ZARA

On January 15, 2002, Jose Maria Castellano

Rios, 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 has
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 flagship company Zara had managed
yet another year of impressive growth and
strong profitability. Indeed, 2001 had in
many respects been a landmark year for
Inditex, for founder Amancio Ortega Gaona
and for Castellano.

History of Zara

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
the first Zara store in La Corua in 1975; by
1989, there were 82 Zara stores in Spain, and
Ortega began international expansion with
Zara stores in Portugal, Paris and New York.
Zaras parent company Inditex took on 4
other formats, Pull & Bear, Massimo Dutti,
Bershka and Stradivarius,1 and in 2001 had

Professors Nelson Fraiman and Me dini Singh of

Columbia Business School, together with Linda
Arrington and Carolyn Paris, prepared this case as
the basis for class discussion rather than to
illustrate either effective or ineffective handling of a
business situation. Copyright2002 by Columbia
Business School.
1

Pull & Bear (6.6% of 2000 sales) was launched in

1991 as a mens basic, casual line, with womens
apparel added in 1998. Inditex purchased an
interest in Massimo Dutti (7.8% of 2000 sales), a
mens shirt company, in 1991 and acquired 100%

launched Oysho, an intimate apparel and

swimwear. See Exhibit I for selected financial
information. The brand names Zara, Pull & Bear,
Bershka and Oysho were invented, generic
names suitable for export; and by fiscal 2000,
over half of Inditex sales were outside Spain.
During 2000-2001, Inditex received widespread
favorable press and analyst coverage, touting
Inditexs success and attributing it to Zaras
unique integrated business model. 2 Inditex
made an initial public offering of stock in May
2001, and was by then the worlds third largest
clothing retailer. Ortegas stake in Inditex was
worth billions, but Ortega remained a famously
privately man, still living near La Corua and
involved in running Inditex.
Zara offered clothing for women (about 58% of
sales), men (about 22%) and children (about
20%).
In its offering document, Inditex
described its Zara in this way:
Zara is a high-fashion concept offering apparel,
footwear and accessories for women, men and
children, from newborns to adults aged 45. Zara
stores offer a compelling blend of fashion,
quality and price offered in attractive stores in
in 1995, in the meantime evolving it into a more
classic and upscale 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 girls, was acquired in 1999.
See Exhibit II for position of various Inditex products.
2

The Most Devastating Retailer in the World, The

New Yorker, September 18, 2000; Just-in-Time
Fashion: Spanish Retailer Zara Makes Low-Cost Lines
in Weeks by Running Its Own Show, The Wall Street
Journal, May 18, 2001; Galician Beauty: Spanish
clothier Zara beats the competition at efficiency and
just about everything else, Forbes, May 28, 2001;
Fast Fashion: How a secretive Spanish tycoon has
defied the postwar tide of globalization, bringing
factory jobs from Latin America and Asia back to
Continental Europe, Newsweek, September 27, 2001.

prime locations on premier commercial

streets and in upscale shopping centers. Our
in-house design and production capabilities
enable us to offer fresh designs at our Zara
stores twice a week throughout the year.
At year-end 2001 Inditex was operating over
1200 stores in over 35 countries around the
world, under 6 faschia, and analysts projected
that Inditex stores would easily number 2000
within 5 years. Zaras vertically integrated
model depended to a great extent on local
Spanish sourcing for a large proportion of
garment manufacture. But Castellano had
considered that Zara would shift more
production offshore, probably to Asia, to take
advantage of the lower wage costs. How
much of a shift was necessary to support
Zaras expansion and to meet possible pricing
pressures, and how much of a shift could be
made without undermining Zaras success
were critical issues facing Inditex.

The Textile and Apparel Industry

In 1999,
the global textile and apparel
industry accounted for 5.7% of the production
value of world manufacturing output and
more than 14% of world employment. The
clothing market in the major countries was
estimated at about $580 billion, with the U.S.
accounting for about $180 billion and Weste rn
Europe about $225 billion. Eastern Europe
(about $14 billion), Latin America (about $45
billion) and some parts of Asia represented
areas for potential market growth as income
levels rose and markets matured out of a
highly fragmented stage dominated by
independent retailers.
The production of textiles is relatively capital
intensive, with labor costs accounting for
about 40% of cost of goods sold, while for
apparel this percentage is about 60%. Textile
manufacture also tends to be highly
specialized, depending on the raw materials
(natural or synthetic or a blend), whether the
cloth is woven, knitted, matted or fused, the
dying or printing, treatment and finishing,
and the overall performance characteristics
desired for the end product, such as how well
it accepts and holds dye, how well it insulates
and machine washability.
Though some
fabrics are simple and basic, there is constant
research and development into high

performance textiles, including

specialized industrial uses.

textiles

for

Apparel production involves the procurement of

fabric, the preparation of designs, including
samples and patterns, the cutting of fabric and
the sewing and finishing of garments. For
knitwear, the production process is modified to
incorporate the procurement of yarn and the
knitting process.
Apparel production is
intimately related to fabric procurement, so
much so that apparel designers will design
around a fabric or will design the fabric for a
particular garment.
In terms of production, the apparel industry
could be roughly broken down into three tiers of
quality, with some correspondence to sourcing of
production:
i.

a high quality segment encompassing

items that incorporate fashion elements
and emphasize quality of material and
workmanship, such as ladies suit s;

ii.

a medium quality segment for more basic

items where quality of material and
workmanship had to be acceptable but
where there was little differentiation
among producers and relatively little in
terms
of
a
time -sensitive
fashion
component (cardigans and khakis);

iii.

and a low quality segment (e.g., mens

underwear)
where
products
had
commodity-like
characteristics
and
competed principally on price.

The low wage countries had grown their

production volume mostly in the medium and
low quality segments, but were increasing their
share of high quality production. Fifty percent of
Europes exports but only 20% of its imports
were concentrated in the high quality segment.
The apparel industry was unusual in that many
segments of it did not really benefit from
economies of scale (volume production of
identical goods) in the traditional sense;
maintaining margin by more precisely meeting
high quality demand was more important to
profitability. For the more mechanized parts of
production fabric production, including knitting
by machine, and cuttingsetup time was not too
significant.
More importantly, except for
commodity-like garments, the ability to manage
small batch production to meet the everchanging tastes of consumers placed a premium

on flexibility and responsiveness of the

production system. Sewing and finishing
services were still done mostly manually and
tended to be highly specialized and the most
labor intensive part of the process, as
reflected in the large participation of small
and medium enterprises in the apparel
industry.
Also
relevant
was
the
preponderance of women, with their relatively
lower wage levels, among apparel production
workers.
Given the labor-intensive quality of apparel
production, it was not surprising that relative
wage levels had been a significant driver of
production sourcing. Along with the analysis
of wage levels, however, firms weighed other
important factors: raw materials quality and
availability, skills requirements and worker
productivity, transportation time and c ost and
other components of lead time, political and
foreign exchange risk, regulatory issues and
social responsibility concerns. A complex
system of quotas and tariffs had also been an
important part of the sourcing equation,
resulting in a number of dis tortions in the
supply chain, such as transshipping of goods
through Hong Kong to avoid quotas on
products from China. Chinas entry into the
World Trade Organization, as well as the
staged dismantling of the textile and apparel
quota system to be complete by 2005
were expected to increase China production
but also result in the reduction of trade
barriers affecting, e.g., import of goods from
the E.U. into Latin American countries. In the
meantime, the regional reduction of trade
barriers had fostere d increased manufacture
in Eastern Europe, Turkey and Northern Africa
in support of European markets and Mexican
and Central American manufacture in support
of the U.S. market.

The Textile and Apparel Industry in

the E.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.
manufacturing employment, and generated a
turnover of 178 billion 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%, France at 13%, Spain

at 9% and Portugal at 6%. The E.U. was the

second largest exporter of textiles and clothing
in the world, but stronger as an exporter of
textiles than of clothing. In particular, the E.U.
countries were leaders in the development of
high-tech fibers and related technologies.
The industry was known for its fragmentation
and the importance of subcontracting within
regional clusters of small and independent but
collaborative firms, such as in northern Italy, but
there are also some large firms, like Inditex,
managing or tapping into the subcontracting
networks to run manufacturing on a larger
scale.3 This industrial district structure of the
textile and apparel industry in the E.U., run on
low overhead but at a high skill level, implied a
different type of scale or network economy,
shared across a group of firms; whether or not
all firms within the system had common
ownership was not as important as how well the
components worked together.
In apparel, the E.Us special strength was
design-driven manufacturing, where design
stayed close to the customer and was bound up
with production. Of particular importance was
the close relationship between clothing
companies and textile companies, which
permitted collaboration on fabric design. On the
other end of the production chain, there was a
significant volume of outsourcing of laborintensive operations (outward processing
transactions (OPT)) to Eastern European and
Mediterranean rim countries, which were near
enough to provide rapid turnaround and could be
relatively easily monitored for quality control.
The Spanish textile and apparel industry was
comprised mostly of many very small firms, and
had traditionally not been strong in R&D or
technolo gical innovation, nor had it needed to be
in order to compete in the domestic market.
However, during the 1990s Spain experienced
greater prosperity, with rising wage levels, and
its domestic customer base had become more
sophisticated. Spanish consumers cared a lot
about fashion and quality in clothing purchases,
with price less of a consideration, but given

See The Competitiveness of the European Textile

Industry, by Maurizio Giuli (South Bank University
London 1997), citing the industrial district model of
production.

general wage levels, luxury name brand

apparel had been out of the reach of most
shoppers.4
Ortegas home province of Galicia is in the
rainy northwestern corner of Spain. A hilly
and picturesque land alongside the Atlantic
ocean, with a Celtic heritage, its weather is
often overcast or foggy. Galicias economy
had been rooted in farming, fishing and
mining. 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 to
Argentina, Uruguay and Cuba. Reducing
unemployment and improving skills levels had
been priorities of the Galician regional
government and labor organizations. The
principal city of La Corua (A Corua in the
regional dialect Gallego) had a modern and
convenient airport, and there were frequent
flights to Madrid and Barcelona, but La
Corua was not a major international port
city.
Though Galicia had not been known as a
center of textile and clothing manufacture on
an industrial level, in the 1980s the region
began an aggressive push to evolve
traditional dressmaking skills and participate
in the sector by promoting a concept of
Galician fashion. By 1998 it was estimated
that 29 thousand people (most of them
women) worked for about 760 firms in Galicia
involved in the textile and apparel business.
Many of the firms (over 450) were small
workshops or cooperatives, with an average
of 15 workers each, and seventy-five percent
of production consisted of the assembly line
production of garments and 16% of knitwear
production. There were also several large
firms headquartered in Galicia:
Adolfo
Domingues, Caramelo, Mafecco and Zara.
Galicias share of national production in the
textile and clothing sector increased from 7%
to 14% from 1991 to 1997, employment
generated
by
Galician
clothing
firms

According to a 1999 report of the U.S. and

Foreign Commercial Service and U.S. Department
of State, 6 out of 10 Spanish women rated quality,
3 out of 10 rated fashion, and only 1 out of 10
rated price, as the most important determinant in a
clothing purchase.

represented 10.5% of the total jobs created by

this sector in Spain for that period, and exports
from the region increased ten-fold from 1991 to
1998.

The Zara Model

Zaras Planning and Design Cycle
The Zara timeline for a season began, as for
other apparel manufacturers, a year or so in
advance of the start of the corresponding
season. There were two seasons, with the
spring/summer collection scheduled to arrive in
stores beginning in January/February and the
fall/winter collection scheduled to arrive in stores
beginning in August/September (reversed for the
Southern hemisphere). About a year in advance
designers began to work to define dominant
themes and colors, and then to put together an
initial collection.
Zara had 200 designers on staff.
While
designers were catwalk-influenced and expected
to adapt haute couture style for the mass
market, they are not themselves encouraged to
be ivory tower aesthetes making distinctive
fashion statements, according to Mara Jess
Garca Galn, head of the Design department.
Zara produces about 11 thousand styles each
year perhaps 5 times as many as a
comparable retailer would typically produce, and
all in relatively small batches to begin with, she
said. This encourages them to experiment, but
always within a commercial orientation.
The designers worked in large open spaces at
Zaras headquarters, with one design center for
each of the womens, mens and childrens lines.
Designers often prepared sketches by hand but
eventually worked on a CAD system to illustrate
the design and associated specifications. The
design centers were light and modern, with pop
music playing in the background.
The store specialists worked in the same rooms,
reviewing daily detailed printouts of store sales
and speaking to store managers by phone to
gather informal feedback. Each store manager
was responsible for a group of stores by region
and visited them periodically.
Each store
manager was likely to have retailing experience
and was chosen for her commercial design sense
and feel for market trends, because it was the
job of the store managers to feed market
information from the stores back into the design

and
production
decision-making.
Communications and workflow within the
design center were very fluid.

Patterns and Samples

In some cases designs were sent out to third
party suppliers for them to prepare samples
(a 2-3 month process), or the paper pattern
and then a sample garment were prepared in house, with Zaras pattern -makers and the
seamstresses who made up the samples
working in the same large, open design
center. Patterns once finalized could be made
available to the computers that would guide
the cutting tools. Based on samples, the
initial collection for the season was finalized
and shown within Zara.

Production Sourcing and Scheduling

Once the initial collection for a season had
been
approved,
the
related
fabric
procurement and production planning started.
Where garments were third party sourced
(about half of the total), commitments for
production were made roughly 6 months prior
to the scheduled store delivery, while
garments for in-house production were
scheduled for manufacture so that they would
be ready in time for scheduled delivery to the
stores. Of the outsourced production, about
60% came from Europe and 30% from Asia,
with the balance from the rest of the world.
The decision to source with external suppliers
or to manufacture in-house was based on a
number of considerations, including expertise,
relative cost and, especially, time sensitivity.
Inditex owned 21 Zara factories, each of
which was separate ly managed. Factory
managers bids were assessed against third
party supplier bids to make sure that in house manufacturing stayed competitive. In
general, garments with fashion styling tended
to be manufactured in -house while basics and
knits tended to be outsourced.
Zara committed about 15-25% of its season
inventory the more basic items six
months in advance of the season, compared
with 40-60% for most apparel retailers. By
the beginning of the season about 50-60% of
its season inventory had been committed
(either already manufactured or subject to
firm
commitment
with
specifications),

compared to what Zara estimated was closer to

80% committed for most apparel retailers.
About a quarter of the seasons collection was
made available at the start of the season, with
the inventory in the stores at the beginning of
the season tending to be more heavily weighted
toward basic items and including the initial
fashion collection, both of which were produced
based on regular lead time commitments
maximizing third party supplier sourcing. Inhouse manufacturing was reserved more for
current (in-season) production. Altogether, in house production was weighted 85% to in season production and 15% to the next seasons
production.

In-house Manufacture
In-house manufacture entailed two basic steps:
fabric procurement and garment assembly and
finishing.
Inditex owned a fabric sourcing
company in Barcelona (Comditel), several textile
production companies and a share in a fabric
finishing company, Fibracolor.
Comditel
managed about 40% of fabric procurement, with
a specialty in greige goods (undyed fabrics,
often woven cotton, which can be dyed or
printed to order). Setup time for dying or
printing was about 4 or 5 days, with the whole
process taking about a week. For synthetics and
more fashion fabrics, Zara relied mostly on
external sourcing.
Based on decisions about which styles were to
be produced and in what sizes, the Zara
factories cut the fabric. A mattress of layered
fabric was laid out on long tables, vacuum sealed
and cut by machine based on a computer layout
of pattern pieces. The layout itself was arranged
by people working at computer terminals who
specialized in appropriate layout with minimum
waste; Zara managers had determined that
these skilled workers were able, within 15 or 20
minutes, to arrange layout with higher utilization
than could be achieved solely with computer
algorithms, though the computer-generated
layouts, which took only a few seconds to
generate, were used for benchmarking. The cut
fabric pieces were marked and bundled for
sewing.
Sewing was subcontracted to a network of 400
smaller firms within Galicia and northern
Portugal. Within this rural area, where wages
were low and unemployment high, Zaras

subcontracted sewing work enabled many

women to work, including on a part-time
basis. Zara reserved time with its sewing
subcontractors but was not limited in terms of
garment specifications given in advance.
Deliveries between the Zara factories and the
subcontractors occurred many times a week,
with subcontractors picking up new work as
they left off completed work.
Overall
turnaround time for sewing ran a week or
two. Pressing, tagging and final inspection of
completed garments occurred upon their
return to the Zara factories. Assuming it had
the fabric in stock, Zara was in a position,
with its in-house design, pattern -making and
cutting capabilities, and its network of sewing
subcontractors, to go from start to finish on a
style production within as little as 10 d ays.

In-Season Production
Zara committed only 50-60% of production in
advance of the season, with the remainder
manufactured on a rolling basis during the
season. It was the in -house portion of the inseason production that easily could be
modified in response to market demand. If
an item was not selling, further production
could be eliminated. If an item sold well,
more units could be made up within a week
or so, assuming the fabric was available.
Zara would produce more to meet demand to
the extent of fabric in stock, but no more.
Miguel Daz Miranda, Vice-President of
Manufacturing, explained:
The size of the production run scale, in
the traditional sense is not an issue. We
recoup our costs on the garments through
markup because people will pay a premium
for the right garment at the right time. It is
the product that drives the customer.
For an expected very strong demand, well
take a bigger risk on the fabric purchasing
decision. Sometimes we make a decision that
from an economic point of view might not
seem sound, but we know that. For example,
we might have an item that is selling very
well, but if we think that we are saturating
the market with that look we will stop
manufacturing it and create unsatisfied
demand on purpose.
From a strictly
economic point of view, that is ridiculous. But
the culture we are creating with our

customers is: you better get it today because

you might not find it tomorrow.
According to Zaras management, echoed by
analysts and the press, it was the ability to
respond in -season that gave Zara a different
fashion risk profile from other apparel retailers.
When the initial collection had items that are
performing poorly in stores, Zara could respond
with alternative offerings, while most apparel
retailers could only respond with increased
markdowns and more aggressive (costly)
advertising to move unpopular merchandise. For
Zara, in-season replenishment did not require
incremental capacity to be found or much higher
costs incurred at the last minute; instead the
close-to-sale -time manufacturing permitted an
ongoing reallocation of resources in the ordinary
course and with minimal disruption. In-house
manufacturing capacity had been reserved and
was available, but exactly what was to be
manufactured could be determined within a few
weeks of when the garments would appear for
sale in the stores. We were able to tilt the in store inventory from equestrian themes to black
within 2 weeks of the September 11 terrorist
attacks, said [Jose Maria Alvarez Gallego, of the
Inditex capital markets group].

Distribution
Distribution of both outsourced and in -house
manufactured garments was centralized at
Zaras 500,000 square meter distribution center
in Arteixo. The distribution center is centrally
located among the fo urteen manufacturing
plants. Garments moved along two hundred and
eleven kilometers of track from the cluster of
factories located there to the distribution center.
Hanging garments were arranged on coded bars
that sorted automatically by style within the
distribution center; stock-picking of hanging
garments was done manually. Folded garments
were sorted on a carousel, with each garment
dropped down a chute toward a box for its
destination store based on its bar code.
About 2.5 million garments could move through
the distribution center each week . Though the
distribution center in Arteixo was utilized at only
50% capacity at the end of 2001, based on the
companys growth plans of 20-25% per year,
more distribution capacity needed to come online, and the company was building a second

distribution center in Zaragoza, in the interior

of the northeastern area of Spain.
Shipments were made out of the distribution
center twice a week, by truck to Europe and
by airfreight to stores outside Europe, so that
stores received goods within 24-36 hours of
shipment in Europe and within 1-2 days
outside Europe.
No inventory was held
centrally, and there was almost no inventory
at the stores that was not on the selling floor

Retailing
Store managers ask for the ite ms from a
collection that they wanted at their stores,
but the final allocations of inventory were
made centrally, taking into account current
store sales and inventory information, and
sometimes included new items not requested
by the store manager. Stores received new
inventory several times a week.
The
freshness in assortment is very important for
fashion forward merchandise. It creates an
exciting anticipation on the part of our
customers. They know when the trucks are
expected at their local store s o that they can
be the first to see the new merchandise,
reported Josefina Luca Bengochea Martn, a
store manager in Barcelona. Our customers
come into our stores on average of 17 times a
year; that number would be 3 or 4 for our
competitors
commented
Jos
Mara
Castellano.
Items that were not sold could be returned
for possible reallocation to other stores or for
outlet sale.
Sale periods were heavily
regulated in Europe; only items previously in
stock could be marked down. In general,
Zara tried to minimize the volume of
merchandise moved at end-of-season sale
prices, since under their system there was no
need for a large inventory clearance. Zara
experienced 15-20% markdown sale of
season volume, compared to 30-40% for
much of the industry. Zara did not advertise,
but instead relied on word of mouth. Typical
expenditure for retail advertising is 3-4% of
sales; at Inditex it ran at 0.3%, almost all of
that for simple newspaper notices of the sales
periods.

The Stores
Zara stores were uniform, including as to
lighting, fixtures and window display, as well as
the arrangements of garments, with a targeted
floorspace of 1200 square meters (see Exhibit
III). There is a model store located at Zara
headquarters that was kept up-to-date in terms
of current product selection. Store locations
were upscale in prime high street areas such as
the Champs Elysees in Paris, Regent Street in
London and Lexington Avenue in New York City,
and the store design, displays and windows
emphasized an upscale, fashio n forward
message.
The uncluttered arrangement of
goods in uncrowded spaces coordinated by color
made the experience of shopping more like that
in high-end luxury stores, and quite different
from that offered by the value marketers.

Pricing Strategy
Zara contrasted its pricing strategy to many
others in its business, who set price equal to
cost plus a target margin. Zara prices are
based on comparables within the target market,
subject to covering costs plus a target margin,
said Jos Pablo Alvarez, Vice-President of
Marketing.
For example, a coat in Madrid,
Spain could be priced for 100, and the same
coat in New Yorks Lexington Avenue store could
be priced $185 (a sample price -tag is shown in
Exhibit IV). Zara printed price tags for multiple
jurisdictions showing on the single tag all of its
different prices by country. This simplified the
tagging procedure and also permitted goods to
be moved from store to store without retagging
and also permitted goods to be transshipped
between one country to another without
retagging. With the adoption of the euro at the
beginning of 2002, Zara is considering switching
to a system of local price marking in the stores,
using a device that reads the item bar code and
prints the appropriate local price.

Growth Strategy
Zaras growth had been outward from its base
in Spain, with the locations for new stores
chosen selectively to stake out sequentially new
territories that could be supported within the
Zara model. Most of the stores are companyowned, although in some markets (eg,Middle
East) Zara has opened a small numbers of stores
through franchises and in some other markets

(eg, Japan) Zara has opened stores through

alliances. Zara does not establish local
distribution centers and warehouses when it
enters a market, or engage in store -opening
promotions.
Zara has about 450 stores in 33 countries
(see Exhibit V) and is opening about 10 stores
a month in 2002. Though Zara had stores in
New York City, Miami, and Puerto Rico,
Inditex management indicated that significant
expansion in the U.S. market was not a nearterm priority. In our view, the U.S. is overretailed, and the U.S. consumer, outside of
the coasts and big cities, has very basic
fashion tastes, said Jos Mara Castellano
The market for high volume styles typical of
American fashion, like chinos, is saturated.
Also in America you usually have to advertise.
We have plenty to do closer to home.

A Sourcing Dilemma
As Castellano stepped to the podium he
reflected on how far Zara had come since he
joined the company from IBM in 1984. He

felt comfortable that Zara was on the right track

for a continuation of the measured and organic
growth off its business model and unique
positioning based in Galicia. However, he and
other members of his management team,
together with Ortega, constantly revisited Zaras
strategy.
One element of the strategy before him now was
production sourcing. To provide some cushion in
its margins, particularly in view of possible
pricing pressure as the Euro took hold in Europe,
Zara had announced that the proportion of
outsourced manufacture would grow, initially to
60%, to take advantage of increased low cost
production coming on-line, principally in China.
This seemed like a moderate, conservative step
toward adopting the conventional wisdom that
higher margins could be built off lower wage
costs, but perhaps away from the Zara model
of local, vertically integrated production. But
how low could local, in -season production go
without negatively impacting Zaras fashionforward image, and ultimately, the competitive
advantage that drove its margins?

Exhibit I: Selected Financial Information for Inditex

(source: Inditex May 2001 Offering Memorandum)

Fiscal Year
(Euro in millions)
1996

1997

1998

1999

2000

Income Statement Data

Net Sales
Growth
Gross Profit
Gross Margin
Operating Income
Operating Margin
Net Income

1,008.5
16.8%
487.5
48.3%
152.4
15.1%
72.7

1,217.4
20.7%
599.1
49.2%
192.8
15.8%
117.4

1,614.7
32.6%
814.8
50.5%
242.1
15.0%
153.1

2,035.1
26.0%
1046.7
51.4%
299.6
14.7%
204.7

2,614.7
28.5%
1337.7
51.2%
390.3
14.9%
259.2

Assets
Cash & Equivalents
Account Receivables
Inventories
Other Current Assets

79.6
NA
NA
110.7

134.8
NA
NA
139.2

151.7
75.0
157.6
7.1

164.5
121.6
188.5
7.3

203.9
145.1
245.1
6.2

Long-term Assets
Goodwill
Deferred Charges

597.7
0
32.3

669.2
1.7
32.3

915.1
1.2
18.6

1168.8
98.1
24.1

1395.7
89.1
22.5

Total Assets

820.3

977.2

1,326.3

1,772.9

2,107.6

55.9
178.2

43.0
229.9

88.3
356.3

116.3
435.4

96.9
573.4

168
3.3

164.1
10.3

186.3
22.0

290.9
37.1

231.8
34.6

Total Liabilities

405.4

447.3

652.9

879.7

936.7

Shareholders' Equity

414.9

529.9

673.4

893.2

1170.9

Total L&SE

820.3

977.2

1,326.3

1,772.9

2,107.6

Balance Sheet Data

Liabilities
Short-term Debt
Other Current Liabilities
Long-term Debt
Other Long-term Liabilities

Financial Statistics
Days Inventory (fye)
Net Working Capital

35.6

33.8

34.2

(204.9)

(234.3)

(273.9)

1,525.5
2.04
748

1,999.8
2.17
922

2,606.5
2.41
1,080

4,752.34
321,000

4,534.69
441,000

4,853.82
537,000

11.0%

5.0%

9.0%

(123.4) (133.7)

Operating Statistics
Total Retail Sales (millions)
Average Sales per Store (millions)
Total Retail Stores
Average Sales per Sq. Meter
Total Selling Sq. Meters
Same Store Sales
Source: May 2001, Offering Memorandum

Inditex - Net Sales & EBIT by concept

source: May 2001, Offering Memorandum

(Euro in millions)

Net Sales
1998

Zara

1999

2000

1,304.2

1,603.4

2,044.7

Pull & Bear

131.9

143.8

172.6

Massimo Dutti

120.5

144.2

184.0

22.3

82.1

134.9

N/A

26.3

72.5

1998
213.0
15.0
14.2
(3.7)
N/A

EBIT
1999
248.4
17.1
17.4
7.1
1.7

2000
327.9
24.1
20.3
8.4
(3.2)

Bershka
Stradivarius

(Euro in millions)
Zara
Pull & Bear
Massimo Dutti
Bershka
Stradivarius

10

Exhibit II: Inditexs Product Positioning

11

Exhibit III: The Display and Store Layout in a Zara Store

12

Exhibit IV: Sample Zara Price Tags

13

Exhibit V: Zara Store Locations: 2000

Source: Inditex May2001 Offering Memorandum

Companyowned
Spain

Franchise

Joint
Venture

Total

220

220

Portugal

32

32

Belgium

12

12

France

63

63

United Kingdom
Germany

Poland
Greece

15

15

Cyprus

Israel

Lebanon

Turkey

Japan

United States

Canada

23

23

Argentina

Venezuela

Brazil

Chile

Uruguay

Mexico

Kuwait

Dubai

Saudi Arabia

Bahrain

Qatar

Andorra

Austria

Denmark

Total

410

27

12

449

14