Case study - Zara International Retail Expansion
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Zara is considering expanding internationally and must decide which new market to enter. It is analyzing entering the Chinese market starting with Shanghai. China represents a large opportunity due to its growing population and rising disposable incomes. Fast fashion is popular in China and production costs are lower there and in Bangladesh where Zara could source garments. The recommendation is for Zara to set up a joint venture in Shanghai, use an "oil stain" approach to expansion, source from Bangladesh, and establish a new distribution center in China to enable its expansion in Asia over three years.
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Case study - Zara International Retail Expansion
- 1. International Expansion Presented by: Neha Randhawa, Alivia Ye, Arjun Pisharody
- 2. 2Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale Agenda For Today’s Meeting Current situation overview at ZARA1 Identifying ZARA’s core problem2 Recommendations & rationale3 Risks & mitigation4 Implementation plan5
- 3. Executive Summary 3Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale Highly competitive, fragmented $900Bn global apparel industry ZARA 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, China Setup JV with local partner, “oil stain” approach, new distribution centre Source from China & Bangladesh Reco Large market opportunity; population, disposable income growing, trendy fashion Fast fashion garments at lower price points popular in China China and Bangladesh has lower labour inputs and rents, cost to manufacture low Rationale
- 4. 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 4Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale
- 5. 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) 5Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale
- 6. Core Issue – Marketing and Sales Problem As ZARA grows internationally… Which market should it enter and how? 6Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale
- 7. 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 Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale
- 8. Recommendations 8Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale 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
- 9. Why China - The Golden Opportunity 9Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale • 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. 10 Shopping is very important for Shanghai residents Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale Beijing and Shanghai rank Shopping as the most important leisure activity Shanghai pays more attention to fashion information
- 11. Shift in Consumer Trends 11Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale • 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
- 12. How to move forward 12Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale 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
- 13. Risks & Mitigation 13Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale RISK: Zara products entering the black market MITIGATION: Hard to imitate trends and low price points HIGHLOW 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 Fiber Agreement MITIGATION: Develop strong relationship with suppliers and have strict regulations against wrong practices RISK MITIGATION
- 14. Implementation 14Agenda Executive Summary Situation Analysis Core Issue Recommend ations Risks & Mitigation Implementa tion Rationale 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
- 16. 16 Exhibit 1: Product Market Positioning Map Fashion - Fashion + Price - Price + Benetton GAP H&M ZARA ZARA: Medium quality fashion clothing at affordable prices
- 17. 17 Exhibit 2: ZARA vs. Key Competitors GAP H&M Benetton ZARA Production Outsourced Outsourced In-House 40% In-House 60% Outsourced Production Lead Times High High High Low
- 18. 18 Exhibit 3: ZARA’s Business System ZARA Design Sourcing & Manufac turing Distributi on Retailing
- 19. 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. 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 EXHIBITIONS DESIGN INTRODUCTION TO COLLECTION MANUFACTURING 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 5TH QUARTER