ZARA's Expansion Into The Chinese Market: Pros & Cons

Possible economic arguments for ZARA’s decision to expand in Chinese market:

1. Its business in home country has reached a saturated level. In other words, there is not much space for further growth as it has tapped most of the market. This is true given the fact that ZARA is the largest clothing retailer by sales across Europe

2. By expanding its business in Beijing, Hong Kong & coastal city of Shanghai, we say that they able to further exploit the existing economies of scale (EOS). It can be purchasing EOS, managerial EOS or even financial EOS. As such costs of production could fall even further & this may give them cost advantage over close rival such as H&M, Mango & etc

3. ZARA can be considered as a monopoly firm legally, owing that it controls more than 25% of the market share. As such this gives them more advantage of further reaping supernormal profit in the long run shall their expansion plan a great success. How this could be done? Through a proper price discrimination practices. Price discrimination is a practice of selling the same product to the different market at different prices. Higher price will be charged in a market where consumers ability & willingness to pay are higher & vice versa

4. Possibly to avoid heavy regulations by competition watchdog back in Europe such as the European Commission. In China & other Asian markets, the regulations could be much looser as part of the government’s effort to attract inflow of foreign capital. In other words, MNC (Multinational Company). This is crucial for many of the developing Asian economy as it could bring benefits such as drop in unemployment, technology & knowledge transfer & etc

However,

1. Though by operating in huge market like China, ZARA may not be able to earn the extreme super normal profit as one think. This is because the business still face stiff competition from rivals such as Spain’s Mango, Germany’s C& A & Swedish H&M which has started to gain their strong foothold in the Chinese market. Of course, not to mention strong local brand such as Esprit (US & Hong Kong)

2. ZARA faces cost disadvantage in China since rivals such H&M & Mango already source a greater proportion of their merchandise from the region. Example, H&M the Europe’s second largest fashion retailer sources more than 60% of its products in Asia, more than half of that from China compared to 34% for ZARA