Zara Report Stock Valuation

ISSUE IDENTIFICATION

Zara‘s recent stock valuation is based on expectations of future growth. In order to satisfy investors and justify the stock's high valuation, it is crucial that Zara derives a growth strategy that will allow the company to achieve profitable expansion.

Zara has structured its operations so that it can detect advancements in fashion and react to them by providing consumers with products that meet their needs. Although this is appropriate for their current business, it is uncertain whether this same level of responsiveness can be maintained as Zara expands. Current responsiveness comes from synchronization between design teams, manufacturing, distribution, and retail stores. Therefore, expansion will not simply require investments in new retail stores, but investment along the value chain to ensure that they keep the same level of coordination on a larger scale.

The issue at hand is sustaining Zara's short production cycle of four to five weeks, while growing internationally. Quick response production is their main competitive advantage and Zara will need to make a trade-off between response time and retail penetration into new markets.

INDUSTRY ANALYSIS

The global apparel industry is a buyer drive market. Buyers determine popular trends, and suppliers respond to their demands. Fashion garments must be delivered in a timely manner, as the popularity of these styles is short lived.

Competition within this industry is intense. Consumers require a wide variety of clothing, and it takes many suppliers to meet these requirements. This competition has resulted in independent retailers who tailor their products to meet local tastes. This makes it difficult to grow internationally, as it is hard to evaluate trends across different markets. Refer to Exhibit 1 for competition analysis.

ZARA'S VALUE CHAIN

Zara's value proposition is to combine affordable prices with the ability to offer new fashionable styles faster than its competitors. See Exhibit 2 and 3 for value chain analysis.

Design

The first step in Zara's value chain is product design. Zara's design process begins with a strong investment in human resources. The company has significantly more designers than its competitors, such as H&M, and these designers are fashion-savvy and in-touch with the evolution of consumer preferences. While competitors may collect data for a few months before formulating designs, Zara's design teams are constantly turning ideas into potential products. Zara's creative teams design several dozen new products each day, and these products are quickly filtered to find the select few that have very positive consumer reactions. This filtration system ensures that only the best designs make it to Zara's store shelves;