ZARA: History and Background

Inditex is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and
accessories for women, men and children through its chains around the world. Zara is the largest
and most internationalized of the six retailers that Inditex owns: (Zara, Massimo Dutti, ull !
"ear, "ersh#a, $tradi%arius, and &ysho'. "y the end of ())*, Zara operated +), stores around the
world, including $pain.
&f Inditex-s total employees, o%er .)/ of them are part of the retail sales force and ..+/ are in
manufacturing, design, logistics, and distribution. 0he remaining **.+/ are part of the corporate
head1uarters of Inditex, which is located in the region of $pain called 2alicia.
0he role of the corporate center at Inditex-s head1uarters is that of a 3strategic controller4 only, and
is in%ol%ed in setting the corporate strategy, appro%ing the business strategies of the indi%idual
chains, and controlling their o%erall performance rather than as an 3operator4 functionally in%ol%ed
in running the chains. 0his gi%es Zara autonomy to operate independently and be responsible for its
own strategy, product design, sourcing ! manufacturing, distribution, image, personnel and
financial results.
5ith this freedom, Zara was able to ma#e ma6or in%estments in manufacturing, logistics, and I0,
including establishment of a 6ust7in7time manufacturing system and a *8),))) s1uare meter
warehouse close to its corporate head1uarters. Zara manufactured its most fashion7sensiti%e
products internally and its designers continuously trac#ed customer preferences and placed orders
with internal and external suppliers based on this information. Due to its uni1ue needs, Zara chose
to internally de%elop its business systems. Zara is now able to originate a design and ha%e finished
goods in stores within wee#s for entirely new designs and ta#e e%en less time for modifications of
existing products.
Key International Competitors of Inditex
2ap, 9!M and "enetton are considered Inditex:s three closest comparable international
competitors. ;s in the product positioning map, Inditex:s flagship brand, Zara, is relati%ely
percei%ed as more fashionable than all the other three and prices less than "enetton and 2ap but
higher than 9!M. In these four competitors, "enetton and 2ap place at relati%ely less fashionable
and higher price, while Zara and 9!M is more fashionable and price lower.
In ;ppendix * which analyzed the operating and financial performance of the < companies in the
year of ())*, we can see that 9!M is the closest competitor in many dimensions, such as =&>,
2ross and ?et rofit Margin, etc. ;lso, 9!M:s focused approach to international mar#et is more
similar to Inditex:s expansion style than the other two closest competitors.
Business Model of Zara
;s the largest and most internationalized brand of Inditex:s chain, Zara is the principle dri%er of the
group:s growth and play the lead role of Inditex:s sales and profit. Zara:s uni1ue business model
brings special interest of business studies and is often sited as @Dell in the fashion industry@.
0he core concept of Zara:s business model is they sell @medium 1uality fashion clothing at
affordable prices@, and %ertical integration and 1uic#7response is #ey to Zara:s business model.
0hrough the entire process of Zara:s business system: designing, sourcing and manufacturing,
distribution and retailing, they presented four fundamental success factors: short cycle time, small
batches per product, extensi%e %ariety of product e%ery season and hea%y in%estment in information
and communication technology. 0hese four elements are in%ol%ed in e%ery aspect of the business.
Zara:s designers trac# consumer preferences on a year7round basis and place orders with both
internal and external designers. >ach year se%eral hundred thousand $AB-s are produced based on
**,))) distinct items %arying in color, fabric and size. Zara is able to accomplish this huge %ariance
due to ordering small batches and internal production of the most stylish, and therefore most time7
sensiti%e items. More predictable styles are outsourced to manufacturers in ;sia. 0he throughput
time from beginning of the design phase to the arri%al of the finished goods in the stores is < to +
wee#s for new items and ( wee#s for modifications to existing items.
0he sourcing and manufacturing process are also #ey to the business model. Zara has purchases
offices in the fashionable cities of "arcelona and 9ong Aong which allow for the purchases to also
ser%e as trend7spotters. Zara uses an Inditex subsidiary, Comditel, for its purchasing of fabric.
;pproximately half the fabric is purchased in grey to allow for flexibility in manufacturing a %ariety
of colors and patterns. 0his is a #ey component of the business cycle as the fabric is finished in 6ust
one wee#. 0he particular distinction of Zara:s manufacturing is that they manufactured its most
fashion7sensiti%e products internally and produce in small batches for the most time7sensiti%e ones.

Dor distribution, all merchandise is shipped through either the central facility in ;rteixo, $pain, or
through satellite sites located in ;rgentina, "razil and Mexico. Merchandise in the main facility
has a capacity of only <+,))) folded garments per hour. 0his facility admittedly has its limitations
unless more capacity can be created elsewhere. ;lso, the %ertical integration of manufacturing and
distribution greatly helped to reduce the "ullwhip effect.
&n the retailing end, the business model allows for Zara to ha%e a much more fashion forward line
because it can commit to its product line much later in the season. In fact, the design process does
not seem to stop and the designers are constantly e%aluating consumer preferences. Zara:s in7store
staff is also young, and %ery fashion7conscious who ser%e as #ey @trend7spotters@. In addition, Zara
pro%ides %ery limited %olumes of new items in the most fashionable of Zara:s stores and then uses
the results of those sales to decide whether the items should also be sold in other
locations. 0he limited %olume and short a%ailable time successfully created a sense of :scarcity: in
consumer:s perception.
Current Issues
Zara is facing se%eral issues. Zara has a consistent business system that gi%es the company its
competiti%e ad%antage. &ne of these ad%antages is the economies of scale that Zara is able to
utilize and the company has been successful in scaling up its distribution system. 9owe%er, with
continued growth, especially due to expansion in the international mar#ets, there is some concern in
regards to Zara-s centralized logistics model. 0he company is concerned with diseconomies of
scale as it grows. 0o address this issue and increase capacity, Zara has begun construction of a
second distribution center in Zaragoza.
0he other concern facing the company is in the area of international expansion and its geographic
scope. 0he company realizes that it needs to continue to expand internationally. 9owe%er, which
territories to enter is somewhat unclear. 0he opportunities to expand within $pain are limited based
on 9!M experience in $weden. &ne possibility is to expand in >urope itself, specifically targeting
Italy. ;nother region is ?orth ;merica, but this region suffers from retailing o%ercapacity, less
fashion7forward sense, demand of larger sizes, higher operating costs, intense competition and
wea#ening demand. $outh ;merica is much smaller and also sub6ect to profitability pressures.
Middle >ast is also a small mar#et though profitable. Eastly, the ;sian mar#et is %ery competiti%e.

5ith this continued expansion, the other 1uestion facing the company was the model it should
utilize in each country. 0he company had experimented with franchising, 6oint %entures, and
company owned stores. 0he 1uestions it faced now were which of these to utilize. ;lso, should it
start up chains or ac1uire existing ones. 0he real issue was to perform all these acti%ities while
maintaining profitability and re%enue growth re1uirements.
Recommendations
$hort 0erm:
Zara faces a myriad of options on how the company wishes to grow. ;fter careful analysis, a few
#ey recommendations emerge. 0he first of these recommendations is to further expand into >urope.
2i%en Zara-s centralized distribution system which is already located in >urope ($pain', it seems
that Zara will ha%e the easiest time le%eraging its existing system in regions within relati%ely close
proximity to its main centers. $pecifically, Zara should loo# into aggressi%ely increasing its
presence in Italy. Zara has already attempted to enter the Italian mar#et twice through 6oint7
%entures. 0he latest of these e%ents paid off with the successful opening of a massi%e store in Milan,
the largest Zara store in >urope. Zara can 3piggybac#4 off this success and aggressi%ely establish a
presence in the lucrati%e Italian mar#et. ;side from the Italian mar#et, there are numerous other
>uropean mar#ets that Zara can and should further expand into. ;mong these are >astern >urope
and 2ermany.
;nother important strategic recommendation in%ol%es the ;sian mar#et. Zara should hold off on
this expansion route.. ;lthough huge in scope, the ;sian mar#et has pro%en to be a mar#et of
intense competition. ?ot only does such competition s1ueeze margins but it re1uires careful
strategy if success is to be achie%ed. If Zara is focusing on an aggressi%e expansion program in
>urope, it cannot de%ote the resources and focus necessary to achie%e great success in such a
competiti%e mar#et as ;sia. Durthermore, although there is intense competition in the ;sian
clothing industry, established brands can still earn a price premium o%er the competition in this
mar#et. ; larger presence in >urope will only raise Zara-s cache and ma#e it easier for the company
to compete in the ;sian mar#et in future.
&ther mar#ets that Zara is considering expanding in are the $outh ;merican and Middle >astern
mar#ets. It is ad%isable that Zara not see# growth in these mar#ets, at least initially. 0he $outh
;merican mar#ets are much smaller than some of Zara-s other growth opportunities. 0hey are also
sub6ect to profitability pressures that are thought li#ely to continue. 0he Middle >astern mar#ets,
although more profitable than $outh ;merica, is e%en smaller in scope than $outh ;merica. 5ith
other much larger growth opportunities a%ailable to Zara, the company should not expend %aluable
focus and resources in these regions (at least not in the short term'. 9owe%er, the Middle >astern
mar#ets do offer profitable opportunities. 0hus, Zara should explore growth in these mar#ets but not
before attac#ing some of the bigger growth mar#ets.
0o support this growth, Zara must scale up its distribution system. 0he case mentions that Zara was
beginning construction on a second distribution center which would add substantial capacity to the
system. ;lthough some argue that a centralized logistics model might suffer from diseconomies of
scale and that what wor#ed well for a *))) stores will not wor# well for ())) stores, the increased
capacity that Zara will gain from expanding its distribution centers will be pi%otal in supporting the
growth of the company.
Eong 0erm:
Zara should loo# into expansion into the B$ mar#et. Zara is operationally strong and should be
able to out7compete other companies on this dimension. >%en though "enetton and 9!M had
trouble with this area in the B$ mar#et, Zara-s trac# record indicates that it should be able to
compete. Dor example, 2; shows re%enues + times larger than Zara-s, but its C&2$ is ,)/ of
net re%enues %s. only <./ for Inditex. Dor 2;, operating expenses account for F(/ of the gross
margin and for Inditex, this number is only +./.
2; suffered declines due to its inability to reposition itself to a more fashion7dri%en assortment
and is not profitable due to its high C&2$ and operating expenses. Zara-s system may help it a%oid
both of these mishaps. It has room to grow in the B$ mar#et if it can #eep its costs low and
continue to monitor trends %ia its sophisticated I0 system, store managers, fashion7conscious staff,
and designers (trade magazines, fashion shows, industry research, etc.'.
Zara-s competiti%e ad%antage is in its business system. 9owe%er, when Zara mo%es into
international mar#ets, it loses some of these ad%antages. It loses some control o%er costs G shipping
costs, tariff costs, etc. Zara can o%ercome this problem by re7configuring its system to a less
centralized approach. It should #eep some portions of its systems centralized (such as designing,
purchasing, etc.' but should mo%e manufacturing and distribution to the international mar#et. Dor
example, in the B$ mar#et the company can establish a manufacturing facility in Mexico (or B$'
near its satellite distribution center in Mexico. It can also expand this distribution centers to ser%ice
the B$ mar#et. 0he products can be purchased centrally and then shipped from Comditel directly
to ?orth ;merica for manufacturing and distribution, instead of ha%ing to go through $pain. 0his
will result in a slight increase in manufacturing cost (due to increased labor and facilities costs in
B$', but these will be offset by reduced shipping and tariff costs. 0he rest of the system can stay
centralized and pro%ide support for the ?orth ;merican manufacturing and distribution.
"y utilizing this method, Zara may be able to reduce its costs. 0he current prices are based on
mar#et conditions and therefore Zara can lea%e the prices intact and en6oy greater margins, which
would help preser%e its margins and allow it to in%est in systems to sustain its competiti%e
ad%antage.
0he other issues in the B$ mar#et are retailing o%ercapacity, less fashion7forwardness, need for
larger sizes, and considerable internal %ariation. Zara-s current system of I0 and mangers feedbac#
system to designers will help Zara a%oid o%ercapacity. Manufacturing and distributing close to the
source (in B$' will help Zara address the latter three issues.
Implementation and Risks
Zara is already in the process of implementing a second distribution facility in Zaragoza. 0his will
help with its continued >uropean expansion. ?ow that it has a flagship store in Milan, it should
continue expanding in Italy. Zara should continue expanding li#e it traditionally has in the rest of
>astern >urope with its 3oil stain4 approach. It already has a presence in many of the countries li#e
2ermany and oland. 0herefore, its expansion will be more of the same. Its distribution system is
already in place, so integration of the new stores into the networ# will be something Zara already
has experience in.
Dor o%erseas expansion, it re1uires much more capital. Zara will need to in%est in manufacturing
and distribution facilities in ?orth ;merica as it mo%es into that mar#et. ;s soon as it has the
capital re1uirements, Zara should build a manufacturing facility in ?orth ;merica. In addition,
Zara will ha%e to in%est in training the management to be able to operate these facilities in a similar
fashion. 0he purchasing and designing can continue to stay centralized. 9owe%er, the new
facilities will need in%estments in I0 and logistics to communicate with the current systems and
utilize the existing #nowledge in the system.
0he ris#s in%ol%ed by expansion into the B$ mar#et are clear. 0here is intense competition, higher
operating costs, and wea#ening demand in the B$ mar#et. 0his clearly poses a ris# to the growth
Zara may be able to obtain. 0his can result in capital losses and similar obstacles were faced by
both "enetton and 9!M.
&ther ris#s that company faces are to its margins with international expansion. 0he company is
unable to control the increased costs in exporting to foreign countries and currently passes these
costs to the consumer. 9owe%er, it may be difficult to continue doing this and margins are li#ely to
get s1ueezed. 0he company needs to be able to grow while maintaining these margins. If it is
unable to do so, it ris#s threats to its competiti%e ad%antages and cost efficiency.
Zara also faces ris#s to its image and therefore has to be %ery careful in regards to franchising and
6oint7%entures. 5ith these models, Zara may ha%e a limited role in operating the retail locations.
9owe%er, if these are poorly managed and operated, there is a possibility of tarnishing the brand
and the image that Zara has created. 0his can also effect the positioning and mar#et segmentation
strategy in a particular country G for example, in $outh ;merica, the company has to position itself
as a 3made in >urope4 brand.