CASE STUDY

OCTOBER 19, 2011

ZARA: Staying Fast and Fresh

In early 2011, despite a successful decade of continued growth, fashion retailer Zara’s CFO
Miguel Díaz was anything but complacent. When asked about the future, Díaz responded:

Challenges abound. At the pace stores are being added in the rest of the world, the
inevitable question is whether we should open our first major distribution center
outside Spain. Another concern is that the prices of raw materials and labor are not
going down, in part because the cost structure in Asia is changing. The old textile
model in which each year better garments were produced at lower costs will not hold
on forever, and we have to remain alert to these changes.

Zara, the flagship brand of the Spanish retail conglomerate Inditex, was one of the leading
retailers of fast-fashion, churning out frequent in-season assortment changes of knockoffs of
popular runway styles and trendy fashions. The company had received a lot of attention for its
centralized distribution model. In the past 10 years, Inditex and more specifically Zara had been
studied by MBA students, the world over, to understand its success in distribution and supply chain
efficiency. Numerous cases had been written by academics to better understand Zara's operations,
marketing, information systems, and overall strategy, but the same authors had always questioned
Zara’s long-term sustainability. (See Exhibit 1 for a brief survey of previous cases.) Nevertheless,
Zara's net sales reached €8,088 million in 2010, representing an increase of 14% over the previous
year and right in line with the average growth it had shown over the last decade. (See Exhibit 2
for a graphical representation of Zara's growth and significant events.)

Inditex
In 2010, Inditex founder Amancio Ortega Gaona was considered by Forbes Magazine to be the
9th richest man in the world, but his life did not begin that way. Ortega began his career in 1963 as
a clothing manufacturer in A Coruña, Spain making garments for wholesalers. The way the story
goes, in 1975, after a customer cancelled a large order, Ortega decided to open his own store as
an outlet for unsold products. It was to be called Zorba, following the popular film featuring Anthony
Quinn, but that name had already been taken by a nearby store. In a quick display of his decision
making, Ortega reused the billboard letters and came up with the name Zara. Through his own
store, Ortega learned firsthand what customers wanted and realized that

Professor Felipe Caro prepared this case as the basis for class discussion. The content does not engage the
responsibility of the Inditex Group. The case is not intended to serve as primary source of data, endorsement, or a
description of adequate/inadequate managerial practice. Special thanks to Katherine Helfet and Paige Hosler who
helped in the writing process. This project was supported by the Easton Technology Leadership Program.

Copyright © 2011 by UCLA Anderson School of Management. All rights reserved. No part of this publication may be
copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of
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Zara: Staying Fast and Fresh UCLA Anderson School of Management

it often did not match the styles that wholesalers were ordering. He then made it a rule to have one
hand touching the factory and the other touching the store. The importance of handling large
amounts of information also became evident, and in 1976 he purchased his first computer.

In the 1980s, Ortega’s interest in technology led him to meet Jose Maria Castellano, a professor
at the local university who had experience with information systems, sales and finance. In 1985,
the Inditex Group was established as the owner of Zara and Castellano joined as Deputy Chairman.
Castellano helped to drive growth in the organization and to develop technological support for the
vertically integrated business model that Ortega had envisioned. The philosophy of end-to-end
control guided local expansion in the 1980s and worldwide expansion in the decades that followed.

In parallel with the international expansion, Inditex also expanded its brand concepts. In 1991,
Inditex launched Pull & Bear, which had a larger selection of everyday basics, that is, garments with
less fashion content and more competitive prices. The same year, Inditex acquired 65% of
Massimo Dutti, a brand originally targeted only to men, offering a more sophisticated look with great
attention to fit and fabric quality. Inditex later took full ownership of the brand and diversified its
assortment to include women's and children's wear. The concept of Bershka was introduced in
1998, aimed at avant-garde female shoppers in their teens. A year later, Inditex acquired
Stradivarius, which complemented its portfolio of trendy garments for women in their mid twenties.
Outside of common functions such as human resources, information systems and real estate, and
a shared focus on cutting-edge designs at affordable prices, each brand operated independently.

When Ortega decided to step down in 1997, Castellano took over as Inditex's CEO. Castellano’s
ongoing vision for the company led Inditex to an Initial Public Offering (IPO) on May 23, 2001.
Ortega agreed to sell 26% of his stake in the company to the public. The IPO was not intended to
generate cash for the company as the revenues from the sale went back to Ortega. Instead, it was
intended to stabilize management and solidify the company’s leading retail position. The IPO was
oversubscribed by 22%, signaling that the shares were undervalued. Simultaneously, Inditex
agreed to distribute 4.3 million shares to employees through an Employee Stock Participation Plan.
Ortega maintained just over 60% of the company’s equity.

In 2005, Castellano resigned as CEO of Inditex. With the help of an executive search firm, the
Board of Directors proposed the appointment of Pablo Isla as the new CEO. Isla had achieved
great success as a state lawyer chairing the Board of Directors of the Altadis Group and serving
as general counsel to Banco Popular. In a press release from Inditex, the company cited its choice
of Isla as “a step forward in the design and reorganization of the management team of Inditex.” Isla
oversaw Inditex's continued growth while emphasizing store execution and overhauling internal
processes. His frequent visits to the stores not only demonstrated his commitment to Inditex’s
“bottom up” structure but also allowed him to recognize opportunities for improvement.

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UCLA Anderson School of Management Zara: Staying Fast and Fresh

In 2008, an economic crisis hit Spain hard. Much like in the U.S., the crisis was generated by
long-term loans, but in addition Spain had a large trade deficit. These factors drove the
unemployment rate above 20% in the years that followed. The developed world entered into a
recession that depressed consumer confidence and affected most market sectors, in particular the
retail industry. (See Exhibit 3 for stock prices for Zara and its direct competitors.) Despite the
crisis, Inditex closed the decade in 2010 with a Compound Annual Growth Rate (CAGR) of 37%
(see Exhibit 4). In terms of locations, Inditex had grown from 1,080 stores in 33 countries in 2000
to about 5,000 stores in almost 80 countries ten years later. The number of employees quadrupled
over the same period and three more brands were added. Launched in 2001, Oysho offered stylish
lingerie and intimate apparel. Zara Home was introduced in 2003, expanding Zara's concept to
home decor. Uterqüe opened in 2008 selling high-end accessories and a fashionable selection of
leather garments. As for Zara, 2010 crowned a decade during which it consolidated its position as
a leading global brand in the apparel market.

Competitive Landscape
Among specialty apparel retailers worldwide, Inditex took the lead in annual revenue (see
Exhibit 5). Its three most relevant competitors were Gap Inc., H&M and more recently Fast
Retailing.

The Gap

Based in San Francisco, CA and originally founded to sell Levi’s jeans, The Gap saw great
success through the 1980s and 1990s and grew with an expansion of concept stores, including
Banana Republic, Old Navy, Gap Outlet and Gap Inc. Direct, the online division. The Gap was
known for its unpretentious basics, which included jeans, T-shirts, khakis and regular work clothes.
It operated a “buying” model for the manufacturing and production of its garments, and orders to
manufacturers in international locations had to be placed 9 months before the season began.
Products were manufactured in large quantities and extensive promotions were used to stimulate
demand so a 30% markdown off the full price was very common. Led by retail innovator Mickey
Drexler, The Gap opened its first international store in the U.K. and reached sales of $1B in 1987.
Though global expansion continued, it was hindered by a challenging cost structure and adaptations
of size and color for different markets. After the departure of Drexler, the consumer trend to more
individualized clothing and a failed attempt to make the brand more fashion forward, The Gap saw
its revenues decline from a peak of $16.4B in 2004 to $14.2B in 2009. In 2010, The Gap had fully-
owned stores in six countries and franchises in another 22 international locations.

Hennes & Mauritz

H&M was founded in 1947 in Sweden and saw good success as a specialty apparel retailer.
H&M was seen as Inditex's closest retail competitor on product offerings in specialty apparel, though
it operated only one concept with its own name. Although these stores carried a variety of private
label brands appealing to different customer segments, H&M delivered large marketplace-like
stores with low prices and high variety refreshed daily. Using about 100 in-

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Zara: Staying Fast and Fresh UCLA Anderson School of Management

house designers, H&M designed and purchased its product mix from 700 independent suppliers in
Europe and Asia. H&M also depended on a large network of distribution centers located in each
country of operation. H&M expanded rapidly in the new century, with revenue growth up to 127
million Swedish kronor in 2010. Its goal was to achieve 10-15% growth in the number of stores each
year. In 1998, H&M launched its own online shopping portal in Sweden and then followed in Norway,
Denmark, Finland, the Netherlands, Germany and Austria. It was not until September 2010 that
H&M launched its online shopping portal in the UK, making it the eighth country with an H&M e-
commerce platform.

Fast Retailing

Despite revenues equal to only 56% of Inditex’s in 2010, Uniqlo and its corporate owner Fast
Retailing managed to grow rapidly over the turn of the century. In that time period, CEO Tadashi
Yanai doubled the revenues of Uniqlo and had a big vision for the company going forward. His goal
was to expand the company tenfold within ten years to achieve sales of ¥5 trillion by the year 2020.
Although Fast Retailing was originally founded in 1963 as a men’s apparel retailer, the first Uniqlo
store was not opened until 1984. Uniqlo offered inexpensive basic clothes, providing a broad array
of colors to its customers. Fast Retailing had pushed its way into foreign markets determined to
gain market-share. In 2009, the company acquired Theory, a New York based apparel design
company with a large share of the workplace attire market, providing tailored suits in a high quality
stretch textile to young professionals around the world. This expansion of concept further
exemplified Fast Retailing’s quest to get a foothold in the global apparel market.

Benetton

The Benetton Group was founded in Italy in 1965 and had become a world leader in providing
knitwear by the early 1980s, supplying more than 1,900 shops with its sweaters, t- shirts and jeans.
Benetton was one of the first major retailers credited with utilizing deferred differentiation in its
production of clothing, a strategy that delayed the process of dyeing until after yarn and fabrics
were assembled into garments. This strategy gave Benetton a competitive edge, but eventually
other retailers followed and deferred differentiation became mainstream. Benetton’s operations
were highly decentralized and most of its retail stores were owned and operated locally as
franchises, limiting its ability to track demand and make changes to product assortment in a timely
manner. The Benetton Group was considered a major competitor in this market in the 1980s and
1990s, but it struggled to keep up later on. In fact, Benetton’s sales increased less than 2% to €2.05
billion over the period from 2000 – 2010.1