rm seca group6 zara

ZARA: FAST FASHION

RETAIL MANAGEMENTSECTION AGROUP 6

AGENDA

GLOBAL APPAREL INDUSTRY

INDITEX, ZARA and ITS BUSINESS SYSTEM

UNDERSTAND THE VALUE CHAIN – PORTER’S MODEL

ZARA’s INTERNATIONAL EXPANSION

RECOMMENDATIONS ( MCKINSEY FRAMEWORK)

CASE OBJECTIVEAnalyse Inditex and Zara’s International Expansion and provide recommendations for sustainable growth and Future Geographic

Focus


PRODUCTION

• 30% of world production is exported – half from developing countries – reflect cheap labour and inputs

• China became export powerhouse and major supplier for Japan• Turkey, North Africa - major suppliers for EU• Mexico and Caribbean basin - major suppliers for US

CROSS BORDER INTERMEDIATION

• Trading companies play vital role for smooth flow of apparels from factories to retailers E.g. Li & Fung in Hong Kong

• Branded marketers – outsourced production E.g. Liz Claiborne• Branded Manufacturers – sold products under their own brand

name E.g. US based VF Corporation

GLOBAL APPAREL INDUSTRY INDITEX and ZARA


MARKETS and CONSUMERS

• 2000: Retail spending on apparels was 900 bn euros• Europe 34%, US 29%, Asia 23% of market• Expenditure on apparel was decreasing as income increased• Local variation in customer attributes and preferences

• Germans- Price sensitive, British- social affinity, French- variety/quality

• 5 ways of retailer Expansion• Choose a “sliver” of value instead of competing across entire

value chain• Emphasize partnering• Investing in brand• Minimize tangible investment• Arbitrage international factor price difference



RETAILING

• Major role shaping imports into developed countries• Large Apparels Retailers promote Quick Response reducing Forecast

Errors and inventory risks, cycle times• Retailing activity remained local but fashion retail was globalised


COMPETITOR POSITIONING

FASHION - FASHION +

PRICE-

PRICE+

ZARAH&M

GAP

BENETTON

• Amancio Ortega started clothing factories

1963• Zara first

opened in La Coruna

1975• Inditex – holding

company atop Zara

1985

Integrate forward to improve

manufacturing/ retailing interface

In 1985, Jose Maria Castellano

Rios joined – Importance to computers to

enable business

INDITEX and ZARA : AN OVERVIEW

Operation

• Manufacturing base in Galicia which was strategically important in terms of transport cost• Manufactured and sold apparel, footwear and accessories for women, men and children through 6 retail chains• 2001: Operated 1284 stores outside Spain, employed 26724 people(80% retail sales, 8.5% manufacturing, reminder for logistics activities) and selling area was 659400 sq meters

Financials

• Return on Equity was stable and oscillated around 22% - 25% mark ; Net margin was stable and was in the 9-11% range• The asset turnover ratio was also consistently > 1 with stable Return on Assets around 11-13 %

INDITEX and ZARA GLOBAL APPAREL INDUSTRY

ZARA BUSINESS SYSTEMDesign

Sourcing & Manufactur

ing

Distribution

Retailing

• Flat organization • Design team : design, tracking

consumer preferences – bridge merchandising & production back end

Design

• Sourced ‘gray’ fabric – max flexibility – from Comditel (100% subsidiary)

• IN-HOUSE (40%)• Cutting done by Inditex owned

workshops• Sewing outsourced

Manufacture & Sourcing

• Own centralized Distribution System at Arteixo

• Speculations about being subject to diseconomies of scale – 2nd centre at Zaragoza

Distribution

• Decentralized store management• Managers determine products to sell

and return• .03% on advertising

Retailing

• Fashion sensitive products manufactured internally•Vertically integrated – bull whip effect reduced •Cycle : 4-5 weeks for design and have finished goods in stores ( Industry : 6 months for design, 3 months for manufac)


PROS & CONS OF THE BUSINESS SYSTEM

Cost savings by centralized DC Capacity problems with only one DC Lack of decentralization – farther from each

market ; requires more scheduling and control


DISTRIBUTION

RETAILING

Flexibility using JVs Store Standardisation consistent image & low cost

Low advertising – no communication to customers

Store Mngrs gather info at POS Flat Structure Continuous tracking of Customer

Preferences Presentation of items in key stores

Higher Staff – Higher labour costs

DESIGN

SOURCING and MANUFACTURING

In –house 40% ;better control; short lead time Dyeing and Cutting – Core Activity done in-house

Low advertising – no communication to customers

FIRM BASED VALUE CHAIN

•Store places order twice a week to headquarter – hard deadline – •No inventory check on store comp•Handheld for newly available – linked to IS

•Shipping clothes involves Commercials at La Coruna• Determine store to be supplied – future SKU production with product manager

•11000 new items/year•Dyeing, Cutting – ZARA owned factories•Sewing – small workshops in Galicia & North Portugal•No forecasting- rely on commercials

ORDERING FULFILMENT DESIGN & MANUFAC

VALUE CHAIN ANALYSIS GLOBAL APPAREL INDUSTRY

ZARA’s COMPETETIVE ADVANTAGE

Vertical Integration• Merchandising strategy: Scarcity and Opportunity; Buy

now, not later• Fast Fashion : Up-to-date designs

Quick Response to Demand (Pull System)

• Purpose: to provide information to designers quickly

Small Batch Production

High Product Turnover

Central Distribution Center / Strong IT System• Place to move merchandise• Minimizes lead time• Shipped by time zones

VALUE CHAIN ANALYSIS GLOBAL APPAREL INDUSTRY

Efficient supply chain (primary

activities) and fast response

to the changing market

INTERNATIONAL EXPANSION

Market Selection• Oil Stain Technique : Opened operations in countries resembling

Spain in terms of economic development• Macro Analysis: Macro variables tariffs, tax,legal costs, salaries, real

estate• Micro Analysis: Sector specific – local demand, channels,

competitors, store locations• It used Market price to forecast future prices of apparels rather then

cost based approachMarket Entry • Company Owned Mode: High Growth and low business risk markets

with high resource availability• Franchise Mode: Small, Risky and culturally differentiated market

and administrative barriers• Joint Venture Mode: Market where it was difficult to obtain retail

space E.g. Japan (Bigi) and Germany(Otto Versand) Market• No acquiring foreign chains – overlapping networks, physical and

cultural impediments

INTERNATIONAL EXPANSION GLOBAL APPAREL INDUSTRY

INTERNATIONAL EXPANSION

Marketing• Flagship Store opened on a pilot basis - Marketing mix refined on this

basis - replicated throughout country• Pricing: Market Price + Difference in supply chain cost from Spain• Position

• Positioned differently in emerging and developed countries based on income difference

• Store format in different countries were also different due to position difference

• Promotion: No major investment in advertising and promotional activities

• Product: Difference in product features based on cultural and climateGrowth Options

• Limited in Spain• Italy market presented the maximum growth potential as the

customers spent maximum euros on apparels (1000 Euros viz-a-viz 600 Euros in Spain)

• Other growth opportunity present in North America and Asia

INTERNATIONAL EXPANSION GLOBAL APPAREL INDUSTRY

MCKINSEY RECOMMENDATIONS TO RETAILERS

1. CHOOSE YOUR SLIVER

2. GET COMFORTABLE PARTNERING

3. INVEST IN INTANGIBLE ASSETS

DESIGN : In houseSOURCING : Fully outsourcedMANUFACTURING : Partly outsourcedLOGISTICS :Partly OutsourcedSALES : Fully OutsourcedDISTRIBUTION : In house

Long term relations with Suppliers - ZARA ControlFranchise systems and JV – Controlled Partnerships

BRAND : Low advertising especially in foreign marketsTECHNOLOGY : Strong Investments; JIT with ToyotaPEOPLE: Low heirarchiy; people given opportunities

MCKINSEY FRAMEWORK GLOBAL APPAREL INDUSTRY


4. KEEP CAPITAL REQUIREMENTS LOW

OPERATION IMPACT

Central DC – direct shipping to stores

Short lead times; Low storage costs

Intense market research – store manager

involved in product development

Low failure rates

Long term leases; Different business

modes for Expansion

Low financial strain

Flat heirarchy Flexibility and quicker communication

Production of price sensitive items

outsourced

Low production and selling prices



5. EXPLOIT OPPORTUNITIES TO ARBITRAGE


RECOMMENDATIONS

Short-Term Solution: Expand in Europe

• Focus on Italy (63 Billion Euro Market)• Implement “Oil Stain” expansion method

Long-Term Solution: Expand Outside of Europe• Establish operations in North America ; North American Distribution

Center (Mexico)• Asian Expansion• Increase stores drastically to enhance presence in people’s mind

Focus on Marketing

• Marketing through Internet • Combined with E-commerce for US market

RECOMMEN-DATIONS GLOBAL APPAREL INDUSTRY

THANK YOU

rm seca group6 zara

Documents

global apparel

international

chain analysis

fully outsourced

term solution

partly outsourced

north america

mckinsey framework