The Street-Smart Zara Strategy

“Globalization Has Taught Us a Lot”

José María Castellano, deputy chairman and CEO of the Inditex Group, whose star is Zara, has helped build the fashion empire to a worth of €13 billion. Castellano, a member of IESE’s International Advisory Board, explains the importance of a young and flexible team and sheds light on the group’s strategy for the future.

Zara employs around 50,000 people and takes on 7,000 new employees every year. In 2004, it opened a new store every day somewhere in the world, and has a total of 2,200 stores in 56 different countries. These figures could never be achieved without a united team able to keep the pace. How do you motivate your people?
The key lies in sharing a strong corporate culture, with a clear vision of our business and objectives at all levels, so that geographical distance and cultural differences actually become an advantage, an element that enriches the project rather than creating difficulties. I believe that the first step towards unity is to share in an exciting project, one in which we all feel as though we are playing a part. The managers at Inditex are very young, but they nevertheless assume high levels of responsibility in the decision-making process, with the opportunity to grow both personally and professionally along with the company. This involvement, this feeling of participating in a common project, is the key element that allows our stores in New York, Barcelona and Tokyo to operate on the same model.

During the next five years, the Inditex Group wants to double in size in Europe. Why expand your presence in Europe and not in other emerging markets?
Expansion in markets other than Europe is another possibility that we are exploring. We already have a significant presence in other regions of the world. Mexico, for example, is the country with the largest number of group stores after Portugal and Spain. We have also opened stores in markets that could be regarded as emerging, such as Russia, Malaysia and Brazil. However, our presence there is not the result of a particular strategy to grow in that type of market. We are merely attempting to take advantage of opportunities that are interesting from a business point of view.

In general, any country where there is an interest in fashion could be a good location for us to develop our business. We therefore have 300 stores in America, the Asia-Pacific region, the Middle East and North Africa.

However, we are convinced that Europe should be our natural growth area as it is here that there are excellent prospects for our business, as shown by the strategy pursued by our competitors, who have located more than 80 percent of their stores in Europe. We have the potential for growth in the domestic market, particularly in respect of the youngest of the Inditex Group’s formats.

We want to achieve particular growth in countries such as Italy, France, the United Kingdom and Germany. In these last two markets, for example, we have between 30 and 35 stores. They are huge markets in which other companies in the sector have more than 200 stores. We believe in the growth potential of these countries and the evolution of our business reflects this.

How do you take advantage of the synergies caused by globalization?
Competing in a global marketplace is unquestionably a challenge, but it is also a great opportunity. It’s an opportunity to learn from the successes and failures of others and also from the response of the different markets to our commercial advances.

The Inditex Group now has standard processes that originated, for example, from the particular needs of a subsidiary in Japan that other subsidiaries did not necessarily view as a priority. However, making use at a corporate level of initiatives that have sprung from a particular local environment has allowed us to improve and become more efficient. We can’t ignore potential like that.

And the U.S.?
It’s not yet the right time to talk about expanding in the United States. In fact, the company hasn’t even discussed a timetable for this. We have a presence in the main North American cities, from the Atlantic to the Pacific coasts, but for the moment we manage only 16 stores there, with a few more to be opened during 2005. Clearly, Zara’s growth potential in the country is enormous. Up until now, we wanted to take advantage of any real estate opportunities that arose and were in line with our strict criteria for store location. It’s true that in recent years we have slightly increased our growth rate in the American market, but you can’t compare five new stores with the almost 300 that we opened over the last year in Europe.

The U.S. is a very large and complex marketplace. When we finally decide to expand there it will require a great amount of effort, not only from an investment point of view but also in terms of human resources and management. That effort is currently being devoted to Europe.

Do you think that we are currently too “frightened” in Europe by China? Is it possible to compete with China’s strength?
The removal of export quotas from a country like China has its impact on the fashion distribution sector. In our case, the impact is smaller because our way of looking at fashion leads us to put market response times before other factors such as cost.

In this regard, 70 percent of our production comes from within Europe, and this will remain the case during the coming years. The proximity of our suppliers, especially those who make clothing with greater fashion content, is essential if we are to maintain a flexible response to the changing trends that can occur within each collection. In general terms, I believe that European industries cannot compete on the basis of cost, which is a battle that is already lost. They must compete on the basis of productivity.

In any case, we don’t see this process as a confrontation. We have maintained a stable presence in China (through our sales offices) since the mid-1990s. We have opened our first store in Hong Kong, and we hope to open more stores there over the coming years.

According to the experts, one thing that has made the Inditex Group distinctive – especially Zara – is its individual marketing strategy favoring stock rotation in its shops. Why do you think this has worked at Zara? And how is a brand built today?
Our model is no better than the ones used by our competitors, though it is different. We also know that it is a model that can be copied. However, it is very difficult to achieve a corporate culture as strong as the Inditex Group’s, with a team of professionals who have accumulated a wealth of experience in highly diverse markets and who are accustomed to making decisions at the speed at which we operate throughout the world.

Zara is a very well-known brand, not only in Spain, where it has about 100 percent recognition, but also in markets in which we do not operate and others in which we are only taking our first steps. In our case, the limited use of traditional advertising often surprises people. However, I always say that this is not a low profile business. It’s true that our corporate culture in this regard is very different from other companies in the sector, but we are still a highly visible brand.
Our fame comes from the display windows in our stores, which are located in some of the most well-traveled streets in 400 cities around the world. We have not renounced advertising. Instead, we have gone for location and the image that our stores transmit as the point at which the processes of design, manufacture and distribution all come together.