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Ortega, It was a pleasure meeting you in the elevator last Tuesday. I would like to follow up on our conversation regarding the state of Inditex. As I mentioned to you in our previous discussion, I have been extensively analyzed the status of your company, its products, and its main competitors for the past few years. Before moving forward, I must congratulate Zara¶s vast expansion and growth throughout the past few years. The company has remained focused on its core fashion philosophy: that creativity and quality design, coupled with a rapid response to market demands will yield profitable results. Nevertheless, the subsequent question regarding this expansion remains: How will Zara sustain financial growth and solidify a strong market position in 2002? Currently, Zara appears to have an agenda for ensuring successful expansion. However, after a deeper analysis, four pivotal strategic issues have been identified which could either stifle company growth, or propel Zara to successful expansion. These strategic issues include: European market expansion Inventory management Future growth opportunities In order to mitigate these matters, I suggest the following: Focus on UK, Switzerland, Portugal, and Austria markets Restructure Inventory Management Strategy Expand to the United States market While Zara¶s inventory levels have quickly flourished, the company¶s sales growth rate has suffered. These strategic issues will provide a strategic solution for Zara to sustain the increased inventory levels, sustain sales growth and uphold the company¶s value proposition of offering new, moderately prices faster than other retailers. Within the past years, Zara has experienced significant revenue growth, increased profit margins, and elevated inventory levels. However, with the increasing pressures of competitors (The Gap, Hennes and Mauritz, Benetton, and specialty retailers), the global apparel market is becoming bloodier and bloodier. In efforts to ensure Zara¶s competitive within the market, these recommendations have been extrapolated from an extensive company analysis, and implementation suggestions have been outlined in detail within the report. I believe these suggestions are pivotal for Zara to ensure sustainable growth and establish itself as a market leader in the global apparel market.
Michelle McKelvey Gertz Consulting firstname.lastname@example.org 571.294.8827
1|P a ge
These four areas have been selected for their greatest opportunity for growth within their respective markets (please refer to Exhibit 5). Portugal: Although the United Kingdom and Switzerland have proved to be stable economies. while Austria has the lowest number of apparel outlets. and an effective multi-channel distribution operation have a very strong chance of succeeding in the United Kingdom retail industry.html 4 Retrieved from http://www.2 This market also has the second highest GNP compared to other countries. Through the culmination of these factors.com/wfb2001/switzerland/index.grant-thornton. Penetrating this market would provide a viable opportunity for Zara to position themselves as a premium retailer in a strong economic environment.html 2|P a ge . It is essential for Zara to leverage their current assets in four primary countries: the United Kingdom. low barriers to entry. a trusted brand name. Overall.com/world_economy/united-kingdom/uk-economy-2001-2007. Other Market Expansion 1 2 Retrieved from http://www.co. the total apparel market has a value of ten billion dollars and is expected to grow to nineteen billion by 2006. the United Kingdom has the second largest population which displays an attractive. Portugal¶s retail market has low barriers to entry and shows a possible demand for the entry of a larger retailer. Inditex currently owns 562 retail outlets in Portugal. Moreover.European Market Expansion The first topic addressed is the company¶s expansion into international markets. Portugal is a prime area for current growth. which will ensure shorter lead times. Zara strongly values efficient distribution and short lead times. These statistics display strong consumer purchasing power. it can be speculated that this market has a strong consumer purchasing power and a growing demand for large retailers. specialist retail stores occupy a meager percentage of the apparel market. the country has the third highest total sales per person and a low number of sales generated from specialty retailers. The United Kingdom: According to an industry report by Grant Thorton LLP. They are located very close to Zara¶s headquarters. Portugal and Austria. Switzerland. which is synonymous with Switzerland¶s short geographical distance to Spain causing it to be advantageous for Zara to penetrate this market.economywatch. and a relatively unsaturated retail market. The strong parent brand presence provides an excellent foundation for Zara to enter the market. In addition. 38 of which are Zara stores.pdf Retrieved from http://www. Since 1985. coupled with the highest total sales per outlet and the second highest total sales per person. These markets demonstrate the most potential for Zara to increase their total sales and provide a strong platform for future expansion. the country¶s GDP has rose from 51% to 78% in 20014.uk/pdf/UK%20global%20outlook%20retail%20report. of which Zara must capitalize upon it. Zara should increase their retail presence in to Austria. Switzerland: Similarly to the United Kingdom. it can be determined that Portugal is a country destined for growth.co. the country has the lowest number of retail outlets and has the second highest amount of total sales per outlet. Through this. ³retailers with a strongly defined base. Moreover. Austria: Finally. Switzerland houses a stable economy with a per capita GDP of 20% higher than fellow western European economies3. In addition. Zara currently operates a mere three stores in this region.pdf 3 Retrieved from http://workmall. these figures demonstrate a relatively unsaturated market and strong consumer purchasing power. large customer base and a strong force for revenue generation.´1 Currently.uk/pdf/UK%20global%20outlook%20retail%20report.grant-thornton. Furthermore.
very low total sales per outlet ratio. it is clear that Zara¶s cash conversion cycle has increased by an alarming 90% from 1999-2001. Zara should forego activity within the Asian retail market. Zara has already established a significant brand presence in Spain through opening over 166 retail stores over the past two years. This suggests that as Zara expands globally. and other relevant information. which would hinder Zara¶s ability to compete on price with established retailers. this is not an attractive market in which to continue efforts. Moreover. These improvements will allow Zara and local management to increase the accuracy of inventory forecasts thereby decreasing days sales of inventory. as we peel away the layers of this figure. The new team members would focus on developing. Zara should invest capital and time into extensively researching local market trends and increase inventory visibility between nearby retailers. Spain: I firmly advise you. this would require an immense amount of resources and human capital. stock is like food. which could have been allocated towards a more attractive market. Moreover. Spain has very low total sales per person ratio. Information Technology Infrastructure: Although accurate forecasting is essential to Zara¶s business model. management is having difficulty predicting and allocating inventory levels and amounts in new markets. and inventory turnover -ultimately yielding a stronger sales growth rate. Overall. In fashion. which accounts for 29. precise forecasting is essential for Zara to sustain the 14. To mitigate this problem. Zara must place increased efforts towards its Inventory Management Strategy. Zara currently utilizes a hybrid model of human intelligence and IT which drive information flow from local stores to corporate headquarters. Mr. Ortega to halt further expansion in Spain¶s retail market. However. gross margins are meaningless if inventory is not sold. ³This business is all about reducing response time. as demonstrated in Exhibit 5. In addition.Asia: With regards to immediate expansion. These factors would squeeze the seemingly high profit margins. Zara¶s factories offer more flexibility and control than outsourcing production to Asia (regardless of lower costs). Inventory Management Strategy In order to benefit most from the target areas listed above. this would enable the installation of modern software applications and would increase Zara¶s business 3|P a ge . Zara should focus on strengthening their brand in other economies and acquiring a new consumer base. and implementing a new operating system. Zara must also refine their information technology infrastructure to sustain their inventory growth. However.95% of Zara¶s total retail store growth. As stated by Jose Maria Castellano. cohesiveness between nearby Zara outlets is inexistent. On a local level.´ Forecasting: After a thorough analysis of Zara¶s financial statements (please refer to Exhibit 1 and Exhibit 2). If they implement a new operating system. the root of the problem is the drastic 9% increase in Days Sales of Inventory. and a very low GNP per capita. This will aid in maintaining the collection of 85% of their full ticket price and high margins. inadvertently causes a disconnect within forecasting. this market is laced with fierce competition and extremely high barriers to entry. The fact that these store managers do not communicate inventory levels. a foundation will be formed causing Zara¶s penetration within Asian markets to be more advantageous to the company. Through leveraging Zara¶s brand in these four European markets. In terms of production. While the allure of low high production margins may be tempting (please refer to Exhibit 4). store managers cannot see the consolidated demand of nearby retailers. It goes bad quick.32% increase in their inventory levels. In order to increase the efficiency of inventory management. Zara must formulate more accurate forecasting models and develop a more efficient distribution system in order to efficiently manage their inventories. and therefore. testing.
In order for this expansion to be successful. However. yields a capacity utilization which remains low and thus. and dying processes of their supply chain. Miami) and age segments (18-24 aged females vs. but have failed to act local.tx. The company should increase advertising costs from 0. the company can then extend their target market to 18-34 females. upon initial entry into the United States market. segmentation.5% less than their competitors on marketing efforts. 25-32 aged females). and trend analysis will be more efficient and easier because of 5 Retrieved from http://www. forecast product demand. Zara should formalize contracts with their suppliers in efforts to decrease lead time. they should look towards expanding in the United States market through expanding their satellite distribution center in Mexico.capabilities and increase efficiency. Zara should also consider expansion in the United States retail market. they outsource the stitching process to 450 workshops in Galacia. Zara¶s vertically integrated supply chain has hindered the company¶s ability to grow and has caused dis-economies of scale. but also harness communication between local stores. However. processing. moderately priced retailer. which would decrease lead times and increase production control. and ultimately acquire significant cost advantages. waiting times increase gradually. this would increase their in house production capabilities to from 40% to approximately 50% and streamline their supply chain. the acceleration starts at lower levels of capacity utilization. Zara should make their current distribution center in Mexico a hub for North and South American production and inventory management. the company must solidify a strong brand position.ncsu. Moreover. Zara owns the cutting. which will enable Zara to focus on specific geographic segments (New York vs. if they buy the workshops. Currently. Expansion into the United States Market In addition to increased growth in European markets. They should not increase their capacity of their current CDS. Through an extensive consumer analysis. Zara should purchase the 450 workshops in Galicia to fully vertically integrate their supply chain. This market research. strategically segment their product lines. As demand becomes more variable. Thus. Zara has done an excellent job of thinking global. Brand Position: Thus far. Distribution Centers: In addition to their twenty company owned factories. Zara currently spends approximately 92. the waiting time does not increase (please refer to Exhibit 6). Zara would not have to ship out products. Conversely. This new system would encompass the old benefits of Zara¶s current information system. As we noted above.edu/jtatm/volume2issue1/articles/gereffi/gerefficompletea.pdf 4|P a ge . As capacity utilization begins to increase. and establish an efficient inventory management strategy. which would increase access to ³real time´ information and allow the design team to react faster to forthcoming trends and store inventory levels on both local and national levels. then redistribute them to stores. Overall.2%. a higher the capacity. For example. Zara has defined their broad consumer base as fashion conscious city dwellers with middle to middle-high income and is positioned as a trendy. Although this will increase advertising and research costs. In order to combat this problem. wait for them. This will aid Zara in achieving economies of scale because it will be much easier to understand their consumer. Although this process is labor intensive. which currently holds 29% of the total global apparel market5. This would streamline the supply chain. Once brand loyalty is established. we believe Zara should initially target females.3% to 1. Zara has encompassed several deficiencies regarding instilling communication between its various levels of retail outlets. ages 18-22. a new software could be used to automatically update the POS terminals after every sale. Zara¶s brand equity must be built around their core customer.
Even with the increase in globalization. because we believe Zara will be more successful in those markets. Although this might result in an increase in manufacturing costs (increased labor and facilities costs in Mexico). it is essential that Zara analyze the failures of their competitors. tariff costs. market price driven. Zara should enter into a longer lease in larger cities with higher purchasing power. which would decrease lead times and lower shipping costs. which aligns with the company¶s value proposition of fast fashion. this cost will be offset by reduced shipping. not the designers push drives the retail demand curve. Zara must ensure to keep their costs low and operating costs low through accurately forecasting demand and understanding the American consumer. instead of shipping from Spain which takes 24-48 hours. higher quick response. and focused on lean production.Mexico¶s close proximity to the United States. Because this distribution center is close to the United States. we believe Zara should segment their broad target market and offer product lines tailored to different market segments. GAP failed because it did not reposition itself as a fashion forward company. In addition. tastes still vary widely between countries. Thirdly. Mexico Distribution Center: With this expansion into the United States market. e-commerce site. The new distribution center can then quickly ship fashion forward items to cosmopolitan cities (New York City. This will yield more accurate data collection. Product Segmentation: Zara¶s production chain is heavily design driven. Los Angeles and Miami) within 24 hours. coupled with seven Zara stores. The company can use their parent brand presence and resources to help build their brand reputation. Zara develops 10-15% of the products that vary each season (fashion items) with little regard to each countries market trends. Zara should expand the capabilities of their smaller just in time distribution center in Mexico.000 designs per year. Zara has a design team of 200 employees which produce 12. Secondly. The consumers pull. Zara can initially sell their basic clothing lines then expand to offering more fashion forward lines. and a higher product turnover per store. the fashion forward product lines should be concentrated in cosmopolitan cities because they are located near major airports and are typically home to fashion forward. we recommend Zara sign a ten year lease for these company owned and joint venture stores in large cities (in order to maintain tight control of their brand). Currently. Nevertheless. Products can still be purchased centrally. This would expedite the product development process and lead to shorter throughput times in the Mexico distribution center. Social media provides customers with fast information. and competitor history) that will drive brand equity in the United States market: Firstly. Moreover. and directly shipped from Comidtel to Mexico for manufacturing and distribution instead of shipping through Spain. as mentioned above. 5|P a ge . Although not every product will be sold on their site. Inditex¶s 58%). Zara should heavily utilize social media when expanding to the United States market. and franchise stores enter into a five year lease in lower traffic areas. United States market trends. Inditex already has 184 stores. we have identified three key components (social media. We propose an addition of five designers to the design team. production scheduling. which will specifically focus on creating designs and analyzing trends for the United States market. They can also maintain tight control of production. trend conscious consumers with a greater purchasing power. Social media can generate powerful viral marketing buzz at a low cost. the product management team can increase the accuracy of forecasting the trends for the next season. and increased ability to forecast inventory levels as well as market trends. and manage distribution. Inditex¶s 48%) and high operating expenses (92% of their gross margin vs. GAP had a very high COGS (70% COGS vs. sales and product information. In terms of determining the locations of these new stores. In addition. Zara should strengthen their e-commerce site. directly control capacities.
91% 521.04% 1.20 19.20 19.50 69.97 85.24 2000 9.79 -9.26 18.70 276.35% 5.60 323.00 4.8 44.07% 1.63 63.24 12.Exhibit 1 Inditex Financial Analysis (millions of Euros) Inditex Net Profit Margin EBIT EBIT Growth Rate Asset Turnover ROA ROE Sales Growth Rate Inventory Inventory Growth Rate Inventory Turnover Accounts Receivables Receivable Turnover Accounts Payable Accounts Payable Turnover Days Sales Outstanding Days Sales of Inventory Days Payable Outstanding Cash Conversion Cycle 1999 10.89 145.5 27.54% 22.62 -5.92 90.90% 24.03% 5.73 426.60 20.5 26.48 0.90% 26.4 35.5 19.29% 353.07% 1.07% 22.30% 22.48% 245.10% 28.10 4.04% 188.62 61.94 6|P a ge .1 30.03 2001 10.17 18.25 13.02 17.30 4.92 87.53% 5.71 121.15 11.06% 410.47% 704.22 184.
60 22.85% 11.Exhibit 2 Zara Key Competitors Financial Analysis Inditex Gap H&M Benetton Operating Cost / Total 30.182.63% 43.40 1.93% Asset Turnover 1.722.91% 29.74 Financial Leverage 1.48% 37.02 1.25 ROE (net income / equity) 22.60% 7.05% 7|P a ge .75 2.33% Net profit Margin 10.52 1.74% Sales Net-Income per employee 12.88% -0.82 1.65 (54.27% 24.32 2.27 Current Ratio 1.25 1.48 3.83% 29.869.22) 17.06% 9.22% 27.46% -0.96 0.63 Gross Profit Margin 51.92% 51.
50 8|P a ge .4 0.70 0.78 0.64 0.7 12 n/a 2 2 0.35 0. 1998) Labor Cost EU Countries Germany Spain Italy Portugal UK Major Suppliers Turkey China India Egypt Other Major Markets US Japan 2 0.67 0.17 18 7 14 4 11 23 11 20 6 13 0.4 0.85 Value Added % Value Added 10 14 20 n/a 0.Exhibit 3 Average Labor Costs and Productivity in Apparel ($/hour.20 0.
Exhibit 4 Price of a T-Shirt Country Japan USA Canada Kuwait Saudi Arabia Bahrain Mexico Qatar Poland Denmark Lebanon UK Venezuela Cyprus Spain Relative Price Level 231% 209% 178% 171% 170% 170% 164% 160% 158% 153% 152% 151% 147% 136% 100% 9|P a ge .
Exhibit 5 European Market Analysis Lowest Distance from Spain Highest Distance from Spain Highest GNP per Capita Lowest GNP per Capita Highest Population Lowest Population Highest Total GNP Lowest Total GNP Highest # Total Outlets Lowest # Total Outlets Highest Total Sales / Person Lowest Total Sales / Person Highest Total Sales / Outlet Lowest Total Sales / Outlet Lowest Specialist Sales (Euros/sq. meter) Highest Specialist Sales of Apparel Sales (%) Lowest Specialist Sales of Apparel Sales (%) #1 Portugal Finland #2 France Sweden #3 Switzerland Greece Switzerland Denmark Sweden Poland Greece Spain Germany Ireland Germany Ireland Italy Austria Italy Portugal Austria Spain UK Finland UK Portugal Greece Finland Austria Finland UK Greece France Denmark France Finland Netherlands UK Switzerland Spain Finland Italy Portugal Germany Germany Ireland Switzerland Greece Italy UK Sweden Denmark Italy Portugal 10 | P a g e . meter) Highest Specialist Sales (Euros/sq.
Exhibit 6 Capacity Utilization vs. Waiting Time 11 | P a g e .
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