CASE 3-4 Continued Growth for Zara and Inditex CIRCA 2008 chains has zoomed, Zara's rivals Hennes & Mauritz AB of Sweden and Mango of Spain have also become fixtures on U.S. ARTEIXO, Spain-Zara stores have set the pace for retailers shopping streets. around the world in making and shipping trendy clothing. Now In addition to Zara, which makes up 60 percent of its busi- Pablo Isla, chief executive of parent company Inditex SA, says ness, Indites owns seven smaller store brands, including the more Zara needs to speed up. As rivals catch up. Mr. Isla is attempting upscale Massimo Dutti and the youth oriented Wershka In the one of the fastest global expansions the fashion world has ever last 12 months Inditex added 560 stores, including entering now sten, opening hundreds of new stores and entering new markets. markets in Croatia, Colombia, Guatemala, and Oman, to reach To do that, as an economic downturn threatens sales, Inditex is 3,691 stores in of countries. It plans expansion of a similar scope changing the systems that have driven its success at Zara and its over the next year. other store brands, to save time and money. Among the innova- The first Zara store opened in 1975 in La Corunia, a port town tions, it is introducing new methods to enable store managers to near Arteis in a remote corner of northern Spain. Its two key order and display merchandise faster and adding cargo routes for traits were an eye for customer tastes and a production process shipping goods. "There has been a clear change of mentality in that started with the final price and worked backward to the most- the company, " Mr. Isla, a former tobacco executive who arrived efficient production. In the mid-1980s, local business-school at Inditex in 2005, said in an interview at the company's head- professor Jost Maria Castellano, a technophile, joined Indites quarters here. as right-hand man to founder Amancio Ortega Gaona, and the The world's second largest clothing retailer by sales after Gap company became a world class logistical outfit, peddling *fast Inc., Inditex is responding to a predicament shared by other com fashion." The first foreign store, in Portugal, opened in 1989, panies that come up with game changing formulas: Eventually followed by New York. In 2001, Mr. Ortega look Indites public competitors catch up, forcing the pioneers to do even better to keep and its stores are now on prime shopping shreds around the work. their edpo. Low-cost carrier Southwest Airlines Co. is making big Stores are stocked with new designs twice a week. Collections changes to fend off rivals that have copied its efficient operate are small and often sell out, creating an air of exclusivity and cut- ing model. Inventory-control methods at Walmart Stores Inc. are ting down on the need for markdowns. The company ships clothes being mimicked around the world, and Google Inc. is updating its straight from the factory to stores. Unlike competitors who manu- search engine to keep users loyal facture most of their wares in Asia, Indites makes two-thirds of it's The consumer slowdown is adding pressure. Indilex shares goods in Spain and nearby countries such as Portugal, Morocco have fallen nearly 24 percent in the last 12 months, in large part and Turkey. The retailer says the higher labor costs are offset by because investors are worried about an economic downturn in the flexibility of having production close to its warehouses and Spain, where Indilex generales over a third of its $12 billion in distribution centers, which are all in Spain. annual sales. The company is pressing ahead with its expansion At "the Cube," as employees call their futuristic-looking plans even as consumers are slowing down. In the U.S., retail- headquarters outside La Corula, sales managers sit at a long ers had their worst monthly sales results in nearly five years in row of computers, monitoring sales at every store around the January, and some chains are planning to close stores and cut jobs. world. When a garment sells well-or flops-they quickly tell U.K. retailer Marks & Spencer PLC recently reported its worst designers silling nearby to whip up fresh designs. In the base- quarterly sales performance in two years, and warned the pain ment, stylists decide store layouts and window displays. One could extend into 2009. room is built like a shopping street, its walls limed with lit and The industry is watching the company's logistical makeover. decorated store windows that dictate how storefronts will look Though it sells inexpensive trendy clothing-"fast fashion" in from New York's Fifth Avenue to London's Regent Street. Every industry parlance-Zara has been so successful in luring high- two weeks, new decorations are photographed and e-mailed to paying customers that luxury fashion brands such as Gucci, stores to replicate. Burberry and Louis Vuitton have overhauled their gum prac- To speed up new store openings, Mr. Isla needed to cut start-up tices to send new fashions to stores more frequently. "They're a costs. Inditex now avoids store openings in slow months such as fantastic case study in terms of how they manage to get product August. In the past, stores opened year-round, accruing costs from to their stores so fast." Stacey Cartwright, chief financial officer the first day even if sales took longer to build. Mr. Isla's goal is of Burberry Group PLC, says of Zara. "We are mindful of their for Inditex is to reverse a trend of costs growing faster than sales. techniques." It mel that target in the first half ended July 31, 2007, when costs In recent years, competitors across the globe have adopted grew 16 percent over the same period the previous year, while Zara's methods. Italy's Benetton Group SpA now replenishes sales increased 19 percent. stores up to ance a week. Los Angeles-based Forever 21 Inc. and In another move to cut costs, Mr. Isla installed software in Japanese apparel giant Fast Retailing Co., owner of the Uniqlo store computers to schedule staff based on sales volume at differ- chain, can get new looks in their stores within six weeks. Even ent times. As a result, more salespeople work at peak times such outdoor clothing maker Patagonia Inc. has doubled the number of as lunchtime or the early evening. Inditex says the more flexible now styles it offers every year. As the popularity of cheap-and-chic schedules shaved 2 percent off the hours staff work. Alarm tagsPart 6 Supplementary Material are now attached to garments at the factories. In the past, at a big and selling its fast-changing collections online. So it caught Zara location wach as the four-floor More on Madrid's Alberto many by warprise when it said Wednesday that it will launch Aguilera shopping street, 10 people spent an average of 12 hours online sales next year for Zara's Autumn/Winter 2010 collee- a week putting on the tags. Now, Inditex estimates, those sales- tion. "There had been some concern that Inditex was falling people spend 3 percent more time serving customers. * In the past, behind competitors on c-commerce," said Anne Critchlow, an a shipment would come in the morning, and the staff wouldn't analyst at Societe Generale. have it unpacked till noon. They were just giving away three hours Initially, the company plans to launch the online store www of prime selling time," Mr. Isla says. zara. com in Spain, France, Germany, laly, the U K. and Portugal Shipping papers now label the newest collections "NEWC." Later, it will roll it out in all of Zara's remaining markets. In the Those pieces are often rushed to the shop floor on plastic shipping medium term, Inditex may also launch its other six formats online, hampers and only later switched to Zara's customary light wood said Chief Executive Pablo Isla. "The Internet is becoming a more hangers. Zara regulars know to look for the black plastic hangers and more relevant channel, so it would be logical to continue with the latest looks, says Dilip Patel, U.K. commercial director expanding online with the other formats," he said. Neither H&M for Inditex. Store managers also use new hand-held computers nor Inditex disclose what proportion of sales comes from their that show how garments rank by sales, so clerks can re-order best- online outfits. U.S. rival Gap Inc. generated about 8 percent of its sellers in less than an hour-a process that previously look about Gap-branded sales in the U.S. on the Web three hours. These orders arrive, together with new pieces, two For the find half ended July 31, Indites's net profit dropped to days later. 2375 million ($550.4 million) from 6406 million a year earlier, Also, each of the company's various store brands shipped while sales were up 6.6 percent at 64 86 billion. Sales in stores merchandise separately in the past, concerned that mixing even open at least a year, however, shrank by an annual 2 percent in the behind the seemes could dilute their images. Combining the brands fiscal find half, compared with a decline of 7 percent in second into larger volumes has allowed Mr. Isla to launch twice-weekly half, and operating costs grew 8 percent as Indites continued to air shipments with Air France Cargo-KLM Cargo. Planes from expand its empire. The retailer opened 166 new stores in the first Zaragoza, Spain, land in Bahrain with goods for Inditex stores half, down from 249 a year earlier. Inditex's gross margin fell to in the Micklle East, fly on to Asia, and return to Spain with raw 55.3 percent of sales from 564 percent a year earlier. Analysts materials and half-finished clothes. The company also started now attributed the decline to a stronger dollar, which is making it more shipments with Emirates Airline. costly to source materials, and pricing pressures in the company's Despite Mr. Isla's efficiency gains, some experts caution that main market, Spain. Zara faces challenges it is not addressing. Keeping a large amount The retailer gave a resilient trading outlook, saying sales of production close to home, some warn, loses its benefits when in the find weeks of its fiscal third quarter were up 9 percent a growing number of stores are far away. "The efficiency of the when stripping out currency fluctuation, the same growth rate supply chain is coming under more pressure the farther abroad as in the first half. Inditex's much smaller U.K. rival, Next they go," says Nirmalya Kumar, a professor at London Business PLC, which launched online sales in 1998, meanwhile, posted a School. 6.9 percent increase in first-half net profit. Cost savings helped For now, the company makes up for some of the cost by push net profit up to $131 8 million ($217.5 million) from charging more for goods sold overseas. In the U.S., for instance. E123.3 million a year earlier, as revenue inched up to $1.51 billion Zara clothes cost up to 40 percent more than they do in Spain. from (1.5 billion. However, that could lead to an inconsistent brand image, a risky Next, which like Inditex sells clothes and home wares, strategy in a globalizing world, some critics warn. Mr. Isla says warned, however, that like-for-like retail sales are likely to that when he joined the company, he considered a logistics center decline between 3.5 percent and 6.5 percent in the second in Asia, where the company produces around a third of its goods, hall. At Directory, its catalogue and online-shopping business, but decided it would only make sense if Zara had more stores which generates about 40 percent of operating profit, Next said in the region. He says the group's current logistics capacity will it expects sales to rise by up to 2 percent. The retailer never- suffice until 2013. theless raised its full-year forecast, saying it now expects to deliver pretax profit "close" to last year's $429 million, subject CIRCA 2009 to its sales performance in the fourth quarter, which includes Christmas. Indilex SA. Europe's biggest fashion retailer by revenue, said Wednesday it plans a major push online for its flagship Zara- brand, as it reported a 7.6 percent decline in net profit for the fiscal CIRCA 2010 first half- Spanish fashion retailer Inditex SA launched its Zara online Indiles, which also owns the Massimo Dulli, Full and Bear, and store in the United States in the fall of 201 1, seeking to widen its Bershka brands, is known for savvy use of information technology clientele beyond the big cities where it currently operates, chief to tightly control production and inventories. It collects data from executive Pablo Isla said. Early indications showed the online its 4,430 stores in 73 countries to detect trends and tweaks prod- launch may have traction in the U.S. market. A Zara application ucis based on consumer tastes. for Apple Inc's cell phone the iPhone has been downloaded by Compared with its main competitor, Sweden's Hennes & more prospective clients in the U.S. than in any other market, Mauritz AB, however, Inditex is a bit of a latecomer to the Isla said. Internet. It started operating an online store for furnishing Speaking to Dow Jones Newswires after the presentation brand Zara Home in 2007, but had so far shied away from the of Inditex's 2009 results, Isla said that more than a million Web for Zara clothing because of the complexity of managing iPhone users have downloaded the App since it was firstCases 3 Assessing Global Market Opportunities released in December. "It's a market where Interned sales are QUESTIONS very important, and it's a way of accessing all those clients that are interested in Zara," said Isla. The App allows shoppers 1. What are the ways that Indilex ensures that "fast fashion" is to check out what's new in the Zara collection, and to find the truly fast? nearest shop. 2. What are the important attributes of a "fast fashion" retailer Indilex, based in La Corona, northwestern Spain, last year to customers? To store managers? scared past Gap Inc. to become the most-selling fashion retailer 3. Why would a retailer introduce its online store country-by- in the world, with more than 4,600 stores. Zara, which is present country? Why was Inditex slow to embrace online sales in 76 countries, will roll out its online store first later this year in when it is so tech-savvy in other ways ? six European countries, and then progressively add the remaining countries where Zara operates. Indites entered the United States 4. Briefly describe five opportunities for continued growth early. in 1994, but has expanded rather slowly. focusing store during the next five years for Zara's parent, Inditex, SA. openings in large cities like New York, Miami and Los Angeles. 5. Pick one of the five opportunities and outline the advantages It currently has 48 stores there Isla said Inditex plans to grow and disadvantages of pursuing it. "selectively" there in the coming three years. 6. Take a look at its now U.S. website. What is good and what "We have to prioritize al every step, and ours are twolokd: is bad about it? Growing in Europe and in Asia," Isla said. Indites is opening almost all of its new stores outside its Spanish home market, which currently accounts for 31.8 percent of group sales. By Saucer: Cecile Ratwerkker, "Thee-Setting Fara Socks More Speed to Fight Is 2013, Inditex expects the weight of Spain to drop to 20 percent of Rising Clap-Chic Rival," The Wall Street Journal February 10 arlie Ching- Total sales, while Europe, excluding Spain, is expected to rise to pher Bjork "Zara Is to Chi Big Delis Push," The Wall Soren Asusul, Sopiemixer IT, celis; Chridopher Bjork, "Zara Has Online Focus for US Hapanion, Indies (30 50 percent and Asia. 20 percent. The remaining 10 percent will Says " Dow booka Newswim, March 17, 2010, Armavel Keara, Zara Mags Catch- come from the Americas. Up with Online Shoppers," Blocribery Business Work, Amani 19, 2011, pp. 34-15.Key points to cover: o Case study analysis: What is the case about (i.e., summarised in 1-2 points)?, What were the issues/problems?, How did the company solve the problems? o Case study reflection: Which International Marketing concepts are relevant to the case?, Why these concepts are important and add to your learning in International Marketing?, How would you apply these concepts to solve the case issues or problems