Facebook Pinterest Search Icon SourcingJournal_horiz Tumbler Twitter Shape photo-camera graph-trend Shape latest-news icon / user

Why Zara Won’t Take China By Storm

LESS THAN ONE WEEK AWAY! Join Sourcing Journal & industry leaders at our SOURCING SUMMIT NY on October 19 to discuss the most pressing issues of the day. Your business cannot afford to miss this!

Inditex, fast fashion pioneer and parent company of leading retail chain Zara, has pushed boldly into China in the past two years, opening over 400 stores with plans for many more. But according to Columbia University professor and Zara expert Nelson Fraiman, the firm may not have what it takes to truly capitalize on the tomorrow’s largest market.

“Zara to me is a European store for European style; it’s very fashion forward,” says Fraiman. Right now, the growing Chinese middle class is drawn to European styles. As an added advantage, Fraiman says, they fit in European cuts. “You know who fits in those clothes? Chinese women fit in those clothes. They can use the same style, same sizing.”

Zara makes about half their goods in Spain, in factories they own themselves. The rest of Zara’s goods are made in cheap, long-lead factories in China and other Asian countries. Those goods are ordered in large quantities, months and months in advance. Zara could expand those lines endlessly.

In order to hit its fast fashion target of three weeks from concept to retail, Zara keeps at least 40% of the capacity in its European factories unbooked. That means they can respond quickly to trends, especially since the factories are often located just down the road from their design center, in Galicia, Spain. That factory capacity is limited, because of limitations in the number of factories that can be opened in Galicia.

Unfortunately, all that growth in China is rapidly soaking up factory capacity in Spain. So rapidly, in fact, that the company is pushing up against its internal booking limits, according to Fraiman. In a few years, the company may face a difficult choice between maintaining its tight lead times and producing enough to satisfy demand in emerging markets.

On top of that, growing in China means sacrificing one of Zara’s major cost advantages – cheap truck transportation from the Spanish factories to the majority of its stores in the European Union. Quick replenishment and rapid product changes in China means using air freight, which is exponentially more costly than trucks.

These problems will only grow as Zara opens more stores, but the firm can hardly afford to abandon the Chinese market. The ongoing economic crisis in Europe has meant that much of Zara’s considerable profits growth in recent years has come from overseas expansion.

The logical solution, according to Fraiman, would be for the company to replicate its model in China. That would mean establishing a Chinese design center and a cluster of high value low lead-time factories near a Chinese fashion hub.

With that base, Zara could potentially expand into the entire South Asian market, including India. It could take advantage of high-speed Chinese freight trains, and could cater a different set of designs to a new market – European influenced, but with Chinese flavor.

The company is unlikely to do this, however, Fraiman says. Amancio Ortega, founder of Zara and the world’s third richest person according to Forbes, is committed to Spain, and wants to focus expansion in the Eurozone, where the company has traditionally had its strongest growth.

A big Chinese push would involve a great deal of risk. The company could lose its DNA, much as Espirit did when it shifted its base to China. Zara’s growth is stable and there’s nothing to necessitate a big leap forward right now. But, as the saying goes, stability is the backward step between growth and decline.

 

Related Articles

More from our brands