Zara's Expansion into Portugal: A Business Environment Analysis

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Business organization and environment in a global context

Table of Contents
Introduction................................................................................................................................1
Background of the organization.............................................................................................2
Discussion of the business environment................................................................................4
Analysis of business scenario................................................................................................7
Conclusion and Recommendation.............................................................................................9
References................................................................................................................................10

LIST OF FIGURES
Figure 1: One of the Zara store in Spain....................................................................................5
Figure 2: Different brands under Inditex...................................................................................6
Figure 3: Estimated future growth of Portugal for business environment analysis...................7
Figure 4: Economic survey of Portugal in 2017........................................................................8

Introduction
The report will discuss the Zara multinational organisation which is planning to make FDI
(foreign direct investment) and also to expand its business operations and functions in
Portugal. The organisation is the leading fashion brand based in the Arteixo, Spain and that is
considered under the largest clothing brand worldwide. On the other side, it will also analyse
that Portugal is the southern European country and provides a large range of opportunities to
the organisation for expanding its business there. The report will analyse the current
condition of Portugal in respect of the Zara business expansion idea so that they will plan
strategy according to the analysis. The report will focus on the business environment of
Portugal along with the market condition so that competitive analysis will also be done. By
the analysis, further recommendations will also be provided to Zara so that they can
overcome the international challenges during expansion.
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Background of the organization
It is a Spanish accessory and clothing retail organisation founded by Amancio, Ortega, and
Rosalia Mera. It is a flagship retail store of a fashion brand: Inditex Group, that also owns
other brands, like, Stradivarius, Pull and Bear, Massimo Dutti, etc. The first retail store of
ZARA was opened in Galicia, Spain by Amancio Ortego with the name of Zorba. However,
later, the letters in “Zorba” was rearranged, and it came up as ZARA with the establishment
of various other stores. The expansion strategy of ZARA in 1980 has enabled it to build a
leading brand in the international market of Portugal. Later, it also explored the US and
French market (Overview of ZARA, 2013).
Figure 1: One of the Zara store in Spain
(Source: https://www.irishtimes.com)
It is a retail store based on the structure of vertically integrated that effectively controls the
supply chain, manufacturing, design, and distribution of its products across the world. In
1984, it invested in the establishment of the first logistic centre in Arteixo at a span of 10,000
sq metres. Currently, it has around 6500 stores in more than 85 countries across the world
that gets annual earnings of more than $9 billion in 2009. ZARA continuously look at the
ever-changing fashion in the market and make effective initiative of new designing and put it
into different stores to reach thousands of customers. This organisation is also known for its
business operation based on eco-friendly practices. The headquarters of ZARA in La Coruna
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uses wind turbines, and solar panels and produces its clothing products that are 100% toxic
free (Success story of ZARA, 2019).
There is no marketing strategy of ZARA, and therefore it does not advertise its clothing and
accessories products. Amancio wanted to globalise ZARA with the availability of quality
products rather than an advertisement of such a wide and loving brand. The product portfolio
of ZARA includes clothes for both men and women along with cosmetics, accessories, and
shoes (The Telegraph, 2019). These products are available to the people living in different
parts of the world through online stores. This facility has supported high revenue and brand
recognition of ZARA in the global fashion market.
ZARA expands its business with the help of continuous improvement in latest technology by
Inditex that has reset the fashion boundaries by providing products what buyers expect from
them. The business model of ZARA is unique as it has established a good interconnection
between its store's factories, and in-house designers. A store manager sends an order to
headquarter twice a week. It is based on the sales information of stores as well as the likes
and dislikes of customers. The order is compiled and sent to the stores by a commercial team
within two days. In addition, such commercial teamwork with the designers to let them
understand the changing trends so that it can effectively be met out. This helps the store
managers to get a wide range of trendy products with the initial launch of seasons. Every
product of ZARA comes from Spain. The flexibility and speed of moving products from one
place to another provided by Inditex help the ZARA to expand the business globally (Inditex,
2019).
Figure 2: Different brands under Inditex
(Source: https://www.eoi.es)
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Discussion of the business environment
ZARA is introducing new varieties of products with the establishment of different stores in
Portugal; hence it is essential to analyse the business environment to identify the potential of
success in the global market. The business environment of Portugal can be analysed from the
following factors:
The economic growth of Portugal was strong with 2.7% in 2017, and that was expanded with
2.3% in 2018. The strong domestic demand is the major growth driver of the business
environment. However, there is a rapid growth in the purchasing power of people, and an
increasing population that reduces the risk of conducting business in Portugal and enhances
success opportunities for ZARA. Besides, the technology is getting advanced in Portugal with
continuous development in big data analytics, cloud computing, social business, mobile
business and cyber security solutions (Technology in Portugal, 2018).
Figure 3: Estimated future growth of Portugal for business environment analysis
The major governing components in Portugal are President, Assembly, the government and
the courts. The government policy on foreign direct investment in Portugal is developed by
the Portuguese agency for Foreign Investment and Commerce. Besides, Portugal has
recovered from the financial crisis in 2008 with the help of government policies and political
stability that has improved business environment, education, public and private sector
efficiency and integration of global retail industry.
The fashion industry is largely impacted by the burning issues of workers’ rights and child
labour. In addition, the wages to the workers in the manufacturing plant gets the appropriate
amount for their efforts, there is various regulatory provision enacted by Portugal government
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which are required to comply by ZARA (Portugal profile, 2016). There is also a regulatory
framework enacted specifically for women regarding flexibility and working time for them.
The socio-cultural factors within Portugal may also impact the operation activities of ZARA;
hence, it is essential to design clothes considering the prevalent culture in Portugal society.
The literacy rates in Portugal is around 100%, and the estimated population is 10, 704, 920 in
which most of the people follow Roman based culture and that are influenced by France and
Italy. Generally, the colour of traditional garments is green and red that are required to be
focused by the ZARA designers to grab more customers towards its clothing.
The unique geographical location in Portugal along with a strong relationship with the EU
has opened up the more potential ways to sell the ZARA’s clothing and accessories in the
new market. In addition, Portugal has also developed a strong tie-up with the African
continent, and Brazil along with the good commercial transactions with the USA provides a
large international platform for trading to the ZARA that is cost effective and growth-
oriented (Portugal Policies, 2018).
The workforce in Portugal is known across the world for their dedication, commitment and
loyalty towards their work. Hence, this enables ZARA to get skilled and versatile labour for
its different outlets that create a positive working environment at the stores and make the
sales of the products at the top position. Also, the easy adaptability with the latest technology
helps the ZARA to offer quality clothing, accessories and other products as per the
customers’ tastes and preferences (Doing business in Portugal, 2019).
Figure 4: Economic survey of Portugal in 2017
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However, there are increasing imports in comparison to exports that impact the overall
economic performance of Portugal negatively, which is estimated to decelerate in 2019 to
1.8% and in 2020 to 1.5%. This may act as a barrier for the growth and long term sustenance
of ZARA in the Portugal market. In addition, there are various regulatory restrictions that
may hinder the business practices of ZARA in Portugal, as the government has specified the
contracting terms, mandatory working hours, and holidays under the international labour
code (Economic and political outline of Portugal, 2019). There is also a Portugal Labour
system, 2008 that govern the entire employment contracts and relevant laws that ZARA is
required to consider regarding its employees. There are also laws relating to intellectual
property rights that protect the intellectual properties of ZARA from being infringed by other
rivals. However, detailed documentation and long registration process under the intellectual
act poses a business threat to ZARA.
The major classification of tax policies in Portugal is corporate and personal income tax. All
the businessman in Portugal is required to declare their business liabilities and file returns to
the tax authorities on a periodical basis. The general tax rate for ZARA setting stores in
Madeira is 20% while stores that will be established in the Azores, the general tax rate is
17.5%. In addition, there are other tax categories too that require long procedural submission
of documents to the tax authorities. Hence, high tax rates and compliance of various tax
provisions may affect the profitability of ZARA as it offers its products at affordable prices to
the customers.
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Analysis of business scenario
The current report has provided that Zara is intending to establish new stores with a variety of
clothes, accessories, bags, and shoes through its different outlets in Portugal. The above task
has outlined the business environment of Portugal that has widened the scope of business
growth and development of ZARA. However, some of the trade barriers like employment and
taxation laws act as a hindrance for the retail business of ZARA in Portugal. The macro
business environment of ZARA within Portugal can be analysed with the help of PESTEL
Model which includes factors like;
The provisions regarding foreign direct investment in Portugal are liberal and hence ZARA
has a wide scope of investing in the projector f establishing different outlets within different
geographical locations of Portugal (Shiferaw, 2014). Also, the stability in political
conditions offers a good business environment for fashion retail stores.
The economic conditions of Portugal are good and showing a rapid increase that opens up
the success doors for ZARA business. The society in Portugal is literate and therefore has
ever changing preference regarding fashion products. In addition, the socio-cultural
environment in the country also modernised that requires ZARA to continuously update with
the market trend of Portuguese to grab a large number of customers. ZARA is producing and
selling its clothes, accessories, and other products with the updated and latest technology.
Portugal invests a huge amount in the technological infrastructure that provides wide
business growth opportunities to ZARA. The environmental laws are not rigid at Portugal
and therefore, ZARA does not require implementing major changes in its current business
practices and supporting the effective establishment of business (Thompson and McLarney,
2017).
The legal regulations and policies regarding child labour, and women employment contracts,
and taxation laws are strict. Therefore, it requires an effective compliance management
system within ZARA to ensure quality working conditions to the workers in Portugal. This
will retain the talented and skilled employees within different outlets as compliance will
boost the trust and loyalty among employees.
Porter’s five forces Model
This model facilitates ZARA to analyse its competitive position in the retail market so that it
can make necessary changes to improve its competitive position. Following are the forces as
specified in this model
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Bargaining power of the buyers: The fashion market is largely influenced by the bargaining
power of shoppers as they desire to get quality clothes, accessories, and other ZARA products
at affordable rates. Hence, it is essential for ZARA to coordinate its team to produce quality
products according to the latest trend and customer demand along with an effective pricing
strategy (Gassmann et al., 2014). Failure of updating with the changing fashion trends or
availability of low quality of products at high prices may result in switching over by the
customer to other brands.
Bargaining power of the suppliers: ZARA has thousands of stores across the world, and
therefore, it is essential to deal with the suppliers to get raw material for the production of
different ZARA products. There is high bargaining power of suppliers in the fashion industry,
and therefore, ZARA is required to make a good relationship with the suppliers to negotiate
for the raw materials effectively. This helps the organisation to enhance its profit margin by
providing final products at reasonable prices.
The threat of substitution: There are various substitutes of fashion products available in
Portugal that may impact the sales of ZARA negatively. Hence, ZARA is required to
approach innovative ways of designing and selling its products to attract a large number of
buyers (Trehan and Mehta, 2014).
The threat of new entrants: There are high growth opportunities in the retail fashion market
in Portugal. Hence, there is the high-risk potential of entering new competitors in the market
that may impact the business practices and sales of ZARA. Therefore, ZARA needs to
develop new fashionable designs and effective supply chain so that it can beat the
competition by offering quality products at low rates.
Competitive rivalry: The competition in the retail sector is very high, and therefore ZARA
needs to analyse the competitive environment in Portugal to effectively build the strategy for
long term standing position in the market. In addition, technological advancement also plays
an important role in making a distinct and recognisable brand of ZARA that distinguish its
products from its competitors.
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Conclusion and Recommendation
The above report has concluded that the current condition of Portugal regarding the business
environment is good in respect of economic and political factor, but Zara can face some of
the trade barriers during their business activities expansion. The report has also conducted the
business analysis of Portugal through which various factors are identified that helped Zara to
plan their strategy. It is concluded from the analysis that Zara may face some legal
implications during their expansion and that the government department of Portugal frames
legal terms. With the analysis, it is also identified that import of the products and services are
done at the large scale within Portugal while comparing with the export of the products and
that restrict the business expansion for Zara in Portugal.
As per the above report, it is recommended that the investment strategy of ZARA in Portugal
is effective one as there is the availability of skilled workers and good locations for the
establishment of fashion stores there. In addition, there is a high scope of business growth as
Portugal is advancing with technological infrastructure in the upcoming years. However,
ZARA is required to analyse the competitive strength in the country to identify its future
position in the fashion market. Also, the limitations of the global market are also required to
be analysed regarding mandatory laws, license, permits, etc before making a foreign direct
investment decision in Portugal. ZARA is also required to make a stronger supply chain in
Portugal to ensure timely delivery of products ordered online. This leads to higher customer
satisfaction and increased customer base.
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