpensive brands and even counterfeit products in the market.
5. Bargaining Power of Suppliers
Zara has an established relationship with its suppliers. It is one of its strengths or source of competitive advantage over brands with traditional business models. The fact that it is the largest fashion retailer in the world has made the bargaining power of suppliers a weak force.
Most suppliers would prefer doing business with established clothing and apparel brands. It is more profitable to work with a global market reach and proven sales performance. The following are the specific factors affecting this force:
• High Number of Supplies in Different Parts of the Globe: There is an abundance of suppliers in the clothing and apparel market across the world. Zara has managed risks to its supply chain by transacting with suppliers in different parts of the globe and outsourcing production from different manufacturing hubs,
• Low Degree of Differentiation Across Production Inputs: The raw materials used in the manufacturing of clothing and apparel products are fundamentally the same. These include cotton and other types of fabric, textile dyes, threads, machinery, packaging materials, and even manufacturing capabilities.
• Low Cost of Switching From One Supplier to Another: Brands like Zara have an abundance of options due to the presence of numerous suppliers offering almost the same materials and services. Large companies have the advantage to negotiate lower costs in exchange for high order volumes or long-term contracts.
• High Forward Integration or Direct Transactions: Large fast-fashion companies have also removed mediators in their supply chains and distribution networks to cut down associated costs and optimize their operations further while also building stronger and closing relationships with their business partners.