Zara: Fast Fashion

Outline
! The Apparel Industry ! How is Zara different? ! Operating Economics and Capital Efficiency (Exhibit 6) ! What is Zaras competitive advantage? ! Video: Management Roundtable ! What is Zaras strategy? ! Is it sustainable? ! How important is Zaras vertical scope? ! Will Zara globalize successfully?

How is Zara Different from Other Apparel Companies?

Design Manufacturing

Distribution

Merchandising

Store Operations

Zaras Differences
! ! ! ! ! Backward integrated into manufacturing Forward integrated into retailing European sourcing (mostly Spain) Centralized distribution (Spain) Capital intensive
! Despite low working capital ! Partly because of in-house manufacturing ! But particularly because of capital intensive store operations

! Information systems and quick response ! Lack of advertising expense ! Low markdown rates

Design Manufacturing

Fabric, zippers, ..

Sewing

Distribution
Quick Respons e

Shipping

Merchandising Store Operations

Why Outsource Sewing?

! Incentives
! Sewing productivity is easy to monitor ! Contracts are easy to write. Sewing a dress doesn t change much even when the designs change frequently! ! High powered incentives significantly increase productivity

! Coordination
! Sewing does NOT need to be coordinated with design, retailing, or even manufacturing, except in simple, easily measured and easily contractible ways (the most important of these is rapid turnaround). ! Changes in design, tastes, etc. change what is sewn, but not the contacts

! Scale
! Sewing does not benefit from scale, so Zara can take advantage of competition among suppliers. ! Outsourcing to a single larger supplier (in Spain) would expose Zara to hold-up - conflict arising because it is locked in.

Gap

H&M

Benetton

Inditex

Operating Results (! Millions)

Net Operating Revenues Cost of Goods Sold Gross Margin Operating Expenses Operating Profits 15,559 10,904 4,656 4,276 379 108 272 280 0 -9 4,269 2,064 2,204 1,615 589 -28 617 206 0 410 2,098 1,189 909 624 286 43 243 92 2 148 3,250 1,563 1,687 982 704 209 495 150 5 340

Non-operating Expenses Pre-tax Income Income Tax Minority Interests Net Income Financial Position ( ! Millions, except where noted otherwise)
Current Assets Property, Plant and Equipment Other Noncurrent Assets Total Assets Current Liabilities Noncurrent Liabilities Total Liabilities Equity--Book Value Equity--Market Value a One Year Change in Market Value (%) b Operating Margin Net Margin Asset turnover ROA Leverage ROE PPE/Sales Assets/Sales Working Capital Working Capital/Sales Total Assets less Current Liabilities

3,436 4,695 435 8,566 2,320 2,850 5,170 3,396 12,687 -60% 2.44% -0.06% 1.82 -0.11% 2.52 -0.28% 30% 55% 1,116 7% 6246 40% 166,000 6 87% NA 3,097 87% 92% 632

1,468 661 54 2,183 432 101 532* 1,650 15,564 8% 13.80% 9.60% 1.96 18.78% 1.32 24.84% 15% 51% 1,036 24% 1751 41% 22,944 14 12% 96% 771 15% 96% 1,201

1,558 720 543 2,821 956 625 1,580 1,241 2,605 -20% 13.63% 7.05% 0.74 5.25% 2.27 11.85% 34% 134% 602 29% 1865 89% 6,672 120 44% 78% 5,456 40% 80% 279

854 1,228 523 2,605 834 285 1,119 1,486 13,433 47% 21.66% 10.46% 1.25 13.05% 1.75 22.89% 38% 80% 20 1% 1771 54% 26,724 39 46% 77% 1,284 60% 86% 514

Other Statistics
Employees Number of Countries of Operation Sales in Home Country (%) Sales in Home Continent (%) Number of Store Locations c Stores in Home country (%) Stores in Home Continent (%) Average Store Size (sq. meter)

Gap Operating Margin Net Margin Asset turnover ROA Leverage ROE PPE/Sales Assets/Sales Working Capital Working Capital/Sales Total Assets less Current Liabilities % of Sales 2.44% -0.06% 1.82 -0.11% 2.52 -0.28% 30% 55% 1,116 7% 6246 40%

H&M 13.80% 9.60% 1.96 18.78% 1.32 24.84% 15% 51% 1,036 24% 1751 41%

Benetton 13.63% 7.05% 0.74 5.25% 2.27 11.85% 34% 134% 602 29% 1865 89%

Inditex 21.66% 10.46% 1.25 13.05% 1.75 22.89% 38% 80% 20 1% 1771 54%

Quantifying Zaras Competitive Advantage

Comparative Margin Analysis Competitor Posted Selling Price - Markdown Retail Selling Price - Manufacturing Cost/Selling Price (Assume 50%) - 14.1% Premium for European Production (a) Gross Margin - Advertising Advertising Adjusted Margin 100.0 -10.5 89.5 -44.8 0 44.7 -3.1 41.6 Zara 100.0 -2.6 97.4 -44.8 -6.3 46.3 -0.3 46.0

(a) 15-20% on 80% sourced in Europe

Management Roundtable Discussion

Design Manufacturing

Fabric, zippers, ..

Sewing

Distribution
Quick Respons e

Shipping

Merchandising Store Operations

Zaras Strategy
! Backward integration into manufacturing of fashion intensive products ! Forward integration into retailing ! Quick response manufacturing & information systems ! Design intensive, fashion follower ! Very short product cycles ! Large, capital-intensive stores with premium locations ! Rapid growth ! Flat organizational structure; little cross chain coord. ! Centralized distribution; small frequent shipments

Competition and Sustainability

! How much of a threat is competition? ! Is imitation a threat? ! Why is imitation difficult?

Vertical Integration
! Why is Zara so vertically integrated? ! Can rivals imitate Zara without integrating? ! Can Zara achieve its competitive advantage without fully integrating?

Other Threats: Why Might Inditex Fail?

! Overinvestment ! Complexity
! Inability to scale up operating efficiencies

! Globalization
! Inability to extend operating efficiencies and advantage to other countries

! Substitution
! particular towards low-cost, low-fashion competition

! Cross-chain challenges

Inditexs Chains

Zara versus Other Inditex Chains

2001 Operations: Zara versus Other Chains Zara 507 488,400 1,050 ! 441 ! 2,477 42% 18% (%) 40% 74% 72% 85% 76% Other Chains 761 171,600 408 78 782 19% 10% (%) 60% 26% 28% 15% 24% Total 1,268 660,000 1,458 ! 519 ! 3,259 36% 16%

Stores Selling Area Capital EBIT Sales EBIT/Capital EBIT/Sales

These calculations based on the numbers shown on page 8 of the case.

Zaras International Expansion

! Does Zaras business model travel well?
! European Expansion: Portugal, Germany, Greece, etc. ! Worldwide Expansion: Middle East, Japan, US, Mexico, etc.

! Why has Zara expanded so much more rapidly in new countries than H&M or The Gap?