Zara Porter Five Forces Analysis
Five Forces analysis of Zara covering threat of new entrants & substitutes, bargaining power of buyers & suppliers and competitive rivalry.
Threat of New Entrants:
Zara is a fast fashion apparel retailer that faces low threat of new entrants. Its customer eccentricity strategy, brand establishment, product differentiation and economies of scale act as major barriers to new entrants. It has supply side economies of scale that reduces the overall cost of product, thereby making it difficult for entrants to compete. Although there’s low customer switching cost, the value proposition of Zara is to provide customers with quick access to fashion brands at modest price thereby earning brand loyalty and brand differentiation making it difficult for new entrants to market themselves as unique and different. It also has demand side benefits of scale because of its large market share and it competes with other competitors even in a demand suppressed market which entrants find hard to imitate. Because of its global presence in most parts of the world and huge investment in marketing, branding, distribution and supply chain, entrants face a tough time to survive and attain the market share. Zara’s business model is unique, however new entrants copying its business model find it relatively easy to compete and thus a major threat to the company.
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This concludes the threat of new entrants in the Zara Porter Five Forces Analysis.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of Zara:
In the retail industry, there are various companies that differ in terms of pricing, quality, and product offerings and thus product for product substitution is high, however there are hardly any substitutes for clothes, i.e. substitution by need is unlikely.
Zara faces a low threat of substitutes. In the fashion industry, all "substitution" is essentially just competition. The different collections can also act a substitutes where people can use the same fashion across different seasons.
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Bargaining Power of Customers:
In the Zara Porter Five Forces Analysis the bargaining power of the customers can be explained as:
Bargaining power of customers/Buyer is moderate. They have indirect bargaining power that forces Zara and other retail fashion industries to innovate and differentiate to attract and retain buyers. Since the concentration of buyers is not in a specific market, they have varying levels of bargaining power. Switching cost of customers is low, which pressurizes Zara to stay relevant and satisfy customer needs at the same time keeping cost competitive. They follow a customer-centric approach and work on improving the overall customer experience to compete with the competitors. Zara is implementing a vertical integration approach in the supply chain model to consistently roll out new trendy fashion for its customers to enable increased customer satisfaction. There’s no customer’s threat of backward integration.
Customers do not have direct say in reducing cost, but because of the flexibility of multiple clothing sources, buyers have a lot of options to choose from, due to which customers have indirect bargaining power.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of Zara:
Bargaining power of suppliers is low and almost insignificant. Zara outsources its production, where majority of its production comes from a group of clusters namely India, Bangladesh, Spain, Morocco, Portugal etc. Since it has a varied list of suppliers (high concentration of suppliers), bargaining power of suppliers is low. Zara and other apparel brand companies control the prices and suppliers receive a small portion of profit. There is no differentiation in products offered by the suppliers which also give more edge to the company. Supply’s threat of forward integration is low, since it requires huge capital investments. The brand has purchasing power since it can swap and substitute for other suppliers at a reasonable cost or implement forward integration. Zara also has in-house production facilities which also reduces its dependency on suppliers. However, it is strategically dependent on the suppliers from developing countries where the cost of labor isn't cheap but supply is fast.
Competitive Rivalry:
The impact of key competitors in the Zara Porter Five Forces Analysis is as follows:
Zara faces stiff competition with major retailing brands like H&M, GAP, UNIQLO, Mango, Forever 21 etc. There are various fashion retail players (higher concentration of players) from big players to small, which makes this industry highly competitive and price sensitive. Zara’s brand and customer loyalty along with its distinguished product offerings helps it to compete with its rivals. It has a brand value of more than $14 billion. It operates on a business model of fast fashion, offering unique and frequently updated fashion trends at high-street prices which provides it a competitive edge. Zara is implementing a vertical integration approach in the supply chain model to consistently roll out new trendy fashion for its customers to enable increased customer satisfaction. While the fast fashion industry is growing with an estimated value of $1 Trillion by 2025, competition is cutthroat and rivals are committed with their differentiated offerings and unique brand value proposition.
What is working well for Zara to sustain its survival is its efficient supply chain, innovation and sustainability strategies, customer centric approach, exclusive product offerings etc.
To conclude, the above Zara Porter Five Forces Analysis highlights the various elements which impact its competitive environment. This understanding helps to evaluate the various external business factors for any company.
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