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MARCH 12, 2003
GUILLERMO D'ANDREA
DAVID ARNOLD
Zara
Every Tuesday and Saturday, a big truck pulls up to the curb on the east side of Broadway between Price and Houston Streets to unload its cargo for the Zara store in SoHo, one of its four in Manhattan. Despite Zara’s fashionable reputation, the stacks of soft-colored dress shirts and elegant women’s jackets came from the 500,000 square-meter warehouse close to Zara’s ultramodern headquarters in Arteixo, close to La Coruña,1 in Galicia, the unfashionable green northwestern region of Spain. According to Vogue, the fashion magazine, even French customers of Zara’s 70 stores identified the firm as being of French origin. These and other fashion pages had shown Cindy Crawford joining Zara’s middle-class customers at a store in Canada, Chelsea Clinton visiting the store in Ankara, the children of the Spanish Royal Family buying regularly at the store on Madrid’s upscale Velazquez Street, and tourist buses stopping for sightseeing at the store on Paseo de Gracia in Barcelona.
Zara led the international expansion of its parent, Grupo Inditex, which had continued at an intense rate in the year 2000. In the last five years it had grown from 180 stores, mainly in Spain, to 1,080 stores in 33 countries in three continents. In the last year alone, 150 stores in 9 new countries had been added, “testing the capacity of our team to adapt to the differing characteristics of different markets,” according to Amancio Ortega Gaona (aged 65), chairman of Inditex. In spite of being one of the richest men in Spain, Mr. Ortega Gaona was known for his obsession with keeping a low profile; he projected an image of a simple, hard-working man who enjoyed being among his team of designers. In fact, the international expansion of the group meant that he was now an unrelenting traveler. Zara had achieved an impressive compound annual growth of 26% from 1995–2000, and sales abroad now made up 52% of total revenues, up from 30% in 1995 (see Exhibit 1 for summary financial performance data). It had experienced different fortunes and followed different strategies from some of its key rivals. The Gap and Hennes & Mauritz (H&M) had both experienced lower incomes, and others like Marks & Spencer were reducing their foreign operations. Zara still sourced 87% of its product from Europe, while the wider industry was globally served by hundreds of low-cost Asian suppliers. One London-based industry expert declared, “In the economics of consumption, vertical integration is passé, but Zara is an exception to the rule.”
1 Known locally and throughout Zara as A Coruña, the city’s name in the local gallego language. This case uses the Spanish name of La Coruña.
________________________________________________________________________________________________________________ This case was prepared by Professor Guillermo D’Andrea, Instituto de Altos Estudios Empresariales (IAE), Buenos Aires, Argentina, in collaboration with Professor David Arnold. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only in MBA (Marcelo Rosatto) 2014-1 by Ana Carmenza Neira at Pontificia Universidad Javeriana from April 2014 to October 2014.
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The new countries that Zara had entered presented very different challenges. These included the very different cultures of Germany, the Netherlands, Canada, Saudi Arabia, and Bahrain, and the “opposite season” effect of participation in southern hemisphere markets such as Brazil, Chile, Argentina, and Uruguay. Future plans promised even greater complexity: the pace set in 2000 of 150 new stores was to be at least maintained, and entries were planned into new countries; Switzerland, Italy, and the Czech Republic would be added in Europe, as well as others in Latin America and Asia (see Exhibits 2 and 3). It was believed that integrating new technologies and training should give more autonomy and responsibility to the company’s management. Zara was widely praised as a leader in its industry, and its distinctive operating model had produced some impressive top-line results relative to some of its major competitors (see Exhibit 4). But of concern to these executives was the fact that Zara’s $2 billion revenues were still well behind Gap’s $11.6 billion or H&M’s $3 billion, in an apparel retailing market which appeared to be increasingly complex and challenging for most of the competing players.
Market Developments—Europe
Zara’s home European apparel sector was characterized by increasing downward pressure on prices, more concentrated and powerful retailers, and a greater variety of retail formats, including department stores, chain specialists, hyper- and supermarkets, and mail order operators. The more successful of these chains took business away from small independents, and the most aggressive were expanding their operations abroad, but with varying results in their attempts. Due to diminishing costs of transportation and the lowering of tariffs and import duties during the 1990s, European apparel companies had substantially reconfigured their supply chains, toward a less integrated and more internationalized model. Looking for improvements in both labor cost and flexibility, the disintegration of these supply chains allowed operating from geographically dispersed facilities. Despite this, there had been little innovation in production processes, and the industry remained labor intensive, especially in the assembly phase. Labor cost in Europe was higher than in other regions, representing 40% of total costs, but when combining productivity and cost, some zones like the North of Portugal were more competitive than the rest of Europe and even Taiwan. Some firms like Hugo Boss were also contracting in Eastern Europe. All over Europe, chains such as Quelle, Otto, or Karsltadt in Germany and Celio in France were gradually driving small, independent retailers out of the market. The chains’ share varied according to the evolution and structure of retailing in each market. Germany and the United Kingdom provided examples of the differing nature of the challenges in each market. The German market was experiencing a liberalization of the so-called blue laws, the long-standing legislation constraining discounting and trading, which was expected to accelerate the modernization of the market. This was expected to attract non-German retailers to address the 55% of the market served by organized retailers. In the United Kingdom, the market was one of the most concentrated in the world: the “multiples,” or chain stores, accounted for 74% of apparel sales, partly because commercial retail space is generally available only on 25-year leases, subject to review only every five years, and even then only to review of the level of rental payment.
In France, hypermarkets and department stores dominated the market, with each share approximately 20%, and only 30% of sales were left to independents. Spain and the Netherlands both shared a similar profile where chains were responsible for 47% of sales. In Italy, home of such venerable fashion houses as Armani, Gucci, Ermenegildo Zegna, and Benetton, independent retailers took 65% of sales, and franchised chains accounted for only 18%.
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This document is authorized for use only in MBA (Marcelo Rosatto) 2014-1 by Ana Carmenza Neira at Pontificia Universidad Javeriana from April 2014 to October 2014.
Zara
503-050
Another trend, noticeable in the late 1990s, was the increasing pressure on retailers operating predominantly in the mid-market segment. Lacking differentiation, Marks & Spencer and C&A, Europe’s two largest clothing retailers, were the highest-profile losers in market share terms, but they were joined by others such as department stores, many inefficient specialist multiples, and in the United Kingdom by home shopping companies. Other major competitors experienced various results in their expanded operations.
The Zara System
While a fabric salesman at a store in La Coruña in 1963, Mr. Ortega Gaona started his business as Confecciones GOA with an initial investment of $83, manufacturing women’s intimate apparel. In May 1975 he opened his first store at Calle Juan Flórez, one of the best streets in La Coruña, a strategy he would repeat in the future, positioning the store as “contemporary fashion of medium quality at a good price.” In 1985, Industrias de Diseño Textil (Inditex) was founded as a holding company. In 1988, the first foreign store was opened in Oporto, Portugal, and the company undertook its first inhouse manufacturing operations. In 1988, Zara B.V. was established in the Netherlands, a first step in the Group’s international structure. In 1989, stores were opened in New York and Paris, and in 1990 a new 130,000 square-meter warehouse was built, the arrangements for which included a joint venture with Toyota for a JIT manufacturing system. The following year, Zara Beijing was established for managing supply from SE Asia.
The Inditex Group’s passion for fashion was reflected in many aspects of company life. For example, the company’s headquarters was a striking minimalist complex, designed by an in-house team, with little fixed furniture, large open spaces decorated all white, with intense, natural illumination (see Exhibit 5). Provided with computer and audio-visual language courses, one room was set aside for anybody wishing to learn English, and was next to the in-house travel agent and the room used for debriefing the trend-spotting teams on their return from foreign scouting trips. Though there was an office in the executive section for Mr. Ortega Gaona, this was used mainly for receiving visitors on formal occasions. He would normally be found at the women’s design section. The guiding principle adopted by the company was zero inventories. Distribution operations aimed at a high intensity of short runs, in order to produce saleable products rather than accumulate inventories. Flexible subcontracting was one key element in achieving a system of small orders and more frequent deliveries. The other key aspect was a close monitoring of changes in demand at the retail level.
This combination of low-priced fashion, manufactured and distributed at high speed, and leading operations technology, enabled Zara to translate the latest fashion trends into products on shelves in less than 15 days. Stores ordered and received deliveries twice a week. The company employed a team of trend-spotters, who traveled around the world in search of new designs, and all the stores were electronically linked to headquarters, providing designers with access to real-time information when deciding with the commercial team on the fabric, cut, and price of a new garment. Staffed with a team of 200 designers, the collection was renewed every year with 11,000 different items, designed by a team of 200 designers. New products were manufactured in limited quantities and tested at certain stores before they entered full-run production, thus keeping failures in the full range at a rate of 1%, compared to the industry’s typical 10%. Each individual garment assigned to a store arrived from the distribution center with its price tag attached (see Exhibit 6). Based on the item’s performance in-store, it could be re-ordered by either the store or region manager, who were equipped with a hand-held computer that would 3
This document is authorized for use only in MBA (Marcelo Rosatto) 2014-1 by Ana Carmenza Neira at Pontificia Universidad Javeriana from April 2014 to October 2014.
503-050
Zara
link daily with headquarters. This computer also included the capacity to add comments on inquiries by customers on the current products or new ones they were looking for. Rather than outsourcing all its manufacturing, Zara produced about half of its merchandise inhouse. Following supply poli...