Zara Case Study

Executive Summary:

Inditex Group, owned by Ortega Gaona-one of the richest men in Spain, has touched the grounds of three continents with stores growing from 180 stores mainly in Spain in 1995 to 1080 stores over 33 countries in 2000. Among the five brands of Inditex, Zara shines as the leading brand. Zara’s unique “design-on-demand” concept and focus on vertical integration stimulated extensive debates about the sustainability of this model in the fashion retailing world. Zara’s senior executives continue to examine the international expansion strategy, especially to North and South America, along with the arising challenges.

Challenges to Consider with Global Expansion

Existing Competition

In the increasingly complex and challenging apparel retailing market, Zara’s major competitors in North America are H&M and Gap. Based on the financial ratio analysis (Appendix E), H&M is the direct competitor with stronger financials in terms of solvency and profitability. Moreover, H&M is planning to expand in the USA by adding 85 more stores by 2003.

Future Distribution Constraints

When expanding to new areas around the world Zara needs will need to weigh the option of continuing their existing vertically integrated structure as opposed to franchising or selling merchandise via other retailers. Zara also needs to review the distribution strategy with regards to expansion. Our analysis shows that the total number of global Zara stores will grow by an average annual growth rate of 12% (Appendix G). Over a ten-year period, that will mean approximately 1000 new stores will be added to the Zara network.

Expansion into Counter-Seasonal Markets

Most of Zara’s stores are currently in the northern hemisphere (Appendix G). Opening and operating stores in the southern hemisphere will pose a counter-seasonal issue. Zara’s centralized management system currently caters to markets in the Northern hemisphere. Southern hemisphere expansion will add complexity to this model-an issue that must be addressed.

Recommendation & Plan of Actions

Short Term Recommendations

The short term recommendation for the Zara brand is to leverage the existing manufacturing and distribution infrastructure within Spain to further expand into the Americas. The existing distribution channel is very robust and the use of these economies of scale will be an asset when it comes to global expansion. The expansion into the Americas should be one that is slow and calculated with a focus on large urban centers. This will allow Zara to follow its expansion policy of being able to monitor growth and success within an area. The retail structure for the Americas should replicate the existing vertically integrated model of directly owning the retail stores as the growth and sales potential is significant. Even though H&M announced plans to expand into the USA, Zara’s strengths and value proposition to customers differentiates the company from the competition (Appendix B). Directly owning the retail stores will offset the increased cost of manufacturing in Spain since the margin earned in the vertically integrated model is greater as compared to franchising. Expanding through owned retail stores requires a significant amount of capital and the risk of this strategy is the significant capital invested. This risk is mitigated by the successfully proven business model.

For all new international markets, Zara needs to establish a continent specific design office. These new design offices will capture trends and create new collections that are relevant for the domestic population. The designs will be communicated back to the Zara headquarters to be integrated within that continent’s 50% flexible clothing line. Those items will then be finalized and manufactured within Spain for shipment back to that continent.

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