ZARA: Searching for growth opportunities. Making inroads into Asia. Case study Reference No. This case was written by Prof. Dr. Jan-Philipp Büchler, Center for Applied Studies & Education in Management (CASEM) at the University of Applied Sciences and Arts Dortmund. The case is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 2013, CASEM, FH Dortmund, Emil-Figge-Str. 44, 44227 Dortmund, Germany No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. 1
Challenge for growth Amancio Ortega Gaona, chairman of Inditex Group, was astonished by the reaction of the audience at the analysts and investors conference after having finished his presentation. He had just presented a double digit increase in sales of +22 % vs. previous year realizing an all-time-high of 3.974 Mio. in the fiscal year 2002. However, several analysts had doubts on the sustainability of the growth strategy because of decelerating growth rates in the past years and a stagnating share of international sales of Inditex Group, thus growth was just generated by penetration in existing markets (see exhibit 1). A sector analyst known for his insisting questions challenged him why there was still no presence in the Asian markets and if Zara was unable to tap into these high growth markets in Asia because of its business model. Internationalization of ZARA Amancio Ortega Gaona realized the expectations in the audience that were driven by the accelerated internationalization and success of his flagship brand ZARA. The internationalization path of ZARA followed the classic stages model of internationalization by firstly entering geographically or culturally close markets before taking opportunities in more distant markets. Since its foundation in Spain in 1975, ZARA has experienced nothing but success. for ZARA with regards to consumer attitudes on lifestyle and fashion. When moving into the Mexican market although geographically even more distant, ZARA operated almost on home turf in terms of cultural distance. The positive experience in the international market place has led ZARA on a rapid global expansion path, regardless of cultural or geographically proximity. ZARA added 24 countries in the following years to the portfolio whereas its major competitors GAP and H&M expanded their business by far more cautiously and slowly. In 1998, the first presence in Asia was established in Japan. However, this presence was not regarded as a convincing growth platform due to the overall weak Japanese economy. A compelling emerging market strategy to secure high double-digit growth rates was required. 2
ZARA Business Model The store is the centerpiece of ZARA s business model because it does not only serve as a mere point of sale but also exercises a significant influence on the design of new fashion items and the speed of production. What distinguishes ZARA from its competitors is the intense flow of information along the vertical integrated value chain activities (see exhibit 2). The stores define the start and end of each business cycle in the value network of ZARA and are considered its most effective communication tool as the company spends only 0.3 percent on advertising normally at the beginning of the sales season. ZARA follows a market based pricing strategy which sets the target prices that the buyer is willing to pay. Customer judgment on new designs of clothes or about new garments or new products that they are interested in is collected by staff members in the stores. ZARA s management in the headquarters receives feedback from the point of sale on a daily basis. The central design group of more than 400 designers at the headquarters of ZARA uses the feedback to create new articles or modifications to the existing goods and to brief the production management immediately for trial production. If successful, the items are delivered to the stores. Every store receives small batches of products twice a week, avoiding large inventories and creating a climate of scarcity and opportunity. are diseconomies of scope with regard to longer distances to certain markets, e.g. South America or Asia. In order to guarantee short cycle times which are crucial in this business model, ZARA faces very high transport costs due to air freight delivery. Finally, ZARA is able to offer in all stores around the world a new fashion collection within two to four weeks. This is up to three times faster than 3
its competitors. The ZARA business model was also summarized as latest fashion at affordable price. 2) Options for future growth At the end of 2002, the options for future growth of ZARA require a revaluation. The analysts were right in assuming the limits of market penetration in the more or less saturated and highly competitive western markets that would lead to a decline in operating margins in the mid-term. However, Amancio Ortega Gaona knew the risks of rapid expansion in the global market place and knew that a careful assessment of each and every country market needed to be conducted and a careful integration of all local business activities into the global business model of ZARA was required. In his answer to the analysts and investors, the chairman made clear that the growth markets in Latin and South America provided many attractive growth opportunities that were close-to-home for ZARA from a strategic and cultural perspective and, thus within its risk appetite. Nevertheless, he acknowledged the high growth potential of the Asian markets and explained that Asia would be one of the major strategic priorities in the next years. He minded them also to balance top line growth expectations and risk appetite. I never know. It depends on the customer and how big the demand is. We must facts-based manager, he always expected a profound argumentation and reasoning that was evidenced by hard facts. He closed his briefing by reminding the managers of balancing risks and opportunities for all countries carefully and to develop a consistent approach for an expansion into Asia. 4
Exhibit 1 INDITEX Group: Key figures Source: INDITEX Annual Report 2002 Exhibit 2 ZARA: Business model Source: Own illustration. 5
References 1) Hansen, Suzy (2012), How Zara Grew Into the World s Largest Fashion Retailer, in: The New York Times, November 9, 2012 2) ZARA (2002), Annual Report 2002 (accessed April 11, 2013), [available at: http://www.inditex.es/en/shareholders_and_investors/investor_relations/annual_reports] 6