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Zara Owner Prepares for Expansion

by: Christopher Bjork, The Wall Street Journal
Mar 20, 2014

Zara parent Inditex's CEO said the retailer will continue investing heavily. Shown, a distribution center near Madrid. Reuters

CABANILLAS DEL CAMPO—On dusty Spanish scrubland just outside Madrid, the world's largest fashion
retailer is laying bricks to support growth for the next decade.

Here, Inditex SA, owner of the "fast fashion" chain Zara, is spending €150 million ($209 million) on a new
logistics hub capable of distributing close to half a million garments daily to stores in 87 countries on five
continents. Made up of four gray warehouses, it will begin operating within months, bringing to 10 the number of
Inditex distribution centers in Spain.

Higher spending on distribution capacity, new stores and a makeover of older Zara stores curbed Inditex's
profits in the fourth quarter of last year, Chairman and Chief Executive Pablo Isla said during a news conference
Wednesday. Net profit fell to €703 million in that period from €708 million a year earlier, while sales rose 4.7%,
to €4.8 billion. Profit margins and sales outside the euro zone were also dented by the strengthening of the euro
against other currencies.

"It's been a year of heavy investment and job creation, which we will continue in 2014," Mr. Isla said.
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Pablo Isla at the new distribution hub in Cabanillas del Campo, Wednesday. Reuters

The Spanish retailer relies on these distribution hubs to distribute garments world-wide. They are a key element
in a sophisticated production chain that allows the company to take new designs from the drawing board to the
consumer in as little as two weeks, the fastest in the industry.

Inditex is spending €500 million on a logistics upgrade, including the Cabanillas hub, betting that fast fashion
has a long runway ahead in coming years as European consumers recover from the longest slump since World
War II. The investment should allow Inditex to keep opening an average of more than a store a day for years.

The Cabanillas hub will receive clothes from suppliers, sort them and send them out to stores around the world
twice a week. Inditex had 6,340 stores world-wide as of Jan. 31, up from 6,009 a year earlier and more than
twice as many as it had in 2007. The company plans to open as many as 500 new stores this year while closing
roughly 100 smaller ones.

The retailer is investing increasingly in larger stores. This year it plans to open new flagship stores in Los
Angeles, Miami and Hong Kong and one in New York's financial district, Mr.Isla said. It is expanding its online
store presence, which by next year will reach 27 countries, with openings planned in South Korea and Mexico.

Inditex's sales have grown 12% in the past six weeks measured in constant currencies. This has reassured
investors, who in previous months had bid down Inditex's shares amid concerns of slowing expansion. Inditex's
shares were the best performer in Spain Wednesday, rising 4.9% to €108.10.

Sales in Spain rose 3% in the second half of last year, reversing a similar-size drop during the previous six
months and paralleling the country's emergence from a two-year recession, Mr. Isla said.

The company said it plans to raise its 2013 dividend by 10% to €2.42 a share, more than expected by analysts.
That translates into a record payday for Inditex's founder, Amancio Ortega, the billionaire who controls more
than half of the company's shares. He will take home almost €900 million.

For the full year, Inditex reported net profit of €2.38 billion, up from €2.36 billion a year earlier. Annual sales
rose 4.9% to €16.72 billion.
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QUESTIONS:

1. (Introductory) What makes Zara a leader among similar retailers?

2. (Introductory) Look up Zara on the internet to determine more about their distribution process. Name at least
3 methods that Zara uses to stay ahead of their competition. For each of these strategies, explain how the
operation must be structured to enable this performance.

3. (Introductory) How is Zara's production strategy focused on the customer's needs and wants? How might this
strategy be used in another industry? Describe.

4. (Advanced) Zara is a leader in maintaining a fast and responsive supply chain.

• Describe how Zara's production and supply chain strategies might be utilized within your company to
improve performance.
• Describe the production and supply chain measures which will focus the performance of the operation on
your customers' needs and desires.
5. (Advanced) The article highlights how a company can utilize productive operations and a lean supply chain to
be competitive.
• What operational and supply chain changes must occur at your company to provide this edge over
competition?
• Describe the transformation process required to accomplish these changes.

Reviewed By: Bradley Miller, University of Houston - Bauer College of Business