Colombia Case Zara

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ZARA On January 15, 2002, José María Castellano Ríos, chief executive officer of the Spanish apparel company Inditex, stepped to the podium at the Jacob Javits Convention Center in New York City to accept the International Retailer of the Year award from the National Retail Federation. The year just closed had been a tumultuous one on the international scene, and for retailers it had been a down year. Retail consolidations and bankruptcies were occurring at a fast pace. Yet Inditex and its flags
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   1  ZARA On January 15, 2002, José María CastellanoRíos, chief executive officer of the Spanishapparel company Inditex, stepped to thepodium at the Jacob Javits Convention Centerin New York City to accept the InternationalRetailer of the Year award from the NationalRetail Federation. The year just closed hadbeen a tumultuous one on the internationalscene, and for retailers it had been a downyear. Retail consolidations and bankruptcieswere occurring at a fast pace. Yet Inditexand its flagship company Zara had managedyet another year of impressive growth andstrong profitability. Indeed, 2001 had inmany respects been a landmark year forInditex, for founder Amancio Ortega Gaonaand for Castellano. History of Zara †   Amancio Ortega Gaona, a native of Galicia,had worked as a clerk at a ladies’ apparelretailer before starting his own housecoatmanufacturing business in 1963. He openedthe first Zara store in La Coruña in 1975; by1989, there were 82 Zara stores in Spain, andOrtega began international expansion withZara stores in Portugal, Paris and New York.Zara’s parent company Inditex took on 4 †  Professors Nelson Fraiman and Medini Singh of Columbia Business School, together with LindaArrington and Carolyn Paris, prepared this case asthe basis for class discussion rather than toillustrate either effective or ineffective handling of abusiness situation. This case was prepared underthe auspices of the W. Edwards Deming Center. Itwas sponsored by the Chazen Institute and theCenter for International Business Education.The authors wish to thank José María CastellanoRíos of Inditex and Luis Bastida and FranciscoGonzález of BBVA for making this project possible.Copyright©2002 by Columbia Business School. other formats, Pull & Bear, Massimo Dutti,Bershka and Stradivarius, 1 and in 2001 hadlaunched Oysho, an intimate apparel andswimwear brand. See Exhibit I for selectedfinancial information. The brand names Zara,Pull & Bear, Bershka and Oysho were invented,generic names suitable for “export”; and byfiscal 2000, over half of Inditex sales wereoutside Spain.During 2000-2001, Inditex received widespreadfavorable press and analyst coverage, toutingInditex’s success and attributing it to Zara’sunique integrated business model. 2 Its successhas led to Zara being described as “possibly themost innovative and devastating retailer in theworld” by Daniel R. Piette, Chairman and CEO,LV Capital. Inditex made an initial public offeringof stock in May 2001, and was by then theworld’s third largest clothing retailer. Ortega’sstake in Inditex was worth billions, but Ortega 1 Pull & Bear (6.6% of 2000 sales) was launched in1991 as a men’s basic, casual line, with women’sapparel added in 1998. Inditex purchased an interestin Massimo Dutti (7.8% of 2000 sales), a men’s shirtcompany, in 1991 and acquired 100% in 1995, in themeantime evolving it into a more classic and upscaleline for men and women. In 1998, Bershka (5.2% of 2000 sales), a “club” look line for teenage girls, waslaunched, and a 90% interest in Stradivarius (2.8% of 2000 sales), a line of day or street wear for teenagegirls, was acquired in 1999. See Exhibit II for positionof various Inditex products. 2 “The Most Devastating Retailer in the World”, TheNew Yorker, September 18, 2000; “Just-in-TimeFashion: Spanish Retailer Zara Makes Low-Cost Linesin Weeks by Running Its Own Show”, The Wall StreetJournal, May 18, 2001; “Galician Beauty: Spanishclothier Zara beats the competition at efficiency – and just about everything else”, Forbes, May 28, 2001; “Fast Fashion: How a secretive Spanish tycoon hasdefied the postwar tide of globalization, bringingfactory jobs from Latin America and Asia back toContinental Europe”, Newsweek, September 27, 2001.    2remained a famously privately man, still livingnear La Coruña and involved in runningInditex.Zara offered clothing for women (about 58%of sales), men (about 22%) and children(about 20%). In its offering document,Inditex described Zara in this way: “Zara is a high-fashion concept offeringapparel, footwear and accessories forwomen, men and children, from newborns toadults aged 45. Zara stores offer acompelling blend of fashion, quality and priceoffered in attractive stores in prime locationson premier commercial streets and in upscaleshopping centers. Our in-house design andproduction capabilities enable us to offer freshdesigns at our Zara stores twice a weekthroughout the year.” At year-end 2001 Inditex was operating over1200 stores in over 35 countries around theworld, under 6 fascia, and analysts projectedthat Inditex stores would easily number 2000within 5 years. Zara’s vertically integratedmodel depended to a great extent on localSpanish sourcing for a large proportion of garment manufacture. But Castellano hadconsidered that Zara would shift moreproduction offshore, probably to Asia, to takeadvantage of the lower wage costs. Howmuch of a shift was necessary to supportZara’s expansion and to meet possible pricingpressures, and how much of a shift could bemade without undermining Zara’s success—were critical issues facing Inditex. The Textile and Apparel Industry In 1999, the global textile and apparelindustry accounted for 5.7% of the productionvalue of world manufacturing output andmore than 14% of world employment. Theclothing market in the major countries wasestimated at about $580 billion, with the U.S.accounting for about $180 billion and WesternEurope about $225 billion. Eastern Europe(about $14 billion), Latin America (about $45billion) and some parts of Asia representedareas for potential market growth as incomelevels rose and markets matured out of ahighly fragmented stage dominated byindependent retailers.The production of textiles is relatively capitalintensive, with labor costs accounting for about40% of cost of goods sold, while for apparel thispercentage is about 60%. Textile manufacturealso tends to be highly specialized, depending onthe raw materials (natural or synthetic or ablend), whether the cloth is woven, knitted,matted or fused, the dying or printing, treatmentand finishing, and the overall performancecharacteristics desired for the end product, suchas how well it accepts and holds dye, how well itinsulates and machine washability. Thoughsome fabrics are simple and basic, there isconstant research and development in highperformance textiles, including textiles forspecialized industrial uses.Apparel production involves the procurement of fabric, the preparation of designs, includingsamples and patterns, the cutting of fabric andthe sewing and finishing of garments. Forknitwear, the production process is modified toincorporate the procurement of yarn and theknitting process. Apparel production isintimately related to fabric procurement, somuch so that apparel designers will designaround a fabric or will design the fabric for aparticular garment.In terms of production, the apparel industrycould be roughly broken down into three tiers of quality, with some correspondence to sourcing of production:i.   a high quality segment encompassingitems that incorporate fashion elementsand emphasize quality of material andworkmanship, such as ladies’ suits;ii.   a medium quality segment for more basicitems where quality of material andworkmanship had to be acceptable butwhere there was little differentiationamong producers and relatively little interms of a time-sensitive fashioncomponent (cardigans and khakis);iii.   and a low quality segment (e.g., men’sunderwear) where products hadcommodity-like characteristics andcompeted principally on price.The low wage countries had grown theirproduction volume mostly in the medium andlow quality segments, but were increasing theirshare of high quality production. Fifty percent of Europe’s exports but only 20% of its importswere concentrated in the high quality segment.    3The apparel industry was unusual in thatmany segments of it did not really benefitfrom economies of scale (volume productionof identical goods) in the traditional sense;maintaining margin by more preciselymeeting high quality demand was moreimportant to profitability. For the moremechanized parts of production —fabricproduction, including knitting by machine,and cutting—setup time was not toosignificant. More importantly, except forcommodity-like garments, the ability tomanage small batch production to meet theever-changing tastes of consumers placed apremium on flexibility and responsiveness of the production system. Sewing and finishingservices were still done mostly manually andtended to be highly specialized and the mostlabor intensive part of the process, asreflected in the large participation of smalland medium enterprises in the apparelindustry. Also relevant was thepreponderance of women, with their relativelylower wage levels, among apparel productionworkers.Given the labor-intensive quality of apparelproduction, it was not surprising that relativewage levels had been a significant driver of production sourcing. Along with the analysisof wage levels, however, firms weighed otherimportant factors: raw materials quality andavailability, skills requirements and workerproductivity, transportation time and cost andother components of lead time, political andforeign exchange risk, regulatory issues andsocial responsibility concerns. A complexsystem of quotas and tariffs had also been animportant part of the sourcing equation,resulting in a number of distortions in thesupply chain, such as transshipment of goodsthrough Hong Kong to avoid quotas onproducts from China. China’s entry into theWorld Trade Organization, as well as thestaged dismantling of the textile and apparelquota system – to be complete by 2005 –were expected to increase China productionbut also result in the reduction of tradebarriers affecting, e.g., import of goods fromthe E.U. into Latin American countries. In themeantime, the regional reduction of tradebarriers had fostered increased manufacturein Eastern Europe, Turkey and Northern Africain support of European markets and Mexican,Caribbean and Central American manufacture insupport of the U.S. market. The Textile and Apparel Industry in theE.U. and in Spain The textile and apparel industry in the E.U.employed about 2 million people in 1999,accounting for 7.6% of total E.U. manufacturingemployment, and generated a turnover of 178billion euros. Italy had the largest percentage of the E.U. textile and apparel business, at 31%,with the U.K. at 15%, Germany at 14%, Franceat 13%, Spain at 9% and Portugal at 6%. TheE.U. was the second largest exporter of textilesand clothing in the world, but stronger as anexporter of textiles than of clothing. Inparticular, the E.U. countries were leaders in thedevelopment of high-tech fibers and relatedtechnologies.The industry was known for its fragmentationand the importance of subcontracting withinregional clusters of small and independent butcollaborative firms, such as in northern Italy, butthere were also some large firms, like Inditex,managing or tapping into the subcontractingnetworks to run manufacturing on a largerscale. 3 This “industrial district” structure of thetextile and apparel industry in the E.U., run onlow overhead but at a high skill level, implied adifferent type of scale or network economy,shared across a group of firms; whether or notall firms within the system had commonownership was not as important as how well thecomponents worked together.In apparel, the E.U’s special strength wasdesign-driven manufacturing, where designstayed close to the customer and was bound upwith production. Of particular importance wasthe close relationship between clothingcompanies and textile companies, whichpermitted collaboration on fabric design. On theother end of the production chain, there was asignificant volume of outsourcing of labor-intensive operations (“outward processingtransactions” (OPT)) to Eastern European andMediterranean rim countries, which were near 3 See The Competitiveness of the European TextileIndustry, by Maurizio Giuli (South Bank University –London 1997), citing the “industrial district” model of production.    4enough to provide rapid turnaround and couldbe relatively easily monitored for qualitycontrol.The Spanish textile and apparel industry wascomprised mostly of many very small firms,and had traditionally not been strong in R&Dor technological innovation, nor had it neededto be in order to compete in the domesticmarket. However, during the 1990’s Spainexperienced greater prosperity, with risingwage levels, and its domestic customer basehad become more sophisticated. Spanishconsumers cared a lot about fashion andquality in clothing purchases, with price lessof a consideration, but given general wagelevels, luxury name brand apparel had beenout of the reach of most shoppers. 4  Ortega’s home province of Galicia is in therainy northwestern corner of Spain. A hillyand picturesque land alongside the AtlanticOcean, with a Celtic heritage, its weather isoften overcast or foggy. Galicia’s economyhad been rooted in farming, fishing andmining. Galicia had generally been poorer,and experienced higher levels of unemployment, than other parts of Spain,and in the early part of the 20 th century,many people emigrated from Galicia toArgentina, Uruguay and Cuba. Reducingunemployment and improving skills levels hadbeen priorities of the Galician regionalgovernment and labor organizations. Theprincipal city of La Coruña (A Coruña in theregional dialect Gallego) had a modern andconvenient airport, and there were frequentflights to Madrid and Barcelona, but LaCoruña was not a major international portcity.Though Galicia had not been known as acenter of textile and clothing manufacture onan industrial level, in the 1980’s the regionbegan an aggressive push to evolvetraditional dressmaking skills and participatein the sector by promoting a concept of  “Galician fashion”. By 1998 it was estimatedthat 29 thousand people (most of them 4 According to a 1999 report of the U.S. andForeign Commercial Service and U.S. Departmentof State, 6 out of 10 Spanish women rated quality,3 out of 10 rated fashion, and only 1 out of 10rated price, as the most important determinant in aclothing purchase. women) worked for about 760 firms in Galiciainvolved in the textile and apparel business.Many of the firms (over 450) were smallworkshops or cooperatives, with an average of 15 workers each, and seventy-five percent of production consisted of the assembly lineproduction of garments and 16% of knitwearproduction. There were also several large firmsheadquartered in Galicia: Adolfo Domingues,Caramelo, Mafecco and Zara. Galicia’s share of national production in the textile and clothingsector increased from 7% to 14% from 1991 to1997, employment generated by Galicianclothing firms represented 10.5% of the total jobs created by this sector in Spain for thatperiod, and exports from the region increasedten-fold from 1991 to 1998. The Zara Model Zara’s Planning and Design Cycle The Zara timeline for a season began, as forother apparel manufacturers, a year or so inadvance of the start of the correspondingseason. There were two seasons, with thespring/summer collection scheduled to arrive instores beginning in January/February and thefall/winter collection scheduled to arrive in storesbeginning in August/September (reversed for theSouthern hemisphere). About a year in advancedesigners began to work to define dominantthemes and colors, and then to put together aninitial collection.Zara had 200 designers on staff. Whiledesigners were catwalk-influenced and expectedto adapt haute couture style for the massmarket ,  “they are not themselves encouraged tobe ivory tower aesthetes making distinctivefashion statements,” according to María Pérez,head of the Design department. “Zara producesabout 11 thousand styles each year – perhaps 5times as many as a comparable retailer wouldtypically produce, and all in relatively smallbatches to begin with,” she said. “Thisencourages them to experiment, but alwayswithin a commercial orientation.” The designers worked in large open spaces atZara’s headquarters, with one design center foreach of the women’s, men’s and children’s lines.Designers often prepared sketches by hand buteventually worked on a CAD system to illustratethe design and associated specifications. The
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