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W15431

WHAT BUSINESS IS ZARA IN?1

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Daniel J. Doiron wrote this case solely to provide material for class discussion. The author does not intend to illustrate either
effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the

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permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.

Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-09-24

What would 2016 have in store for Inditex and its flagship brand Zara with its “fast fashion” business
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model? It had taken years for new competitors to build business models that could effectively compete
with Zara’s approach.2

Many would recall the early deference many had towards Zara and its counter-intuitive business model.
Why would anyone invest in a fashion manufacturer and retailer who produced their clothes in the high-
cost labour market of Spain (versus Asia), spent very little on advertising, ostensibly overspent on
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positioning high-end stores in chic retail districts across Europe, carried substantially less inventory than
competitors, manufactured clothes that were, arguably, of a lesser quality and finally, charged 15 per cent
less at the cash register. By all accounts, this approach was viewed as a formula for disaster in the highly
competitive retail fashion industry.3

At the time, most observers were just not forward thinking enough to see the value in Zara’s approach.
And, over time, Inditex took great pride in proving them wrong. By 2014, Zara was, by far, the number
one fashion retailer in the world by many measures.4 It really was its unique business model that enabled
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this astounding success.

Inditex, however, could not dwell on past successes, as the future was full of significant challenges
associated with the many new upstart and copycat competitors who had infiltrated the market. These new
firms would, more than likely, also enjoy a good degree of success. Disruptive innovations, such as Zara’s
business model, inevitably were copied. Examples of how industries evolved around disruptive business
models included Southwest Airlines leading the discount airline industry and Wal-Mart dominating the
discount department store industry.
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Perhaps it was time for Inditex to reinvent the industry business model, once again.

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THE EARLY YEARS

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In 1963, when Amancio Ortega Gaona started his small dressmaking firm in La Coruña, Spain, at the
tender age of 16,5 he never dreamed it would lead to the world’s largest retail fashion empire. Nor did he
aspire to become the fourth richest person in the world.6 What he did come to understand over the next
twelve years was that textile manufacturing was a very risky, often frustrating, business when you were

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one step removed from your customers. This was especially true in the fast changing women’s fashion
segment of the market. So, in 1975, he opened up his first Zara store in the centre of La Coruña, Spain, a
town of 246,000 people and was driven by the overriding principle that the key to success as a fashion
retailer was to link fashion design to manufacturing and distribution in a way that allowed for rapid
response to the finicky, and often changing, needs of the customers. This was the sole foundation for the
creation and growth of Zara. It still is. Early success spurred the opening of nine new stores in Spain’s
largest cities over the next eight years.7

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Ortega also learned that to be successful he would have to take advantage of the intelligence and trust the
judgment of his employees throughout his company.8 In other words, a top down decision-making model,
as it related to new product design and distribution, would be counterproductive to his overriding notion
of reacting quickly to his customers’ needs. Thus, he put critical processes of product design,
manufacturing and distribution decisions in the hands of his employees across the company.

It was the combined approach of manufacturing new clothes as quickly as possible in response to
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customers’ needs and desires while adopting a decentralized decision-making process that allowed Zara
to thrive and grow in the ultracompetitive retail fashion industry. Over the next 17 years following the
launch of Zara in 1975, Ortega opened more than 1,000 new stores, culminating in an initial public
offering on May 23, 2001. The funds raised through this offering would provide the fuel for a tremendous
evolution that would see Inditex grow to operate 6,683 stores in 88 markets across eight brands, with
fiscal 2014 revenue of €18.1 billion9 and industry leading profit margins (see Exhibit 1).10
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THE GLOBAL FASHION RETAIL INDUSTRY

The global retail apparel industry had revenues of US$1.323 trillion in 2013, employing approximately
seventy-five million people. The industry was expected to grow at a pace of 5.1 per cent annually to reach
an estimated US$1.685 trillion by the end of 2018.11
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The industry was influenced by a number of factors, including changing demographics and urbanization
of the global population. A full 64.4 per cent of the Asian population would be urbanized by 2050, up
from 45 per cent in 2011. Likewise, Europe would see 82.2 per cent of its population living in urban
centres, 88.6 per cent in North America.12 According to the McKinsey & Company report on succeeding
in the future fashion market, “by 2020, a quarter of global wealth will be concentrated in just 60 mega-
cities, some of which will be larger than countries.”13 With the global population predicted to grow to
over nine billion people by 2050, from the 2014 level of seven billion,14 it would seem the industry was
on a trajectory for massive growth. This, tied to a growing middle class in developing nations, like China
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and India, could lead to a substantive increase in spending on fashion clothing. In 2010, the Brookings
Institute predicted that by 2021 “on present trends, there could be more than two billion Asians in middle
class households, [with] China alone [accounting for] over 670 million middle class consumers, compared
with only perhaps 150 million today.”15 Middle class spending was projected to rise from US$21 trillion
today to US$51 trillion in 2030.16 This would surely fuel the retail fashion apparel industry for years to
come (see Exhibits 2 and 3).

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The women’s apparel market was predicted to grow by 4.8 per cent annually from 2010 to 2025,

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outpacing the previous growth of 3.3 per cent for the six years prior.17 Lu et al. stated that “some 80 per
cent of top growth cities for total apparel sales by 2025 will be in emerging markets.” They went on to
say that these cities would enlarge the world apparel markets by an additional US$100 billion over this
time period.18 Emerging markets at that time would represent 55 per cent of mid-market women’s apparel
sales (see Exhibit 4).

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NDP Group suggested that in 2013 the U.S. women’s apparel business alone reached US$116.4 billion, a
4 per cent increase over 2012. Online purchases were on a fast growth trajectory as well, representing 15
per cent of women’s apparel sales in the United States, up an astounding 17 per cent over 2012.19

Trends and challenges in this market were many. Responsible sourcing, including greater visibility across
the entire supply chain, topped the list. Tragic events, like the blaze at the Tazreen garment factory in
Bangladesh in November of 2012,20 had heightened the need for textile manufacturers and retailers to

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strengthen their supply chains to ensure fair trade, safe work environments, living wages, social
commitment and responsible resource development.

Industry growth opportunities, specifically in developed countries, included the plus-size categories. This
was a US$17.5 billion market in the 12 months ending April 2014 in the United States, up 5 per cent over
the previous year,21 and was a direct reflection of the obesity epidemic under way in the developed world
where seven of 10 Americans were now overweight.22
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The apparel industry moved hand-in-hand with fluctuations in the global economy, with the demoralizing
recession of 2009 – 2010 having had a significant negative impact on the industry. According to a study
by comScore in 2011, there was a noteworthy decrease in consumer’s willingness to buy the brand they
want most, from 54 per cent in 2008 to 45 per cent in 2010.23 Price point clearly became a defining factor
during economic downturns, with branded retailers such as Gap and H&M (Hennes and Mauritz)
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suffering the most.

Other factors impacting the industry included global transport costs, linked to the price of oil. It would
seem, with oil prices near or below US$60 per barrel by mid-2015, these costs were likely on a downward
swing. Technological innovation in textile manufacturing was having an impact on important metrics
within the industry beyond cost reduction. Mass customization, small batch manufacturing and time to
market were becoming key risk management factors. These drove a deeper focus across the entire supply
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chain. New fabric innovation was also having a strong positive impact on the growth of the apparel
industry, specifically in the sportswear market.

Commodity prices could significantly impact the industry cost structure, and specifically cotton, which
represented approximately 36 per cent of the textile fibres market.24 In 2014, global cotton prices tumbled
by 20 cents per pound to an average price of US$1 per pound on lower demand,25 with total global
production at 116.7 million bales, down 5 per cent from the previous year.26

Additionally, the rapidly growing aging population of consumers over 60, referred to as a “demographic
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earthquake” in developed countries would become one of the fastest growing segments for consideration
along with their expenditures on clothing.27

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CUSTOMER BEHAVIOURS

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Perhaps the most significant factors driving change to the retail apparel industry were associated with
shifting customer behaviours. Customer buying behaviours and patterns could directly influence a firm’s
ability to succeed and in many cases, these behaviours would determine a firm’s approach, and indeed the
resulting industry business model. The urban retail fashion market, where Zara played,28 was inextricably

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tied to two key customer behaviours:

Hard to Predict and Influence

Fashion apparel customers were a fickle group that could be extremely hard to predict and influence.
They could be easily swayed by unpredictable factors, such as celebrity fashion, friends’ fashion choices
or the need to differentiate themselves in a crowded urban environment. These variables made it

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extremely challenging to predict the next fashion hit and contributed to the single largest risk in retail
apparel: a “fashion miss.” In turn, fashion misses resulted in discounts and markdowns in order to make
room for new inventory. For example, in 2014, H&M had 24.2 per cent of their entire online offering on
discount, with close to 10 per cent discounted by 50 per cent or more.29 Studies have shown that specialty
apparel retailers could end up marking down from 30 to 40 per cent of their inventory by up to 60 per cent
on average.30 To mitigate this risk, many apparel retailers spent an exorbitant amount of money on
advertising, with a focus on building brand awareness and loyalty. And it worked — to a degree. For
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example, Gap spent US$637 million on advertising in 2013 on sales of US$16.148 billion; representing
3.9 per cent of sales or 10.1 per cent of gross profit.31 In the highly competitive fashion industry this could
be a defining driver of profitability.

Tastes Change Often

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Fashion cycles could also be notoriously short, especially in the urban womenswear segment. Trends
came and went, which drove fashion retailers to introduce new fashions more often and avoid
replenishing old items where old stock might necessitate potential discount. At H&M, upwards of 23.1
per cent of its current range of online offerings had been replenished;32 this impacted both their inventory
turnover ratios and ability to sell items at or near full price. Introducing new fashions frequently could
have the positive desired effect of enticing customers back to the store more often. An average customer
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would visit the typical fashion store(s) four times per year, while some fashion retailers, such as Zara,
enticed their customers back as many as 17 times per year with fresh fashion choices appearing more
often.33 A fashion retailer’s ability to react quickly to shifting fashion preferences could be a defining
success factor.

INDITEX AND ZARA — A UNIQUE APPROACH

Inditex was the public holding company for Zara and seven other retail brands, including Bershka,
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Massimo Dutti, Pull & Bear and Stradivarius. After 23 years of diversifying into these new categories,
Zara still represented the vast majority of the sales (and profitability34) of Inditex. In 2014, Zara
represented 64 per cent of Inditex’s revenue across 2,085 stores35 (see Exhibits 5 and 6) and a full 66.4
per cent of its EBIT.36

Inditex had been on a tear for the last decade. It had taken its sales from €5.67 billion in 200437 to €18.1
billion in fiscal 2014.38 This had been accomplished through a focused geographic expansion effort that had

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seen the company open, on average, 1.22 stores per day across 88 countries.39 Its recent focus for

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geographic growth was primarily Asia, where 450 stores in China alone where opened by the end of 2014.40

The company’s approach was very different from its traditional competitors. For instance, it was highly
vertically integrated, and unlike all its competitors, it manufactured the majority of its own clothes. In
fact, it manufactured about half of its own products in what most would consider, the high cost labour

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markets of Spain, Portugal or other nearby countries, relying less on Third World outsourced
manufacturing.41 Its competitors, by contrast, outsourced the vast majority of their production.

Unique Capabilities

Inditex had built a number of defining competencies, which its competitors did not possess. The first was

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associated with time to market. The company could move from a sketch of an idea to a product ready for
shipment in as little as two weeks.42 This was precisely why Zara had been dubbed as the leading
champion of the relatively new “fast fashion” industry. However, Pablo Isla, chief executive officer
(CEO) and chairman of Inditex, did not endorse this term. “I don’t identify with the concept of fast
fashion,” he said. “We are not about selling a million striped T-shirts as fast as possible.” He went on to
say that the success was “based not on speed but on accuracy, on understanding exactly what customers
want, week by week, and store by store.”43
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This highlights a key capability at Inditex — its ability to identify customer needs and desires and
translate these critical inputs back to the design teams in La Coruña. Zara achieved this through employee
groups dubbed “commercials.” There were three essential levels of commercials that worked closely with
one another at Zara. The design team commercials, which typically consisted of four employees — two
product managers and two designers were responsible for designs in a specific category, such as women’s
sport clothing. They were given all the decision authority required to succeed, including independence in
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setting designs, ordering fabric, manufacturing quantities and pricing. These teams decided what Zara
would make and sell. In fact, they introduced an astounding 18,000 new individual designs for Zara stores
each year. These teams were supported by regional commercials responsible for liaising with store
managers (and customers) across certain geographic footprints. Their overriding responsibility was to
identify the clothing styles that would sell in their markets. They did this through observing what people
were wearing (and importantly wanted to wear), along with the insights (and orders) coming from the
store managers.44
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Store managers were the third level of commercials. Their primary responsibility was to select the
inventory they believed would sell in their stores, accomplished through talking with and observing
customers. They had to also be up to the minute and intimate with their store inventory levels and sales.
They ordered new inventory within each category in the store twice a week. For many years Zara chose to
not implement a store-wide inventory management system, requiring store managers to count inventory
by hand. This, among other things, forced the store managers onto the floor and, by default, to interact
with customers. The insights gained from this interaction helped managers purchase inventory for their
store that was more relevant and compelling for their customers. However, store managers would not
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always receive the items they ordered. At times, the regional commercials would place new items in
stores to “see how they would sell.” They usually made these new clothes in small batches to avoid any
significant markdowns in the event they were not popular.45 This approach drove fashion failure rates for
Zara’s new products that were as low as 1 per cent, which was considerably lower than the industry
average of 10 per cent.46

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Commercials were encouraged to remain vigilant at introducing new items weekly and not restocking old

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items, giving Zara a replenishment rate of only 2.8 per cent.47 This led to two unique customer behaviours.
Firstly, Zara customers would visit stores often (17 times per year48) as there were always new fashions to
be had. Secondly, when customers found something they liked, they were motivated to avoid deferring their
decision to purchase, as Zara had created a sense of scarcity; it simply would not be there next time. These
two behaviours drove Zara to an industry-leading inventory turnover ratio of 29.58 in 2013.49

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These three levels of commercial teams were the heart of Zara’s success, and they ultimately represented
how Zara delivered what customers wanted and when they wanted it, as CEO Pablo Isla had implied.

A core capability at Zara related to its ability to efficiently manufacture clothes in small batches. Not only
could it move a new item from concept to market very quickly, it was able to accomplish this in small
batches permitting it to test the market with very little risk.50 The challenges of having achieved this level

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of mass customization should not to be underestimated. Inditex invested heavily in automation within its
manufacturing plants, tied to effective management of its entire supply chain, with a focus on breaking
down any bottlenecks in the manufacturing process. For instance, it operated a local dye and finishing
plant close to its factories in La Coruña and did most of its own pre-cutting prior to delivering product to
its sewing subcontractors. This was not without cost implications; its clothes typically cost 20 per cent
more to manufacture than its competitors, who manufactured in vast quantities in third world countries.51

Distribution was centrally managed through a large distribution centre located in La Coruña. All clothes
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sold by Zara, even those manufactured in Portugal or Morocco (or China for that matter), were sent to
Spain for distribution. Bloomberg Business reported:

Beyond the distribution center are the 11 Zara-owned factories. Every shirt, sweater and dress
made in them is sent directly to the distribution centre via an automated underground monorail.
There are 124 miles of track. Across the surrounding Galicia region are subcontractors, some of
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whom have worked for the company since Amancio Ortega founded it in 1975.”52

This enabled Zara to ship new inventory to every store in its network at least twice a week. Orders
typically arrived two days after the store placed their request.

Additionally, Zara looked to manage its production costs by focusing on fabricating apparel that was
designed to be worn only a small number of times, driving lower cost of materials. This did not seem to
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be an issue with its customers who enjoyed changing their fashions often.

Marketing

The foundation of Zara’s marketing strategy had always been its stores. New stores were opened at a
dizzying pace; 1.22 a day over the past decade.53 The company took store location, design and layout very
seriously. Window front designs were viewed as its pre-eminent form of advertising. In fact, Zara had a
“full team of window front designers who constantly travel around to international locations to understand
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the culture and customers of each store. They then create the window design that is unique to the store,
and all the props and details are then shipped to each store to be put up under strict guidelines.”54 Zara
traditionally had spent lavishly on its store locations. In fact, it completely revamped each store every four
to five years, with minor tweaks in-between. Its stores were characterized by its high-end look and feel,
along with relative low levels of inventory. This was somewhat anti-intuitive in relation to its competitors
who liked to fill their stores with inventory in an attempt to optimize the revenue of their retail space

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investment. On the contrary, Zara had always been focused on making the shopping experience as

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pleasant as possible for its customers, enticing them to come back more often.

There were 2,085 Zara stores in 88 markets at the end of 2014. These stores were primarily situated in the
high-end retail sectors of major urban centres. Inditex recently announced the purchase of a 4,400 square
metre commercial property in the heart of New York’s SoHo district for an astonishing US$280 million.

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They also announced plans to open up a 2,800 square metre store in the World Trade Center.

Zara spent very little on advertising; only advertising (some) new store openings and twice yearly sales
events. It spent purportedly 0.3 per cent of its revenue on advertising, versus the industry standard of
between 3 per cent and 5 per cent. There was no advertising line item in its financial reports as this
category had not amounted to a material expenditure. Marketing Magazine’s Assistant Editor Belle Kwan
said it best:

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No four-page spread in a glossy publication, no gaudy red posters with tacky WordArt bubbles
screaming discounts, no half-naked B-grade celebrity with perfect hair prancing across a billboard.

This is a story about the brand that made it sans advertising, sans endorsement and sans almost all
forms of mainstream marketing. And when we say “made it,” we mean a loyal global following
across 78 countries, and a name that draws squeals of excitement from consumers and nods of
respect from industry experts.55
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Zara typically priced its clothes an average of 15 per cent lower than its competitors.56 It had been
Amancio Ortega’s goal from his humble beginnings in La Coruña in 1975 to provide good quality fashion
clothing at affordable prices.57 The difference was Zara did not look like any discount fashion store in the
marketplace. As Derek Thompson of The Atlantic put it, Zara liked to “cozy up to the most famous brands
in the world to sing their luxury ambitions even as they profit off a brilliant, cheap, short supply chain that
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delivers similar fashion at a much lower price.”58 Zara enjoyed placing its stores close to luxury brands,
such as Prada and Gucci, that, of course, tried to keep as far from Zara as possible.

COMPETING INDUSTRY BUSINESS MODEL

Traditionally, industry titans, such as Gap introduced the majority of their new clothing launches twice a
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year during the spring and fall fashion seasons. These introductions were preceded by up to nine months
of centralized planning, production and marketing. New line items were revealed to the market on fashion
runways and vetted through a team of elite fashion designers and corporate executives. Small runs were
made at Third World manufacturers, shipped to centralized facilities, vetted once more, changed and
finalized. At this point, large orders were placed with these manufacturers for production at ultra-low per
unit cost. Orders were shipped and stored in regional warehouse facilities relatively close to retail outlets.
Retail point-of-sale strategies were drawn up and store layouts designed. Inventory levels, determined
centrally, were shipped to stores. Subsequently, the advertising and selling began in full force to push
product offerings to prospective customers.59
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This approach carried the risk of fashion misses, which traditionally, were more than offset by the super
low costs of manufacturing offshore. This led to industry-standard gross profit margins of approximately
35 per cent in 2014.60 Growth was accomplished through both geographic expansion and brand
expansion. For example, Gap grew from 1,640 stores in 200461 to a peak of 3,700 in 2014.62 They also
grew across multiple brands representing different market niches, including Gap, Banana Republic, Old

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Navy, Piperlime (an online boutique), Athletica and Intermix.63 It was not uncommon to have multiple

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Gap-branded stores in one mall or shopping district.

INNOVATIVE NEW FASHION COMPETITORS

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As with any successful new business model that changed an industry, inevitably, a host of new
competitors emerged, who presented either variations of the model or totally new approaches. Zara was
experiencing this first hand with the emergence of competitors such as Uniqlo and Topshop.

Uniqlo was a Japanese firm that had been labelled a technology company, not a fashion company, with a
sole focus on revolutionary fashion changes through technology innovation around the products, not the
fashion. Kensuke Suwa, Uniqlo’s director of global marketing, explained its approach:

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Between fashion and sports is a new area. There are a lot of fashion trends going on, but there is no
true innovation that impacts your actual life. How to make your life better could be in the middle
between fashion and sports. For example, athletes wear technically sophisticated uniforms; some
of the essence of that could result in better clothes that would change clothing itself, instead of just
following fashion trends.64

This approach helped Uniqlo quickly grow to 1,574 stores65 with sales forecast of US$13.7 billion in their
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2014 fiscal year (ending August 31, 2015).66 For 2014 Uniqlo was the largest apparel chain in Asia, with
an eye to becoming number one in the world and a near-term goal of expanding in the United States.

Topshop, a U.K.-based clothing retailer, had been trying to beat Zara at its own game and could be aptly
defined as “faster fashion with a bite.” It boasted more than 300 new products per week, versus Zara’s
200.67 Its market positioning was slightly different than Zara, with pricier clothes that were arguably
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higher in quality. “With more than 300 stores across the U.K., over 250,000 shoppers visiting the frankly
jaw-dropping Oxford Circus flagship every week, and more than 140 stores in international territories, it’s
no exaggeration to say the Topshop is a shopping institution.”68 It had a presence in 31 countries,69 across
Europe, Asia and Latin America, with an eye to expansion in the U.S. It had a thriving online business
that attracted 1.9 million users per week.70 Topshop was a great example of a firm that had taken Zara’s
business model, modified it and created a unique value proposition in the market.
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NEXT STEPS

The competitive landscape was changing. The fast fashion world Zara had invented and dominated was
changing. Perhaps it was time to reposition how Zara and the other Inditex brands competed in this
changing world. Zara had changed the retail fashion industry once, could it do it again?
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EXHIBIT 1: INDITEX 2012 / 2014 FINANCIAL RESULTS

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INCOME STATEMENT

As of:
(In Millions of U.S. dollars) January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

Revenues 15,505 17,925 18,800 20,365

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TOTAL REVENUES 15,505 17,925 18,800 20,365
Less Cost Of Goods Sold 6,309 7,213 7,646 8,484
GROSS PROFIT 9,196 10,712 11,154 11,881
Selling General & Admin Expenses, Total 5,530 6,300 6,743 7,259
Depreciation & Amortization, Total 827 895 954 1,016
Other Operating Expenses 4 13 (2) 9
OTHER OPERATING EXPENSES, TOTAL 6,361 7,208 7,695 8,284
OPERATING INCOME 2,835 3,504 3,459 3,597

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Interest Expense (4) (12) (13) (11)
Interest And Investment Income 34 27 25 29
NET INTEREST EXPENSE 30 15 12 18
Income (Loss) On Equity Investments 0 0 0 36
Currency Exchange Gains (Loss) 23 1 (33) (2)
Other Non-Operating Income (Expenses) (12) 0 0 0
EBT, EXCLUDING UNUSUAL ITEMS 2,876 3,520 3,438 3,649
Other Unusual Items, Total 0 0 (8) (2)
EBT, INCLUDING UNUSUAL ITEMS 2,876 3,520 3,430 3,647
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Income Tax Expense 690 859 754 826
Minority Interest In Earnings (14) (7) (5) (11)
Earnings From Continuing Operations 2,172 2,654 2,671 2,810
NET INCOME 2,172 2,654 2,671 2,810
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EXHIBIT 1 (CONTINUED)

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BALANCE SHEET

(In Millions of U.S. dollars) As of:

ASSETS January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

Cash And Equivalents 3,898 4,321 4,325 4,270

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Short-Term Investments 0 293 239 250
TOTAL CASH AND SHORT TERM INVESTMENTS 3,898 4,614 4,564 4,520
Accounts Receivable 243 334 346 403
Other Receivables 374 685 678 642
TOTAL RECEIVABLES 617 1,019 1,024 1,045
Inventory 1,436 1,778 1,885 2,091
Other Current Assets 163 113 132 333
TOTAL CURRENT ASSETS 6,114 7,524 7,605 7,989

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Gross Property Plant And Equipment 8,651 9,714 10,559 12,074
Accumulated Depreciation (4,083) (4,472) (4,783) (5,282)
NET PROPERTY PLANT AND EQUIPMENT 4,568 5,242 5,776 6,792
Goodwill 245 233 229 223
Long-Term Investments 11 5 23 170
Deferred Tax Assets, Long Term 401 430 596 723
Other Intangibles 691 689 722 769
Other Long-Term Assets 293 370 515 623
TOTAL ASSETS 12,323 14,493 15,466 17,289
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LIABILITIES & EQUITY
Accounts Payable 2,067 2,518 2,665 2,791
Accrued Expenses 598 901 839 825
Current Portion Of Long-Term Debt/Capital Lease 1 3 3 9
Current Portion Of Capital Lease Obligations 0 0 0 4
Current Income Taxes Payable 229 186 100 169
tC

Other Current Liabilities, Total 144 310 284 417

TOTAL CURRENT LIABILITIES 3,039 3,918 3,891 4,215
Long-Term Debt 1 4 2 0
Capital Leases 1 1 1 3
Minority Interest 46 40 36 43
Pension & Other Post-Retirement Benefits 43 25 36 69
Deferred Tax Liability Non-Current 205 216 244 271
Other Non-Current Liabilities 651 793 859 960
No

TOTAL LIABILITIES 3,986 4,997 5,069 5,561

Common Stock 105 105 105 105
Additional Paid In Capital 23 23 23 23
Retained Earnings 8,161 9,489 10,586 11,577
Treasury Stock 0 0 (52) (81)
Comprehensive Income And Other 48 (121) (265) 104
TOTAL EQUITY 8,337 9,496 10,397 11,728
TOTAL LIABILITIES AND EQUITY 12,323 14,493 15,466 17,289
Do

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 Page 11 9B15M088

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EXHIBIT 1 (CONTINUED)

os
STATEMENT OF CASH FLOWS

(In Millions of U.S. dollars) As of:

January 31, 2012 January 31, 2013 January 31, 2014 January 31, 2015

NET INCOME 2,172 2,654 2,671 2,810

rP
Depreciation & Amortization 657 746 774 817
Amortization Of Goodwill And Intangible Assets 105 99 102 116
DEPRECIATION & AMORTIZATION, TOTAL 762 845 876 933
Amortization Of Deferred Charges 0 12 18 16
(Gain) Loss From Sale Of Asset 0 0 41 46
Asset Writedown & Restructuring Costs 45 89 13 8
Other Operating Activities (59) 39 (318) (33)

yo
(Income) Loss On Equity Investments 0 0 0 (35)
Change In Accounts Receivable (88) (319) 28 (74)
Change In Inventories (62) (414) (157) (269)
Change In Accounts Payable (74) 582 (5) 231
CASH FROM OPERATIONS 2,696 3,489 3,167 3,633
Capital Expenditure (1,191) (1,313) (1,230) (1,795)
Cash Acquisitions (116) 0 12 0
Sale (Purchase) Of Intangible Assets (134) (135) (147) (184)
op
Investments In Marketable & Equity Securities (14) (287) 34 34
CASH FROM INVESTING (1,456) (1,735) (1,331) (1,944)
Short-Term Debt Issued 0 1 0 7
Long-Term Debt Issued 0 4 0 2
TOTAL DEBT ISSUED 0 5 0 9
Short Term Debt Repaid (16) 0 (1) 0
Long Term Debt Repaid (26) 0 0 0
tC

TOTAL DEBT REPAID (41) 5 (1) 9

Repurchase Of Common Stock 0 0 (51) (30)
Common Dividends Paid (961) (1,098) (1,304) (1,660)
TOTAL DIVIDEND PAID (961) (1,098) (1,355) (1,689)
Special Dividend Paid (137) (137) (206) 0
Other Financing Activities (7) (9) (8) (4)
CASH FROM FINANCING (1,146) (1,239) (1,570) (1,684)
No

Foreign Exchange Rate Adjustments 16 (20) (52) 88

NET CHANGE IN CASH 110 495 214 92

Source: Bloomberg L.P., “Industria De Diseno Textil (ITX:ContinuousMarket (SIBE),” Bloomberg Business, August 31, 2015,
www.bloomberg.com/research/stocks/financials/financials.asp?ticker=ITX:SM&dataset=cashFlow&period=A&currency=US
%20Dollar, accessed August 31, 2015.
Do

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 Page 12 9B15M088

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EXHIBIT 2: THE GROWING EMERGING ECONOMY AND MIDDLE CLASS HOUSEHOLD SPEND

os
rP
Copyright: @ McKinsey & Company.
yo
Source: Richard Dobbs, Jaana Remes, James Manyika, Charles Roxburgh, Sven Smit and Fabian Schaer, Urban World:
op
Cities and the Rise of the Consuming Class, McKinsey & Company, June 2012,
https://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Urbanization/Urban%20worl
d%20-%20Rise%20of%20the%20consuming%20class/MGI_Urban_world_Rise_of_the_consuming_class_Full_report.ashx,
accessed February 18, 2015.

EXHIBIT 3: INDITEX GROWTH DATA

tC
No
Do

Copyright: @ Inditex.
Source: Inditex, Inditex Annual Report 2014, Inditex, June 2015,
www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36-
6458f55ac099, accessed July 14, 2015.

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 Page 13 9B15M088

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EXHIBIT 4: GLOBAL WOMEN’S APPAREL MARKET GROWTH

os
rP
Copyright: @ McKinsey & Company.
yo
Source: McKinsey & Company, Unleashing Fashion Growth City by City, McKinsey & Company September 2014,
www.mckinsey.com/search.aspx?q=unleashing+fashion+growth+city+by+city, accessed January 22, 2015.
op
EXHIBIT 5: INDITEX BRANDS AT A GLANCE
Net Sales Number of Net Openings Markets Online
(millions of €) Stores in 2014 Served Markets
Zara 11,594 2,085 94 88 26
tC

Pull & Bear 1,284 898 24 65 21

Massimo Dutti 1,413 706 41 68 24
Bershka 1,664 1,006 52 68 17
Stradivarius 1,130 910 52 59 17
Oysho 416 575 26 40 15
Zara Home 548 437 43 48 23
Uterque 68 66 -10 12 14

Copyright: @ Inditex.
No

Source: Inditex 2013 Annual Report, Inditex, June 2014, www.inditex.com/documents/10279/18789/Inditex_Group_

Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-45822932ff72, accessed February 2, 2015.

EXHIBIT 6: ZARA INDICATORS

Do

Copyright: @ Inditex.
Source: Inditex, Inditex 2013 Annual Report, Inditex, June 2014, www.inditex.com/documents/10279/18789/Inditex_Group_
Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-45822932ff72, accessed February 2, 2015.

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 Page 14 9B15M088

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ENDNOTES

os
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Inditex or any of its employees.
2
Most would agree that the term fast fashion represented only a part of Zara’s core business model, not the entire
foundation of their success.
3
Devangshu Dutta, “Retail @ the Speed of Fashion,” Third Eyesight, 2002,
http://thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf, p. 3, accessed August 31, 2015.

rP
4
Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” The Telegraph, October 20 2014,
www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion-
retailer.html, accessed August 31, 2015.
5
Vivienne Walt, “Meet Amancio Ortega: The Third-Richest Man in the World,” Fortune, January 8, 2003,
http://fortune.com/2013/01/08/meet-amancio-ortega-the-third-richest-man-in-the-world/, accessed January 20, 2015.
6
Forbes Media LLC, “The World’s Billionaires,” Forbes, January 20, 2015, www.forbes.com/profile/amancio-ortega/,
accessed January 20, 2015.
7
Inditex, “Our History,” www.inditex.com/our_group/our_history, accessed January 20, 2015.
8
Andrew Mcfee, Vincent Dessain and Anders Sjoman, “Zara: IT for Fast Fashion,” Harvard Business Publishing, Boston,

yo
MA, September 6, 2007, p. 3.
9
€1 = US$1.09843 as of July 31, 2015.
10
Inditex, Inditex Annual Report 2014, www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/
a8323597-3932-4357-9f36-6458f55ac099, accessed July 14, 2015.
11
MarketLine, Apparel Retail: Global Industry Guide, September 5, 2014, www.researchmoz.us/apparel-retail-global-
industry-guide-report.html, accessed January 22, 2015.
12
Krones AG, Annual Report for Krones AG 2013, p. 57, www.krones.com/en/investor_relations/krones-ag-annual-report-
2013.php, accessed January 21, 2015.
13
Carsten Keller, Karl-Hendrik Magnus, Saskia Hedrich, Patrick Nava and Thomas Tochtermann, “Succeeding in
op
Tomorrow’s Global Fashion Market,” McKinsey & Company, September 2014,
http://mckinseyonmarketingandsales.com/succeeding-in-tomorrows-global-fashion-market, accessed January 22, 2015.
14
Deere & Company, ”John Deere Committed to Those Linked to the Land — Strategy Overview,” December 2014, p. 19,
http://investor.deere.com/files/doc_presentations/Strategy-Presentation-Final-Web_v001_g81y92.pdf, accessed January 20,
2014.
15
Homi Kharas and Geoffrey Gertz, “The New Global Middle Class: A Cross-Over from West to East,” Wolfensohn Centre
for Development at Brookings, 2010, p. 2; Draft version of Chapter 2 in China’s Emerging Middle Class: Beyond Economic
Transformation, edited by Cheng Li, Brookings Institution Press, Washington, DC, 2010,
tC

www.brookings.edu/~/media/research/files/papers/2010/3/china%20middle%20class%20kharas/03_china_middle_class_kh
aras.pdf, accessed January 20, 2015.
16
Lily Kuo, “The World’s Middle Class Will Number 5 Billion by 2030,” Quartz, January 14, 2013, http://qz.com/43411/the-
worlds-middle-class-will-number-5-billion-by-2030/, accessed January 20, 2015.
17
Nathalie Remy, Jennifer Schmidt, Charlotte Werner and Maggie Lu, Unleashing Fashion Growth City by City, McKinsey &
Company, October 2013, p.2, www.mckinsey.com/search.aspx?q=unleashing+fashion+growth+city+by+city, accessed
January 20, 2015.
18
Nathalie Remy, Jennifer Schmidt, Charlotte Werner and Maggie Lu, “Fashion Sense: Apparel Companies Should Look to
Cities for Growth,” Forbes, April 23, 2013, www.forbes.com/sites/mckinsey/2013/04/23/fashion-sense-apparel-companies-
should-look-to-cities-for-growth/, accessed January 20, 2015.
No

19
The NDP Group, “The NDP Group Reports U.S. Women’s Apparel Market Grew 4 Per cent in 2013,” NPD Group, April
16, 2014, www.npd.com/wps/portal/npd/us/news/press-releases/the-npd-group-reports-us-womens-apparel-market-grew-4-
percent-in-2013/, accessed January 20, 2015.
20
The Economist, “A ‘Distinctly South Asian’ Tragedy,” December 6, 2012,
www.economist.com/blogs/banyan/2012/12/garment-factory-fires, accessed August 31, 2015.
21
NPD Group, “Sizing Up the Plus Sized Market: Segment Up 5 Per Cent, Reaching $17.5 Billion,”
https://www.npd.com/wps/portal/npd/us/news/press-releases/sizing-up-the-plus-sized-market-segment-up-5-percent-
reaching-17-billion/, accessed January 20, 2015.
22
Katie Little, “Outsize Growth, Underserved Market: Rent the Runway’s Plus-size Bet,” CNBC, September 29, 2013,
www.cnbc.com/id/101065567#, accessed January 20, 2015.
23
Robin Bowmer, “The Effects of the Recession on Brand Loyalty and ‘Buy Down’ Behaviour: 2011 Update,” IAB Europe,
Do

October 2011, p. 3, www.iabeurope.eu/files/3213/6852/2155/comscore20study20on20brand20purchasing.pdf, accessed

January 20, 2015.
24
Janet Bealer Rodie, “Fiber First — Eco-friendly Raw Material and Fiber Production Are the First Links in a Sustainable
Textile Manufacturing Chain,” Textile World, September/October 2011, www.textileworld.com/Issues/2011/September-
October/Features/Fiber_First, accessed January 22, 2015.
25
Inam Ahmed, “Textile Industry on a Rocky Road,” The Daily Star, August 24, 2014, www.thedailystar.net/textile-industry-
on-a-rocky-road-38398, accessed January 21, 2015.
26
James Johnson, Stephen MacDonald, Leslie Meyer, Bryan Norrington and Carol Skelly, “The World and United States
Cotton Outlook,” February 21, 2014, www.usda.gov/oce/forum/2014_Speeches/Cotton.pdf, accessed August 31, 2015.

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copyright. Permissions@hbsp.harvard.edu or 617.783.7860
 Page 15 9B15M088

t
os
27
A. T. Kearney, “Understanding the Needs and Consequences of the Ageing Consumer,” March 2013,
https://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/understanding-the-needs-and-consequences-
of-the-ageing-consumer/10192, accessed August 31, 2015.
28
Zara defines their target customers as “young, price conscious and highly sensitive to the latest fashion trends.” Arif
Harbott, “Analysing Zara’s Business Model,” The Digital Executive, March 3, 2011, www.harbott.com/2011/03/03/analysing-
zaras-business-model/, accessed August 31, 2015.
29
Katie Smith, “Zara Versus H&M — Who’s in the Global Lead?” Web blog post, EDITD, April 15, 2014,

rP
https://editd.com/blog/2014/04/zara-vs-hm-whos-in-the-global-lead/, accessed January 22, 2015.
30
Doug Hardman, Simon Harper and Ashok Notaney, “Keeping Inventory — and Profits — Off the Discount Rack,” 2008, p.
2, www.strategyand.pwc.com/media/file/Keeping_Inventory_and_Profits_Off_the_Discount_Rack.pdf, accessed January 20,
2015.
31
Gap Inc., “Embracing the New Customer Reality — 2013 Annual Report,” pp. 60 and 69,
www.gapinc.com/content/attachments/gapinc/GPS_AR13.pdf, accessed January 20, 2015.
32
Smith, op. cit.
33
Adrian Swinscoe, December 21, 2011, “Customer Focus in Action: Why ZARA Stores Became a Customer Magnet,”
www.adrianswinscoe.com/customer-focus-in-action-why-zara-stores-became-a-customer-magnet/, accessed August 31,

yo
2015.
34
In 2013, Zara represented €2.089 billion of Inditex’s €3.071 billion in earnings before interest and taxes. Inditex, “Inditex
FY2013 Results Presentation,” March 19, 2014, p. 18,
www.inditex.com/documents/10279/98254/Results+FY2013.pdf/8c54eb89-6319-446c-ac34-9a78d8ccb2e3, accessed
January 20, 2015.
35
2,085 of 6,683 stores in total, representing 31.20 per cent of Inditex stores. “Inditex 2013 Annual Report,” Inditex, June
2014, www.inditex.com/documents/10279/18789/Inditex_Group_ Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-
45822932ff72, accessed February 2, 2015.
36
Inditex, “Full Year 2014 Results Presentation,” March 13, 2015, p. 25,
op
https://www.inditex.com/documents/10279/144578/FY+Results+2014.pdf/71be7a85-1b3c-421f-af83-c312ae0c2043,
accessed June 20, 2015.
37
Inditex, “Annual Report 2004,” June 2005, p. 13,
www.inditex.com/documents/10279/18789/Grupo_INDITEX_informe_anual04.pdf/b8b53824-f2b7-4a2c-9a2f-8b0877cdf5b4,
accessed January 20, 2015.
38
Inditex, “Annual Report 2014,” March 2015, p. 2,
www.inditex.com/documents/10279/18789/Inditex_Annual_Report_2014_web.pdf/a8323597-3932-4357-9f36-
6458f55ac099, accessed August 31, 2015.
39
tC

Calculated as follows: 6,683 stores to end 2014 (“Inditex Annual Report 2014”), compared with 2,244 in 2004 (“Inditex
Annual Report 2004”) across 3,653 days.
40
Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” The Telegraph, October 20, 2014,
www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion-
retailer.html, accessed January 23, 2015.
41
Susan Berfield and Manual Baigorri, “Zara’s Fast-Fashion Edge,” November 14, 2013,
www.bloomberg.com/bw/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge, accessed August 31, 2015.
42
Stephanie Huang, “Why Fashion Is Getting Faster: Zara’s Two-Week Fashion Cycle,”
www.thescrippsvoice.com/archives/2013/11/08/why-fashion-is-getting-faster-zaras-two-week-fashion-cycle, accessed
August 31, 2015.
No

43
Tobias Buck, “Fashion: A Better Business Model,” Financial Times, June 18, 2014, www.ft.com/intl/cms/s/2/a7008958-
f2f3-11e3-a3f8-00144feabdc0.html#slide0, accessed January 22, 2015.
44
Graham Ruddick, “How Zara Became the World’s Biggest Fashion Retailer,” October 20, 2014,
www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11172562/How-Inditex-became-the-worlds-biggest-fashion-
retailer.html, accessed August 31, 2015.
45
Kerry Capell, “Zara Thrives by Breaking All the Rules,” October 8, 2008, www.bloomberg.com/bw/stories/2008-10-
08/zara-thrives-by-breaking-all-the-rules, accessed August 31, 2015.
46
Andrew Pearson, “The Story of Zara — the Speeding Bullet,” Unique Business Strategies, p. 2,
www.uniquebusinessstrategies.co.uk/pdfs/case%20studies/zarathespeedingbullet.pdf, accessed January 22, 2015.
47
Katie Smith, “Zara vs H&M — Who’s in the Global Lead?” April 15, 2014, https://editd.com/blog/2014/04/zara-vs-hm-
whos-in-the-global-lead/, accessed August 31, 2015.
Do

48
Pearson, op. cit., p. 1.
49
Hokey Min, “Zara’s Rapid Rise as a Cool Supply Chain Icon,” June 25, 2015,
www.ftpress.com/articles/article.aspx?p=2359420&seqNum=12, accessed August 31, 2015.
50
Gemma Goldfingle, “Inside Inditex: How Zara Became a Global Fashion Phenomenon,” October 20, 2014, www.retail-
week.com/sectors/fashion/inside-inditex-how-zara-became-a-global-fashion-phenomenon/5065325.article, accessed August
31, 2015.
51
Hardman et al., op. cit., p. 2.
52
Susan Berfield and Manuel Baigorri, “Zara’s Fast-Fashion Edge,” Bloomberg Business, November 14, 2013,
www.businessweek.com/articles/2013-11-14/2014-outlook-zaras-fashion-supply-chain-edge, accessed January 22, 2015.

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 Page 16 9B15M088

t
os
53
Calculated as follows: 6,683 stores to end 2014 (“Inditex Annual Report 2014”), compared with 2,244 in 2004 (“Inditex
Annual Report 2004”) across 3,653 days.
54
Belle Kwan, “Spanish Domination — Zara Brand Profile,” Marketing Magazine, September 23, 2011,
www.marketingmag.com.au/blogs/spanish-domination-6575/#.VNJL7lXF_uI, accessed February 4, 2015.
55
Ibid.
56
Hardman et al., op. cit., p. 2.
57
Mike Bird, “How Amancio Ortega Came from Poverty to Become Europe’s Richest Man,” May 29, 2015,

rP
http://uk.businessinsider.com/the-rags-to-riches-story-of-europes-richest-man-zara-founder-amancio-ortega-2015-5,
accessed August 31, 2015.
58
Derek Thompson, “Zara’s Big Idea: What the World’s Top Fashion Retailer Tells Us about Innovation,” The Atlantic,
November 13, 2012, www.theatlantic.com/business/archive/2012/11/zaras-big-idea-what-the-worlds-top-fashion-retailer-
tells-us-about-innovation/265126/, accessed January 23, 2015.
59
Hiroko Tabuchi and Hilary Stout, “Gap’s Fashion-Backward Moment,” June 20, 2015,
www.nytimes.com/2015/06/21/business/gaps-fashion-backward-moment.html?_r=0, accessed August 31, 2015.
60
CSIMarket Inc, “Retail Apparel Industry Profitability Ratios,” CSIMarket,
http://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1301, accessed January 29, 2015.

yo
61
Gap Inc., “2004 Annual Report — Gap Inc,” p. 9, http://media.corporate-ir.net/media_files/IROL/11/111302/GPS_AR_04.
pdf, accessed January 29, 2015.
62
Gap Inc., Key Facts, www.gapinc.com/content/gapinc/html/aboutus/keyfacts.html, accessed August 31, 2015.
63
Intermix is a brand with 30 boutiques across Canada and the United States, which was acquired by Gap in December
2012.
64
Vikram Alexei Kansara, “With an Evolutionary Approach, Uniqlo Aims to Create New Category,” The Business of Fashion,
April 19, 2013, Disclosure: Vikram Kansara travelled to Paris as a guest of Uniqlo, www.businessoffashion.com/2013/04/
with-an-evolutionary-approach-uniqlo-aims-to-create-new-category.html, accessed February 2, 2015.
65
With 342 in China alone.
66
op
Walter Leob, “Uniqlo Aims to Be the World’s Number One Apparel Brand,” Forbes, April 17, 2015,
www.forbes.com/sites/walterloeb/2015/04/17/uniqlo-aims-to-be-the-worlds-number-one-apparel-brand/, accessed August
31, 2015.
67
Katherine P. Harvey, “Topshop / Topman Brings Top-Speed Fashion,” The San Diego Union-Tribune, October 30, 2014,
www.utsandiego.com/news/2014/oct/30/topshop-topman-store-opens-fashion-valley/, accessed February 2, 2015.
68
Arcadia Group Limited, “Our Brands —Topshop,” Arcadia, www.arcadiagroup.co.uk/about-us/our-brands/topshop,
accessed February 2, 2015.
69
Andrew Clark, “Topshop Bites into the Big Apple,” April 2, 2009, www.theguardian.com/business/2009/apr/02/top-shop-
opens-in-new-york, accessed August 31, 2015.
tC

70
Arcadia, “Topshop — About Us,” https://www.arcadiagroup.co.uk/about-us/our-brands/topshop, accessed August 31,
2015.
No
Do

This document is authorized for educator review use only by Ana Barbero, Universidad Peruana de Ciencias Aplicadas (UPC) until April 2018. Copying or posting is an infringement of
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