Zara Case Study: Analysis of Strategies, Challenges, and Financials

This case study provides an in-depth analysis of Zara, a strategic business unit of Inditex, focusing on its business strategies, challenges, and financial performance. It examines Zara's rapid response manufacturing, vertical integration, and product diversification strategies, along with issues like span of control, over-reliance on the European market, and increasing competition. The study includes a market share analysis, sales performance evaluation, brand analysis, and financial ratio assessments, such as current ratio, return on assets, asset turnover, and profit margins. It also identifies Zara's valuable resources, competencies, and the competitive forces it faces. The study concludes with recommendations for Zara to maintain its competitive edge in the global apparel market. Desklib is a platform where students can find similar solved assignments and past papers.

Running head: ZARA CASE STUDY
Zara case study
Author’s Name
College
Author Note
Author Name, Department, University
This report was written purely for academic purposes, it may not be reproduced without
prior consent from the author
Correspondence regarding this article should be addressed to Author Name, Department,
University, Address.
Contact:

ZARA CASE STUDY 2
Executive summary
This report examines Zara Company, a business unit of Inditex multinational apparel group. The
strategies that Zara employs are carefully identified. The report then identifies the challenges
facing the management. It analyzes various financial details of the company such as profit
margins, current ratio, Return on Assets, Asset turnover, and capital structure of the company to
come up with effective investment decisions. The report further examines the competencies of
the firm and the competitive forces facing the company. Lastly, the report gives
recommendations to help the Zara to remain competitive in the market.

ZARA CASE STUDY 3
Table of contents
1.0 Introduction................................................................................................................................4
1.1 Overview of the Inditex (Zara) company..............................................................................4
2. 0 The Company strategy..............................................................................................................5
2.1 Rapid Response (Fast manufacturing)...................................................................................5
2.2 Vertical integration strategy..................................................................................................5
2.3 Mergers and Acquisition........................................................................................................5
2.4 Mass production.....................................................................................................................6
2.5 Franchising............................................................................................................................6
2.6 Just in time inventory control................................................................................................6
2.7 Product diversification strategy.............................................................................................6
2.8 Low cost and High-quality strategy.......................................................................................7
3.0 Significant problems confronting management.........................................................................7
3.1 Span of control.......................................................................................................................7
3.2 Over-Reliance in European Market.......................................................................................7
3.3 Foreign Exchange Challenges...............................................................................................7
3.4 Legal bottlenecks in the Middle East.....................................................................................8
3.5 Increasing Competition..........................................................................................................8
3.6 Parallel operations and internal rivalry..................................................................................8
4.0 Analysis and Evaluation............................................................................................................8

ZARA CASE STUDY 4
4.1 Market share analysis............................................................................................................8
4.2 Analysis of sales....................................................................................................................9
4.3 Brand Analysis.....................................................................................................................10
4.4 Financial Ratios...................................................................................................................11
4.4.1 Current Ratio................................................................................................................11
4.4.2 Return on Assets (ROA)...............................................................................................11
4.4.3 Asset Turnover..............................................................................................................12
4.4.4 Profit Margins...............................................................................................................13
4.4.5 Rate of returns (ROR)...................................................................................................13
4.4.6 Capital Structure...........................................................................................................13
4.4.7 Marketing and production.............................................................................................14
4.4.8 Valuable resources and competencies..........................................................................14
4.4.9 Competitive forces facing the company.......................................................................14
Conclusion.....................................................................................................................................16
Recommendations..........................................................................................................................17
References......................................................................................................................................18

ZARA CASE STUDY 5
1.0 Introduction
1.1 Overview of the Inditex (Zara) company
Inditex is a Spanish company that owns Zara as a separate strategic business unit among
other business interests. Zara deals exclusively with manufacture and sale of apparel. It is the
most profitable unit of Inditex and contributes over 60% of annual revenue to the mother
company (Hammoudeh, 2016).
Zara can trace its roots in La Coruna Spain where it was established as a store in 1971.
Initially, the store was called Zorba but the name was already in use by a different store that
operated nearby (Mertens, 2015). To avoid confusion, the name was changed to Zara.
Additionally, Zara was established to deal with rejected apparel orders from Inditex but
flourished and became a profitable business entity (Caro et al., 2010).
Established using the Greenfield strategy, Zara had very little competition in Spain
(Mertens, 2015). It soon began designing and manufacturing customer orders on its own.
Consequently, it established its headquarters parallel to Inditex in Spain. In 1980 the company,
through expansion strategy entered the Portuguese market and later penetrated the US and
French markets in 1989 and 1990 respectively (Tokatli, 2008). Since then Zara has expanded its
operations in over 88 markets and operates 1,923 stores worldwide. The company commands
annual sales in excess of 30.9 billion US dollars. It is a market leader competing with 11
multinationals (Hammoudeh, 2016).

ZARA CASE STUDY 6
2. 0 The Company strategy
The company employs a number of strategies while entering a market, manufacturing,
distributing its products and while competing with other multinationals. These are analyzed.
2.1 Rapid Response (Fast manufacturing)
The company has a lead time of two weeks at most from establishing what a customer
needs, designing the fashion, manufacturing it and distributing it to the customers. Conversely,
the competition takes anything between a month to two months for the same processes. This
gives Zara an edge as it releases new designs before competition has a chance (Yu, Subramaniam
& Connella, 2013).
2.2 Vertical integration strategy
The company has avoided the production trap that has engulfed the competition. Zara
controls the design, manufacturing process, and eventually does the distribution of its apparel,
unlike the competition that outsources these processes to East Asia where the cost of labor is
inherently lower. While other companies have to deal with third party delays, Zara ensures that
its products are ready for display straight from their factories in Spain and Portugal (Williamson,
Jenkins, Cooke & Moreton, 2013).
2.3 Mergers and Acquisition
When Zara wants to get into a new market, it first merges with an eating company to be
able to decipher the prevailing conditions. Next, it initiates a buyout by purchasing the shares of
their partners after understanding the market (Porter, 2008).

ZARA CASE STUDY 7
2.4 Mass production
The company produces different fashion designs en masse. In 2014, the company
introduced 18,000 new products to the market. Zara does this by concentrating their production
in Spain. This enables the company to enjoy economies of scale on their products (Stengel,
2011).
2.5 Franchising
A little less than 10% of Zara stores are franchises. These are established in the Middle
East, Some regions in South America like Venezuela and also in parts of Central America. This
is done to abide by each country's regulations. In Middle East countries like Qatar and Kuwait, it
is incumbent upon a foreign entity to issue non-controlling shares to a local entity. Zara forms
these franchises to abide by the law (Tokatli, 2008).
2.6 Just in time inventory control
Zara produces just what has been ordered by the customers. This ensures that there is no
shortage of raw materials, overproduction or underproduction. If a certain design stays on a
particular display for more than 2 weeks, it is circulated to other stores. Overall, this inventory
management technique prevents wastage hence affording Zara low cost of production (Thomas,
2015).
2.7 Product diversification strategy
Inditex the parent company of Zara owns over 9 brands including Stradivarius, Pull &
Bear, Massimo Dutti, Oysho among others. While Zara is the most productive brand
commanding 64% of total sales, the company caters for different clients. For this reason, Inditex
has spread their operating risks (Caro et al., 2010).

ZARA CASE STUDY 8
2.8 Low cost and High-quality strategy
According to Hammoudeh (2016), Zara remains a favorite brand among the consumers
because of their wide range of apparel is affordable compared to what other companies such as
H&M, or NEXT offer their customers. In the same breath, their product quality is not
compromised for price. This endears the company to customers since they acquire quality
fashion at affordable prices.
3.0 Significant problems confronting management
3.1 Span of control
Zara is growing at a fast pace of a new store every single day. In 2014 it had 1,923 stores
with an average annual growth rate of 5%. They are projected to be 2576 by 2020. For this
reason, the management has difficulties in controlling the activities of each individual store. It is
very difficult to inculcate company core values or control customer interactions (Meyer, Estrin,
Bhaumik & Peng, 2009).
3.2 Over-Reliance in European Market
Zara has 1178 stores in Europe accounting for 61% of investment in a region where
economic growth rate is the lowest in the world at 2.4%. This means that if economic crises were
to affect this region again as was the case in 2008, their business would not thrive as projected by
management (Dickson & Chang, 2015).
3.3 Foreign Exchange Challenges
Due to the strength of the Euro and the Dollar, the cost of operations is rising in Spain
and Portugal where Zara has its headquarters and base of operations. The Yuan value is also

ZARA CASE STUDY 9
increasing which is affecting the market dynamics in Asia-Pacific where the company has long-
term interests (Murray, Ju & Gao, 2012).
3.4 Legal bottlenecks in the Middle East
Many countries in the Middle East require partial ownership of foreign companies with
local entities. This is also the case with Central America and Venezuela. This forces Zara to
operate Franchises which it cannot enforce full control (Hammoudeh, 2016).
3.5 Increasing Competition
The market rivalry is becoming intense. There are 10 other competing multinationals in
the apparel market. These include Hennes & Mauritz, Fast Retail, GAP among others. This may
lead to decreasing market share growth in the future (Porter, 2008).
3.6 Parallel operations and internal rivalry
Inditex has its own headquarters in Spain as is the case with Zara. This leads to
duplication of Dutti. On the other hand, the many brands operated by Inditex invite internal
competition. This, in the long run, may lead to inefficiencies (Hitt, Ireland & Hoskisson, 2008).
4.0 Analysis and Evaluation
4.1 Market share analysis
The market is dominated by 11 competing entities. Zara is the current market leader with
an apparel market share of 23%. It is closely followed by H&M with a market share of 18%.
Following the analysis, it is expected that Zara's lead will continue to widen as the global apparel
market is projected to grow to 1.65 Trillion US dollars by 2020 (Statista, 2017).

ZARA CASE STUDY 10
Inditex(ZARA)
24%
Hennes &
Mauritz
18%Fast Retail
13%
GAP
12%
Limited Brands
10%
PVH (Calvin
Klein)
7%
Ralph Lauren
5%
NEXT
4%
American Eagle Outfitters
3%
Abercombie & Fitch
3% Espirit
2%
Market Share
Figure 1. Market share analysis. Source: (Statista, 2017)
4.2 Analysis of sales
Zara is expected to enjoy strong sales growth as customer demands for their products
keep growing at 8.8%. This is only rivaled by PVH, the American company renowned for their
Calvin Klein brand. All other competitors showed lesser growth in sales from the previous year
(Statista, 2017).

ZARA CASE STUDY 11
Table 1. Competing companies’ sales performance
Company
Country of
origin
Percentage Change in sales (Year
2016-2017
Inditex(ZARA) Spain 8.8
Hennes & Mauritz Sweden 4
Fast Retail Japan 4.1
GAP USA 2.2
Limited Brands USA 0.6
PVH (Calvin Klein) USA 8.8
Ralph Lauren USA -10
NEXT UK -1
American Eagle Outfitters USA 5.2
Abercombie & Fitch USA 5
Espirit HongKong -10
4.3 Brand Analysis
From the 9 brands that are run by Inditex, Zara has the highest propensity for sales
representing 64% of the company sales turnover. Other brands like Massimo Dutti which targets
the high-income segment of the market also performed well at 7.8%. However, low performing
brands like Uterque with 0.4% and Oysho 2.3% pull the company for every €1 investment done
by the company and should be overhauled (Leonard & William, 2013).

ZARA CASE STUDY 12
4.4 Financial Ratios
4.4.1 Current Ratio
Table 2: Current Ratio
Current ratio = Current Assets
Current Liabilities = 7,105,953/3,748828 = 1.9
The analysis of current ratio helps in understanding the company's ability to fulfill its
financial obligations with regard to honoring their liabilities as and when they fall due. From the
analysis of the year 2014, Zara had a current ratio of 1.90 which indicates that the company's
current assets can easily handle the current liabilities (Stengel, 2011).
4.4.2 Return on Assets (ROA)
Table 3: Calculation of ROA
Return on Assets = ( Net Profit
Net Assets ) x 100
Net profit from Income Statement (2,510,000)
Net assets= total assets - total liabilities (15,377,000- 4,908,299) = 10,468,701
ROA= (2,510,000/10,468,701) x 100 = 23.97%