Zara Case Memo

To: Zara Management

From:

Subject: Zara's US Expansion

Date: 2001

Background

Following is an analysis of Zara's current expansion strategy into the US retail market and recommendations on future tactics to ensure a successful expansion. Zara's expansion strategy thus far has been quite successful; however, with every new store opened, its ability to maintain an efficient centralized production system and a strong, unique culture will be diminished.

Analysis

Let us first consider Zara's main competitive advantage before analyzing how current and potential future strategies will affect this competitive advantage. Zara currently employs a "design-on-demand" retail model allowing the company to bring the latest fashion trends from conception through production and into the stores in less then 15 days. This advantage is harnessed through Zara's high degree of vertical integration. Zara is involved with almost every aspect of the retail clothing value chain, from fabric cutting and dying through distribution and sales. Integral to Zara's competitive advantage is its strong and distinctive culture, both at the production facilities and in the stores. This unique boutique-style culture entails a minimalist store design centering attention on the clothes, as well as very high throughput rates resulting in customers returning to Zara stores an average of 17 times annually.

As its supply chain is strained through expansion, Zara might consider the movement of production facilities to the US. This may allow items to be brought to market more quickly within the US, however, it will inevitably increase labour and production costs. The current production process entails two main steps. The cutting and dyeing, featuring many flow shop characteristics, occurs at Zara headquarters in Spain. These steps leverage many efficiencies of scale due to a high level of automation. It would likely be more efficient over the long-term to maintain the location of these facilities and expand them according to international demand. The second portion of production, the assembly process, is more labour intensive taking on many job shop characteristics. This portion could be brought over to the US; however, this would increase production costs. Since items are shipped back to headquarters for labeling and packaging it makes sense to keep this portion as close as possible.

Zara should consider the benefits and drawbacks of franchising in its expansion plans. Although franchising will decrease the company's risk and costs involved with its US expansion, it will risk jeopardizing the company's ultimate competitive advantage. It is important that the current store image is maintained. Franchise owners may employ different merchandising, staffing, and store design themes ultimately taking away from Zara's unique image.

Zara is on very solid financial footing. By referring to financial data in the appendix the following conclusions can be made regarding Zara's financial position. It can be assumed that because Zara prefers to lease its retail space, some level of off-balance-sheet financing likely occurs. With no corresponding off-balance-sheet data, financial analysis must be done strictly with the numbers provided. Debt compared to total assets and equity is low compared to its competitors. However, current ratio is low, indicating a high level of current debt compared to current assets. Thus, servicing debt may become a challenge for Zara in the future. Operating Profit Margins are very competitive with other industry players. This indicates that vertical integration is not dampening their ability to turn a profit, as some industry analysts have implied. In fact, due to the integral role the vertical integration plays in establishing and sustaining Zara's unique competitive advantage, its level of vertical integration likely contributes to the relatively high operating

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