Zara's US Operations

Abstract

Zara, a flagship venture of Spain-based Inditex, started its US operations in 1988. Zara USA Inc. is based out of New York and retails men's and women's clothing. The company has now grown to own 49 stores spread across the east and west coast of USA. The once labor-intensive US apparel industry (employing over 1 million workers in the 1980s) has now adopted delocalization and has outsourced production to low-wage countries. For long, the industry relied on a model based on 'mass fashion' products, economies of large-scale and innovations in IT as sources of competitiveness.

In doing so, it ignored the importance of niche product innovation, small-scale supply chains and flexible retailing. Even in NYC, where small firms and fashion markets are important, the large-scale mass-fashion model is pre-dominant & has inhibited contractors from developing highly productive and entrepreneurial supply networks. The lack of emphasis on vertical integration in the US apparel industry even by major brands like the GAP has proved costly. Where GAP faltered, Zara scored.

Its counter intuitive business strategies like high vertical integration, just-in-time manufacturing, limited production runs, rarely running sales, zero advertising and minimal outsourcing have beaten the pants-off its competitors. Tight control on production has enabled Zara to turn its inventories 5.3 times per year, compared to 4.9 times for traditional U.S. apparel retailers. According to a research, while Zara stores take markdowns averaging 15% on about 15% of their inventory, U.S. department stores take an average 40% markdown on about 60% to 70% of their merchandise.

In order to trounce its rivals such as H&M and drive up its sales in America, Zara now plans to start online order processing from the US in September 2011. Launching web stores is a great strategy for Zara, for two reasons:
Firstly, it is more cost-effective to start an online store than invest in real estate in 50 more malls in the US and Secondly, Zara has a strong brand presence in the 25-35 year age-group. This is a more tech-savvy, e-commerce friendly demographic and can help push Zara's US operations
However, as Zara is still relatively new in the US market and is still trying to gain a foothold. There are many challenges that await it here:
As Zara expands in the US, replenishing stores twice a week will be increasingly complex and expensive. Costs are already starting to climb and growth in same-store sales have slowed down.

For now, the company compensates some of the cost by charging more for goods sold in the US. For instance, Zara clothes cost up to 40% more in America than they do in Spain. This trend if continued for long could lead to an inconsistent brand image; also as long as Zara's operations were limited to Europe it could take advantage of its 'fast-fashion' approach. However, the European market is relatively homogeneous and styles that work well in Barcelona, London and Paris are likely to sell equally well in Milan, Berlin and Lisbon.

This may not hold true in the US, The increasing distances between the distribution centers in Europe and stores in the US could take away Zara's 'speed-to-market' advantage as well . The question is whether Zara will continue with its old model to deal with these changes or adopt a new, cutting-edge model that is capable of maintaining the company's competitive advantages and its industry lead?