The Global

Apparel Chain
Production

 Apparel production was very fragmented

 Small & individual apparel manufacturing firms were important part
of production
 Average employment rate of a few dozen people
 About 30% of world production of apparel was exported (with
about 50% exporting from developing countries
 Apparel manufacturing is a labor-intensive process
 As the aftermath, large manufacturers from developed countries
outsourced their labor-intensive production steps to achieve low
manufacturing costs
 Proximity was a factor as it affected the shipping & transportation
costs
Cross-Border Intermediation

 Traditionally, trading companies had primary role in the physical

flows of apparel from factories to exporting countries to retailers
With time, and certain production factors coming into picture, the
complexity of the operation increased
 Branded Marketers: new breed of middlemen; they outsourced
production of apparel that they sold under their own brand names
 Forward or Backward integrators: These were the branded
manufacturers which sold products under their brand names
through one or more independent retail channels and owned some
manufacturing as well.
Retailing

 Retailers played an important role in developing the global industry

Nearly half of all apparel imports into Western Europe was through
direct imports by retailers
Large retailers played leading role in promoting Quick Response
(QR)
 QR is a set of policies & practices targeted at improving
coordination between retailing & manufacturing
This was adapted to increase the speed & flexibility of responses
according to the market shifts & requirements
QR had led to significant compression of cycle times
Markets and Customers

 In 2000, retail spending on clothing or apparel reached approx. 900

billion Euros (of which, Europe accounted for 34%, US for 29% and Asia
for 23% of total market)
 In terms of attributes and preferences, vast variations could be seen in
local markets(within regions) and regional markets
 Hence, the structure of global apparel chains was changing according
to the requirement, based on regional expansion, and it had some
strategic implications
 An article by 3 McKinsey consultants identified the following ways for a
retailer to expand across: choosing a “sliver” of value instead of
competing across the entire value chain; emphasizing partnering;
investing in brands; minimizing (tangible) investments; and arbitraging
international factor price differences
 STRENGTHS
• Cost Leadership strategy
• Faster delivery of new products
• Agile supply chain
• Centralized Distribution System • Online pricing not consistent with in-
• Standardized Product delivering
services
• Fast fashion
SWOT
Analysis
of ZARA
OPPORTUNITIES
• Further Global Market penetration
• More brand associations
• Utilization of Online marketplace
• Advertisement opportunities
• Demand for high fashion at
affordable prices
WEAKNESSES
• Low Quality
• Poor customer service
• Weak online presence
store pricing
• No Advertising
THREATS
• Online suppliers like ASOS
• Global Competitors
• Local Competitors
• Increasing production costs
Inditex

 A Spanish specialty retailer that designed, manufactured, and sold

apparel, footwear, and accessories for women, men, and children
through Zara and five other chains around the world.
 A total of 1284 stores and 26724 employees around the world.
 80% of the employees were engaged in retail sales in store.
 Majority of women employees(78%).
 Going to open 230-275 new stores in 2002.
Home base

“Galicia is in the corner of Europe from the perspective of

transport costs, which are very important to us given our
business model.”
• Inditex was headquartered in Galicia on the
northwestern tip of Spain
• Galicia, the third-poorest of Spain’s 17 autonomous
regions and had poor communication links with the rest
of the country, and was still heavily dependent on
agriculture and fishing.
• Home to thousands of small apparel workshops.
 Spain vs. Italy
• Spain was a relatively productive
apparel manufacturing base by
European standards
• But it lacked in Italy’s fully
developed thread-to-apparel
vertical chain (including machinery
suppliers), its dominance of high-
quality fabrics (such as wool
suiting), and its international
fashion image.
• Italian apparel chains had been
quick to move overseas.
History

 Amancio Ortega Inditex’s founder got his start in the clothing

industry as a teen while working for a local shirt maker in A Coruna,
Spain.
 Ortega began developing his own designs with his wife from their
home.
 In 1975, the couple opened their first store, Zara, which produced
popular fashion at low prices.
 By the end of 1970’s Zara was incorporated and began opening
more stores and factories in Spain.
 In 1988, the company began expanding internationally
Structure

 Inditex operated six separate chains: Zara, Massimo Dutti, Pull &
Bear, Bershka, Stradivarius, and Oysho
 The six retailing chains were organized as separate business units
within an overall structure that also included six business support
areas
 Each of the chains operated independently and was responsible for
its own strategy, product design, sourcing and manufacturing,
distribution, image, personnel, and financial results,
 A strategic vision of the group, coordinated the activities of the
concepts, and provided them with administrative and various other
services.
Structure
Recent governance changes

 Inditex’s initial public offering (IPO) in May 2001 had sold 26% of the
company’s shares to the public
 Founder Amancio Ortega retained a stake of more than 60%.
 The IPO was thought to be motivated primarily by Ortega’s desire to
put the company on a firm footing for his eventual retirement and
the transition to a new top management team.
 Immediate initiatives included approval of an internal code of
conduct, the establishment of a corporate responsibility
department, social audits of supplier and external workshops in
Spain
Zara’s Business System

 Zara is the largest chain operates from 507 Stores with the total area
of 488,400 sq.
 EBIT of €441 mn on sales of €2477mn and a drop of 2-3% in Zara’s
share was expected each year.
 Zara started investing majorly in Manufacturing, Logistic and IT.
 Zara adopted “Distinctive Business System” which constitutes
following things:-
 Manufacturing price sensitive products internally.
 Tracking customer preferences
 Products were shipped directly to the central distribution center.
 Short cycle time (4-5 weeks) which is too less from traditional.
Zara’s Business System

 Zara’s comparison with World Co. of Japan.

 World Co. of Japan have net margin of 2% of total sales as compare
to Zara which has 10% of sales.
 Target market of both the brands are very different.
 World Co. of Japan has relatively small stores network as compare
to Zara.
Zara Vs Traditional Industry
Different components on Zara’s
Business System
Design

 Zara have three product lines- for women, men & children and have
a specialized creative team.
 Zara creates two basic collections each year that are phase in
through the fall/winter and spring/summer.
 Special role of Zara’s Product development personnel, IT system and
store manager.
 Standardized selection process for items. Slightly more that one third
goes into the design.
 Failure rate of just 1% as compare to 10% of the sector.
Sourcing and Manufacturing

Sourcing
 Zara source fabric and other finished products from external long
term supplier.
 One half of the fabric is gray and is funneled through “Comditel” a
fully owned subsidiary of Inditex.
 There are more than 200 suppliers of fabric and other raw material.
Sourcing and Manufacturing

Manufacturing
 40% of the manufacturing is done internally and remaining is spread
Europe, North America and Asia.
 Price and Time sensitive items are outsourced to Asia.
 Out of 20 fully owned factories 18 are located near Zara’s headquarter
in Arteixo.
 Started vertical integration in 1980’s installing just-in-time system with the
cooperation of Toyota.
 Zara like to perform Labor-intensive and Scale-intensive activity.
 Size of workshops for small operations are having employee strength of
just 20-30 generally for stitching and sewn.
Distribution

 Zara has its own centralized distribution system. It consisted of a

400,000-sq.mtr facility in Arteixo and much smaller centres in
Argentina, Brazil and Mexico.
 Orders were received with a frequency of twice a week during
regular periods and thrice weekly during sales season.
 Lorena Alba, Inditex’s director of logistics, regarded warehouses as
a place to move products rather than to store them.
 Shipments to stores were made twice a week via third-party delivery
services.
 Products were typically delivered within 24-36hrs to stores located in
Europe and within 24-48hrs to store outside Europe.
Retailing

 Zara placed more emphasis on backward vertical integration to be

a very quick fashion follower than to achieve manufacturing
efficiencies.
 Zara spent only 0.3% of its revenue on media and advertising,
compared with 3-4% for most of speciality stores.
 Zara’s drawing power reflected the freshness of its offerings, the
creation of a sense of scarcity and an attractive ambience around
them, and the positive word of mouth.
 “We want our customers to understand that if they like something
then they should buy it now, because it won’t be here for a long
time.”
 Items that were slow to sell were immediately removed from the
stores by store managers on the incentive basis.
 Returns were either sold at other Zara stores or were disposed of
through a small, separate chain of close-out stores.
Store Operations

 The stores were used as both, the company’s face to the world and
information sources.
 Zara preferred long-term leases for its stores except when purchase
was necessary.
 Zara actively managed its stores. Old and small stores were
updated as well as relocated to new attractive sites.
 Zara store managers transmitted customer data and their
preferences to the Zara’s design teams.
 Zara promoted 90% of the store managers from within and once
the employee was selected for promotion, a comprehensive
training program was organized with specialized staff at Zara’s
headquarters.
ZARA’S INTERNATIONAL EXPANSION
MARKET SELECTION
• IN 1988 - FIRST NEW INTERNATIONAL MARKET, IN PORTO, PORTUGAL
• IN 1989 – NEW YORK ( AS DISPLAY WINDOW AND LISTENING POST)
FOLLOWED BY PARIS IN 1990 (PATTERN OF REGION AND THEN
COUNTRY)
• AT END OF 2001 ZARA HAD 282 STORES IN 32 COUNTRIES
• INTERNATIONAL SALES OF €1,506 MILLION
• INTERNATIONALLY ZARA ACCOUNTED 56% OF TOTAL ZARA STORES
AND 61% OF ITS TOTAL SALES
• THREE APPROACHES FOR EXPANSION: CHEAPER TO DELIVER,
AWARENESS,
NO ADVERTISEMENT OR WAREHOUSE COST, ONLY HEADQUARTER COST.
• TO STUDY THE MARKET ZARA CONDUCTED BOTH MACRO AND MICRO
ANALYSIS
• UNLIKELY ITS COMPETITORS ZARA FOCUSED ON MARKET PRICE RATHER
THEN
ITS OWN PRICE.
 MARKET ENTRY
Zara used three different modes to enter into new market
 Company-owned Stores
 Joint ventures
 franchises
Company-owned Stores: In 2001 there were 231 company owned stores in 18 countries outside
Spain
These stores were established in key, high profile countries with high growth prospect and low
business risk.
Franchises: At end of 2001 Zara had 31 franchise store in 12 countries like Iceland, Poland, Middle
Eastern
Countries with small, risky or subject to significant culture difference.
Franchise contract typically for five years, and charging from franchisees 5% and 10% of their sales.
Joint ventures: at end of 2001 there were 20 stores in Japan and Germany.
Zara opened joint venture stores in countries with large and important market but with lots of entry
barriers.
MANAGEMENT

 Zara’s international activities were organized primarily under a holding company created
in 1988, Zara Holding, B.V., of the Netherlands.
 Each country team has a country general manager, a real estate manager, a human
resource manager, a commercial manager, and an administrative and financial
manager.
 Country general managers played a particularly important role bridging between top
management at headquarters and store managers at the local level
 The country managers in key European markets were all locals, but some in the Americas
were expatriates.
 Ability to control local store operations was enhanced by the use of standardized
reporting systems.
 Persistently subpar performance generally triggered extensive analysis followed by
attempts to fix the problem(s) identified rather than market exit.
GROWTH OPTIONS

 The growth options for Zara within Spain seemed somewhat limited. Zara still
had only a 4% share.
 Rest of Europe offered the brightest prospects for significant, sustained growth
over the medium term.
 Italy was the largest single apparel market in Europe.
 Italian consumers visited apparel stores relatively frequently and were
considered relatively fashion-forward.
 Formed a 51:49 joint venture with Percassi, an Italian group specializing in
property and fashion retail premises, to enable expansion in Italy.
 This second joint venture resulted in the opening of Zara’s first store in Milan in
April 2002—at 2,500 square meters, the largest Zara store in Europe.
 US and Asia were considered tough markets because of various issues.
Can you graph the linkages among Zara's
choices about how to compete and the ways
they create competitive advantage?
 Zara’s key operational theme is one of agility. Its product development,
manufacturing, and supply chain processes – some of which are a radical
departure from the normal practices in fast fashion – are expressly designed and
implemented for agility

 vertical integration
 quick new product introduction
 high product variability
 small lot manufacturing
 low inventory
 Fast production and distribution strategy allows them to offer latest fashions in

short amount of time

 Zara change over 75% of its merchandise on display every 3-4 weeks which helps

in increasing the frequency of customer visits

 The linkage of the above mentioned elements is what has been truly crucial to

Zara’s success-the big picture, rather than any one item has led to their

competitive advantage
What does it suggest about such
capabilities as bases for competitive
advantage?
 Fast production and distribution strategy allows
them to offer latest fashions in short amount of time
 Zara change over 75% of its merchandise on display
every 3-4 weeks which helps in increasing the
frequency of customer visits
 The linkage of the above mentioned elements is
what has been truly crucial to Zara’s success-the big
picture, rather than any one item has led to their
competitive advantage
How well does Zara's advantage
travel globally?
 Zara owned much of its production & its stores
 Followed backward vertical integration, to be a very quick fashion
follower
 Pricing was largely market-based
 Implementation of the relatively standardized strategies
 Zara’s international activities were organized primarily under a
holding company
 Zara’s drawing power reflected the freshness of its offerings, the
creation of a sense of scarcity and an attractive ambience around
them, and the positive word of mouth
 Zara followed a standard organizational structure to enable
efficiency
Describe Zara's past international strategy with
respect to product, market selection, its mode
of entry and its standardization of marketing
approach
 W.r.t product: Zara placed more emphasis on backward vertical
integration to be a very quick fashion follower than to achieve
manufacturing efficiencies. Also, the store managers transfer the
customer preferences & data directly to Zara’s design teams
 W.r.t market selection: 1. Oil stain method of expansion; 2. Zara
conducted both macro and micro analysis; 3. Unlikely its competitors
Zara focused on market price rather then its own price
 W.r.t mode of entry: Zara used three different modes to enter into
new market – 1. Company-owned Stores; 2. Joint ventures; 3.
franchises
 W.r.t standardization of marketing approach: 1. test based
marketing approach; 2. pricing was market based; 3. standard
promotional strategies
What is the best way to grow the
Zara chain? What prospects do you
seeZara
 inshould
Italian
continue market?
with its rapid growth and keep on analysis
different markets to enter.
 Since Italy was the largest apparel market, Zara should expand in
Italy with cautious analysis, due to the present competition.
 US and Asian markets are good prospects but huge resources and
expertise is required
 Italians spend more than 1000 Euros per capita on apparel
 Italians visited fashion stores relatively more frequently
 Italians were considered more fashion-forwarded
What do you think about the strategy of
focusing on Europe versus making a
major commitment to another region?
 Europe was a mature market and offered great expansion
prospects, as evident from the existing European business.
 South America was relatively much smaller subject to profitability
pressures.
 The middle East was more profitable on average, but even smaller.
 US was less fashion-forward than Europe market and demanded
larger sizes on average & exhibited considerable internal variation
 Asia appeared to be even more competitive and difficult to
penetrate than North America
Thank You