Zara Business Plan Haley Burton Neil Colombini Brendan Morley Franchise A few broad questions related to the finance sector of the franchise are: Do you have the financial resources or means to get the resources required to buy a franchise?, will your capital provide you with a cushion for at least one year after you have paid for the franchise, allowing a one-year period of time to break even?, what is a high estimate of your fixed expenses such as rent and your variable and operating expenses such as wages and stock?. When buying the Zara franchise rights, the franchise fee typically varies between 5% and 10% of the franchise store’s sales. Included in that fee, Zara offers franchisees full access to corporate services, such as human resources, training, and logistics at no extra cost. They also allows them to return up to 10% of purchased merchandise, which is a higher level than many other franchisers permitted. This will cut down on the sunk cost that is purchased stock. Then, breaking down the previous questions further, we have to ask ourselves more specific financial questions before buying the franchise. How much initial investment will you need to buy the franchise? We figured that the startup costs would include the franchise fee, employee training, operating licenses, equipment, and the expenses involved in running a retail space, such as moving expenses, furnishings, equipment, décor, signs, and landscaping. The employee training, however, is included in the franchise fee and the landscaping expenses are covered by the rent expense by the University Village complex owner. The franchise fee was estimated to cost from $20,000 to $30,000. The licensing, furniture, and equipment costs were estimated at $50,000. Franchise Fee Estimate $20,000-$30,000 Employee Training Included in franchise fee Equipment & Furnishings Estimate $50,000 Total $70,000-$80,000 The next question we developed was, what are your ongoing expenses until the business starts showing a profit? Ongoing expenses generally include paying royalties to the franchiser, advertising fees, equipment maintenance, employee costs, rent, and inventory. According to Zara, they charge 5% to 10% percent of the franchise stores sales as a royalty cost based on a yearly revenue amount of 1.5 million dollars a year (based on a goal of sales equaling $300 per square foot). The rent cost of the retail space is $30.00 per square foot times the 5,000 square feet in the store. Following Zara’s business plan of limited advertising; they calculate that it should cost no more that 0.3% of the stores total sales. When calculating employee costs, we based our calculations on have 2 store managers and 10 associates. The managers will be paid fixed incomes of $40,000 with incentive bonuses up to an additional one-half. The associates will be paid $10 an hour. All of our employees will get benefits, equaling 40% of their wages. Royalties 5% - 10% of Sales $75,000 - $150,000 * Rent $30/ft2 * 5,000 ft2 $150,000 Advertising 0.3% of total sales $4,500 2 * $40,000 + Manager Wages Bonuses up to one-half of salary $80,000 - $160,000 10 People + $10/ Associates Wages hr. * 2000 wrk hrs/year $200,000 Benefits 40% of salary $32,000 - $80,000 Inventory Estimate $50,000 Total $541,500 - $744-500 * Based on a yearly revenue equaling $1.5 million. The next question we came up with was how much available cash do we have to put towards the franchise? We knew that we needed to evaluate the assets we have available to meet our initial and ongoing expenses. This was a difficult question for us to consider since we do not know what kind of financial standing we will be in when we reach the time in our lives when we are to make the decision whether or not to buy the rights to the Zara franchise. The last financial related question that we struggle with was what financing can we get to make up the difference between our expenses and cash investment? Once we determine how much we can personally contribute toward paying our expenses, then we need to look at ways of financing the remainder. Because we are beginning a new franchise, we discovered that lenders would want the loan backed by collateral or guaranteed by an agency such as the Small Business Administration. Thus, we decided that we would pursue a SBA loan since the SBA is a government entity and we would be more likely able to receive a loan. Marketing What do customers want? - High quality fashions, at reasonable, prices. This clothing we provide must be cutting edge and exactly what people are buying in Europe. Like every good marketing company, they must understand what the customer values and wants, not what the company wants. This must be realistic and effective. We want to know and understand the customer so well, that the clothes literally sell without advertisement needed. Zara will see a lot of its results through its marketing. When it comes to customer service, the goal is to put customer satisfaction as the highest priority. To build good customer relationships that keep them returning. This is the foundation for many successful clothing retailers, and will be our prime goal. We have examined several other successful fashion retailers, like Nordstrom, and looked at their customer service, this is the type that we hope to impersonate. When it comes to the customer market, Zara will really research its customers thoroughly, such as asking for customer zip codes at checkout, and optional surveys. This typical market might not be the younger designer market that wears brands such as Rock and Republic, True Religion, and Sevens. Zara’s clothing is more European and mature, and not quite aimed at a younger designer market around here, but we are hoping to appeal to a crowd from their mid to late 20s to late forties primarily, with a cunning edge for fashion and what people are wearing in the world’s fashion capitals, for a decent price. We also hope to attract more of a male market as well. We are finding that men now days are becoming more and more fashionable than before and also want to wear designer clothing. This would be a good secondary market. Zara aims to provide current European fashions at reasonable prices. It is a huge success in Europe and Asia, with over 400 stores worldwide, and 32,000 employees, becoming an international enterprise. Zara has grown 25% over the past 5 years to become one of the world’s fastest growing retailers. Zara will communicate directly with its stores of what they sell and do not sell, and replace them in a matter of weeks, versus the nine-month average for most of the fashion industry. We will be geared around speed and responsiveness and use daily sales data to replenish the small inventory, and customer needs. The lower inventory levels and frequent line changes give the customer a sense of luxury and exclusivity. Zara will compete with quality brands such as Gucci, Dolce and Gabanna, and Louis Vuitton, at affordable prices. The customer market may not be the same, but clothing ideas and exclusivity will be. Since inventory is altered and changed frequently, it is likely that the next time you come in; there will not be the same merchandise, due to the change in fashions. This will inspire customers to buy a garment while its there. Zara’s advertising philosophy is that they will market its fast-moving fashions and trends, and not ever be behind them. Normally Zara’s policy is zero advertising, because they preferred to invest a certain percentage of their revenues into opening stores, however, since the fashions are very European, the Zara's in the US will really need to market and advertise this European style, since it is not exactly what you find in American retailers. We will market the idea that this is cutting edge, up-to-date, straight from Europe’s fashion capitals. This will require MORE marketing, than Zara marketing in Europe and Asia, since everyone there already is familiar with Zara. Fashion typically moves from Europe to the coasts of the US and inward, making Seattle a prime location. The latest designs in Europe will not hit here until a matter of months, but Zara will provide what is in now. It will advertise with runway shows at the stores, grand openings, ads in local magazines, such as Seattle magazines, and national magazines such as Vogue and Harper’s Bazaar. As stated above, Seattle is a prime location for Zara because of how fashion moves. We plan to locate our Zara in University Village in Seattle, to aim at a mid to upper twenties market (older students) to a mid to upper forties market. There are several other fashion retailers in the area, so this will hopefully bring in these types of customers. Zara will have a unique store, with lots of personal attention, and a large, attractive, well thought layout, to allow the customer to feel the pleasure of buying fashion. Management and Operations How will the business be handled? The operations of this store are very important. In order to receive support for the opening of this store, knowledge of how the store will operate is a key concept. Our Zara store will be run by a partnership; three partners to be exact. This will stimulate different but congruent ideas to make operations run smooth without complications. However, the store cannot be run by three people alone. Employees and staff will be hired to help customers with their purchases. All employees will attend 15 days of training to understand the Zara customer value. The training will ensure that employees know their way in the store and be able to answer customer questions. At least one manager will be present during store hours to ensure that staff and employees are working properly and on tasks. The store is a retail system, so billing customers will occur by cash, credit, or checks. Also, all merchandise, excluding sale items, will contain a 30 day return policy if the price tag is still in contact, to ensure the clothes were not worn at any time. Computer cash registers will be used to control inventory and to gain customer loyalty. Also, security cameras will be set up around the store to ensure shoplifting does not occur. In addition, magnetic strip sensors will be at the exit to alarm the managers if someone is stealing. Security is a big priority to the extent that thievery will create an imbalance in inventory. Keeping count in inventory is very important to understand so the Zara Company can keep the styles to what the customers want to purchase. Lastly, most budgets will be handled by sales, if everything should work correctly.
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