International Expansion

Presented by: Neha Randhawa, Alivia Ye, Arjun Pisharody

2AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Agenda For Today’s Meeting

Current situation overview at ZARA1

Identifying ZARA’s core problem2

Recommendations & rationale3

Risks & mitigation4

Implementation plan5

Executive Summary

3AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Highly competitive, fragmented $900Bn global apparel industryZARA performing well, but Inditex challenged with high growth expectations

Situation

Which market should ZARA enter next and how?Problem

Pursue Asian market, starting with Shanghai, ChinaSetup JV with local partner, “oil stain” approach, new distribution centreSource from China & Bangladesh

Reco

Large market opportunity; population, disposable income growing, trendy fashionFast fashion garments at lower price points popular in ChinaChina and Bangladesh has lower labour inputs and rents, cost to manufacture low

Rationale

Situational Analysis – Highly competitive, fragmented $900 Bn global apparel industry (Year 2000)

• Buyer-driven apparel global chain – fragmented, research & design important

• ZARA is highly profitable; primary driver of Inditex’s positive results

• Inditex (ZARA) challenged by investors expecting high future growth

• Many global competitors competing on price/fashion (ex. 1)

• GAP• H&M• Benetton

4AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Situational Analysis – Industry trends

• 30% of worldwide apparel production is exported• 50% from developing countries (lower labour costs)

• Per capita spending on apparel fairly inelastic as per capita income grows

• Significant local variation in customers’ attributes and preferences• Within a region• Within a country• Differences between regions is greater

• Richer communication links affect global and local trends (pop culture)

5AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Core Issue – Marketing and Sales Problem

As ZARA grows internationally…

Which market should it enter and how?

6AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Situational Analysis – Key Criteria

7

Market selection

Population and market opportunity, per capita spend

on apparels, design alterations, local preferences

Logistics / Proximity to suppliers

Reduce shipping costs and lags, QR practices, landed

costs, labour input costs, rent expense

AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Recommendations

8AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Where to Expand? Shanghai, China

How to Expand? JV with local partner, “Oil stain” approach

Where to Source? Bangladesh

How to Distribute? New DC in China

Timeframe? 3 years

Why China - The Golden Opportunity

9AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

• 2001: China became an official WTO member • Lowered tariff rates• opened its domestic retail and distribution market to foreigners • granted access to funds for new foreign retailers

• Shifting towards a market-based economy• rural to urban migration increasing • market segregated into first-tier, second-tier, and third-tier cities• first-tier cities are most attractive → metropolises located along

coast-line• Proximity of cities easy for the Oil Stain strategy • Why Shanghai? Shanghai sets the fashion trend in China

10

Shopping is very important for Shanghai residents

AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Beijing and Shanghai rank

Shopping as the most important

leisure activity

Shanghai pays more attention

to fashion information

Shift in Consumer Trends

11AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

• Significant increase in individual’s disposable income

• Fast fashion with lower price points becoming extremely popular• Rising number of working women → significant increase in demand for

womenswear• Estimated that women’s office wear and business casual wear will be

the fastest growing segments

Total Annual Savings (1 RMB = 0.14 EU)

Year 1990 2000 2001 2002 (projected)

Total (RMB Billion) 712 6,433 7,376 9,000

Total (EU Billion) 100 901 1,033 1,260

How to move forward

12AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Joint Venture Strategy• Only 2 types of department stores in China

• State-owned• Joint venture

• Land is very expensive in China hard to secure prime retail space

Source from Bangladesh• Cheaper labour• Looser legislations

Plan to set up new DC in China• Lower costs and ensures JIT • Foundation for Asia expansion

Risks & Mitigation

13AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

RISK: Zara products entering the black market

MITIGATION:Hard to imitate trends and low price points

HIG

HLO

W

HIGHLOW

RISK: Failure to create an impact in China

MITIGATION:Starting with major cities. Starting with Shanghai minimizes risk

RISK: Quality of the material used for production and risk of ‘sweatshop trade’ and Multi FiberAgreement

MITIGATION:Develop strong relationship with suppliers and have strict regulations against wrong practices

RIS

K

MITIGATION

Implementation

14AgendaExecutive Summary

Situation Analysis

Core IssueRecommend

ationsRisks &

MitigationImplementa

tionRationale

Search and finalizing the location of the flagship store in Shanghai –Nanjing Road

Find a Joint Venture Partner

Change in marketing plan depending on results

Years 1 2

Evaluate the success of the first store

Find the supplier in Bangladesh

Advertisements using European Models

Store launch

Depending on the success, plan out store launches in other cities (SuZhou) or others in Shanghai

3

Plan to set up a distribution center

Find distribution centers to support the next phase of expansion

Market Research -Have people on the ground to know the latest trends

ANY QUESTIONS?…

THANK YOU!

15

16

Exhibit 1: Product Market Positioning Map

Fashion - Fashion +

Price -

Price +

Benetton

GAP

H&M

ZARA

ZARA: Medium quality fashion clothing at affordable prices

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Exhibit 2: ZARA vs. Key Competitors

GAP H&M Benetton ZARA

Production Outsourced Outsourced In-House40% In-House

60% Outsourced

Production

Lead TimesHigh High High Low

18

Exhibit 3: ZARA’s Business System

ZARA

Design

Sourcing &

Manufacturing

Distribution

Retailing

19

Exhibit 4: ZARA Competitive Advantages

• Strong business model integration• Decentralized store management; managers determine products to sell

and return or re-distribute• Returns from other stores quickly re-routed• Quick Response (QR pull demand system)• Small batch production due to low product pre-commitments vs.

industry (short forward order book)• High product turnover, limited quantities reinforce “buy now or lose it”• Central DC with strong IT system

20

Exhibit 5: Product Pre-commitments; ZARA vs. Industry

S

A

L

E

S

M

A

R

K

D

O

W

N S

S

A

L

E S

15%INTERNAL MANUFACTURING 85%SEASON

ZARA

M

A

R

K

D

O

W

N S

65% 35%

55%

DESIGN AND RAW MATERIAL

SOURCING

EXTERNAL MANUFACTURING 40-50%

SEASON

DISTRIBUTION AND SALES

Traditional

Industry VISIT TO

EXHIBITIONSDESIGN

INTRODUCTION

TO COLLECTIONMANUFACTURING

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 5TH QUARTER