ZARA On January 15, 2002, José María Castellano other formats, Pull & Bear, Massimo Dutti, Ríos, chief executive officer of the Spanish Bershka and Stradivarius,1 and in 2001 had apparel company Inditex, stepped to the launched Oysho, an intimate apparel and podium at the Jacob Javits Convention Center swimwear brand. See Exhibit I for selected in New York City to accept the International financial information. The brand names Zara, Retailer of the Year award from the National Pull & Bear, Bershka and Oysho were invented, Retail Federation. The year just closed had generic names suitable for “export”; and by been a tumultuous one on the international fiscal 2000, over half of Inditex sales were scene, and for retailers it had been a down outside Spain. year. Retail consolidations and bankruptcies During 2000-2001, Inditex received widespread were occurring at a fast pace. Yet Inditex favorable press and analyst coverage, touting and its flagship company Zara had managed Inditex’s success and attributing it to Zara’s yet another year of impressive growth and unique integrated business model.2 Its success strong profitability. Indeed, 2001 had in has led to Zara being described as “possibly the many respects been a landmark year for most innovative and devastating retailer in the Inditex, for founder Amancio Ortega Gaona world” by Daniel R. Piette, Chairman and CEO, and for Castellano. LV Capital. Inditex made an initial public offering of stock in May 2001, and was by then the † History of Zara world’s third largest clothing retailer. Ortega’s stake in Inditex was worth billions, but Ortega Amancio Ortega Gaona, a native of Galicia, had worked as a clerk at a ladies’ apparel retailer before starting his own housecoat manufacturing business in 1963. He opened 1 Pull & Bear (6.6% of 2000 sales) was launched in the first Zara store in La Coruña in 1975; by 1991 as a men’s basic, casual line, with women’s 1989, there were 82 Zara stores in Spain, and apparel added in 1998. Inditex purchased an interest Ortega began international expansion with in Massimo Dutti (7.8% of 2000 sales), a men’s shirt company, in 1991 and acquired 100% in 1995, in the Zara stores in Portugal, Paris and New York. meantime evolving it into a more classic and upscale Zara’s parent company Inditex took on 4 line for men and women. In 1998, Bershka (5.2% of 2000 sales), a “club” look line for teenage girls, was launched, and a 90% interest in Stradivarius (2.8% of 2000 sales), a line of day or street wear for teenage † Professors Nelson Fraiman and Medini Singh of girls, was acquired in 1999. See Exhibit II for position Columbia Business School, together with Linda of various Inditex products. Arrington and Carolyn Paris, prepared this case as 2 the basis for class discussion rather than to “The Most Devastating Retailer in the World”, The illustrate either effective or ineffective handling of a New Yorker, September 18, 2000; “Just-in-Time business situation. This case was prepared under Fashion: Spanish Retailer Zara Makes Low-Cost Lines the auspices of the W. Edwards Deming Center. It in Weeks by Running Its Own Show”, The Wall Street was sponsored by the Chazen Institute and the Journal, May 18, 2001; “Galician Beauty: Spanish Center for International Business Education. clothier Zara beats the competition at efficiency – and just about everything else”, Forbes, May 28, 2001; The authors wish to thank José María Castellano “Fast Fashion: How a secretive Spanish tycoon has Ríos of Inditex and Luis Bastida and Francisco defied the postwar tide of globalization, bringing González of BBVA for making this project possible. factory jobs from Latin America and Asia back to Copyright©2002 by Columbia Business School. Continental Europe”, Newsweek, September 27, 2001. 1 remained a famously privately man, still living The production of textiles is relatively capital near La Coruña and involved in running intensive, with labor costs accounting for about Inditex. 40% of cost of goods sold, while for apparel this Zara offered clothing for women (about 58% percentage is about 60%. Textile manufacture of sales), men (about 22%) and children also tends to be highly specialized, depending on (about 20%). In its offering document, the raw materials (natural or synthetic or a Inditex described Zara in this way: blend), whether the cloth is woven, knitted, matted or fused, the dying or printing, treatment “Zara is a high-fashion concept offering and finishing, and the overall performance apparel, footwear and accessories for characteristics desired for the end product, such women, men and children, from newborns to as how well it accepts and holds dye, how well it adults aged 45. Zara stores offer a insulates and machine washability. Though compelling blend of fashion, quality and price some fabrics are simple and basic, there is offered in attractive stores in prime locations constant research and development in high on premier commercial streets and in upscale performance textiles, including textiles for shopping centers. Our in-house design and specialized industrial uses. production capabilities enable us to offer fresh designs at our Zara stores twice a week Apparel production involves the procurement of throughout the year.” fabric, the preparation of designs, including samples and patterns, the cutting of fabric and At year-end 2001 Inditex was operating over the sewing and finishing of garments. For 1200 stores in over 35 countries around the knitwear, the production process is modified to world, under 6 fascia, and analysts projected incorporate the procurement of yarn and the that Inditex stores would easily number 2000 knitting process. Apparel production is within 5 years. Zara’s vertically integrated intimately related to fabric procurement, so model depended to a great extent on local much so that apparel designers will design Spanish sourcing for a large proportion of around a fabric or will design the fabric for a garment manufacture. But Castellano had particular garment. considered that Zara would shift more production offshore, probably to Asia, to take In terms of production, the apparel industry advantage of the lower wage costs. How could be roughly broken down into three tiers of much of a shift was necessary to support quality, with some correspondence to sourcing of Zara’s expansion and to meet possible pricing production: pressures, and how much of a shift could be i. a high quality segment encompassing made without undermining Zara’s success— items that incorporate fashion elements were critical issues facing Inditex. and emphasize quality of material and workmanship, such as ladies’ suits; The Textile and Apparel Industry ii. a medium quality segment for more basic items where quality of material and In 1999, the global textile and apparel workmanship had to be acceptable but industry accounted for 5.7% of the production where there was little differentiation value of world manufacturing output and among producers and relatively little in more than 14% of world employment. The terms of a time-sensitive fashion clothing market in the major countries was component (cardigans and khakis); estimated at about $580 billion, with the U.S. accounting for about $180 billion and Western iii. and a low quality segment (e.g., men’s Europe about $225 billion. Eastern Europe underwear) where products had (about $14 billion), Latin America (about $45 commodity-like characteristics and billion) and some parts of Asia represented competed principally on price. areas for potential market growth as income The low wage countries had grown their levels rose and markets matured out of a production volume mostly in the medium and highly fragmented stage dominated by low quality segments, but were increasing their independent retailers. share of high quality production. Fifty percent of Europe’s exports but only 20% of its imports were concentrated in the high quality segment. 2 The apparel industry was unusual in that Caribbean and Central American manufacture in many segments of it did not really benefit support of the U.S. market. from economies of scale (volume production of identical goods) in the traditional sense; The Textile and Apparel Industry in the maintaining margin by more precisely E.U. and in Spain meeting high quality demand was more important to profitability. For the more The textile and apparel industry in the E.U. mechanized parts of production —fabric employed about 2 million people in 1999, production, including knitting by machine, accounting for 7.6% of total E.U. manufacturing and cutting—setup time was not too employment, and generated a turnover of 178 significant. More importantly, except for billion euros. Italy had the largest percentage of commodity-like garments, the ability to the E.U. textile and apparel business, at 31%, manage small batch production to meet the with the U.K. at 15%, Germany at 14%, France ever-changing tastes of consumers placed a at 13%, Spain at 9% and Portugal at 6%. The premium on flexibility and responsiveness of E.U. was the second largest exporter of textiles the production system. Sewing and finishing and clothing in the world, but stronger as an services were still done mostly manually and exporter of textiles than of clothing. In tended to be highly specialized and the most particular, the E.U. countries were leaders in the labor intensive part of the process, as development of high-tech fibers and related reflected in the large participation of small technologies. and medium enterprises in the apparel The industry was known for its fragmentation industry. Also relevant was the and the importance of subcontracting within preponderance of women, with their relatively regional clusters of small and independent but lower wage levels, among apparel production collaborative firms, such as in northern Italy, but workers.