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Inditex’s Zara Faces Rising Competition

Zara’s and its parent company, Inditex, are perhaps the text book for how to do retail supply chain right.

Based in Spain, the company has perfected the way to design, source, produce and distribute to its stores the latest fashion in a matter of just weeks.

Zara’s manufacturing facilities in Spain, Portugal, Morocco, and Turkey produce its trendiest clothes and account for about half of Zara’s inventory, according to the company. Its basic attire such as t-shirts and sweaters are ordered on a traditional schedule, about six months in advance, from facilities in Asia and other low-cost locations. However, regardless of where items are produced, all make their way through Zara’s massive five million square foot distribution center in Spain to be inspected and sorted before being shipped to Zara’s stores.

This centralization has helped the company become one of the most successful global retailers. However, in 2013, China surpassed France to become the company’s second-largest in terms of the number of stores – 142. Like many retailers, Inditex has been expanding globally however, not surprising, this appears to have come at a price as 2013 through October operating costs rose 7.0% and profit slowed. Despite this, the company plans to continue its expansion plans by launching e-commerce operations in South Korea and Mexico in 2014 along with additional physical stores.

Inditex currently has a total of 4,545 stores in Europe, 536 in the Americas and 1,168 in Asia and the rest of the world. Will its centralized supply chain continue to succeed as it expands? or will it look to replicate its Spanish cluster-model in Asia? Based on its recent financial reports, investments and upgrades to its logistics centers in Spain are ongoing while it opens physical stores throughout the world. This indicates that for the time being at least, Spain will remain the focal point of its logistics operations.

It is expanding its online platform which may help stem some of its rising operating costs (Depending on how these platforms operate, it could in fact complicate matters). Online stores were established in China in 2012, Russia and Canada in 2013 and as mentioned previously, South Korea and Mexico in 2014 along with Greece and Romania. Currently,Zara.com is available in over 20 countries and plans to expand its online platform for a total of 27 countries by the end of 2014.

Like other retailers, Inditex’s Zara and its other retail brands are facing the need to expand. Asia presents many opportunities for European and American retailers, however, competition is great and logistics constraints such as delivery remain concerning.

Inditex will need to be mindful of financial consequences as it expands – while necessary, the returns will need to be closely monitored. For the full fiscal year 2013 (period ending January 31, 2014) net sales increased only 5.0% with net income growing 1.0%.