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The company that is going to be analyse in this essay is Inditex and particularly Zara, its main brand. Inditex Group is a textile company, the most important in the Spanish textile sector and one of the most important multinational and one of the most weighty multinationals in Spain.
A Multinational Corporation can be defined as enterprises which own or control production or service facilities outside the country in which they are based (definition by the UN; Czinkota, 1992; page 298). Inditex can be classified as a multinational since they offer their services in 800 outlets in 25 countries all over the world, although the production is done in Spain, its home country. It also follows some of the appropriate strategies to trade abroad as a proper multinational, which will be explained in the following essay.
Inditex Group is a conglomerate of companies, mainly textile enterprises, but also from other sectors. It gathers an important number of companies all around the world, trading in the USA, Mexico, France, the Netherlands, Belgium, Luxembourg, Italy, Germany, Greece, Portugal, Andorra, UK, Israel, China, Cyprus, Malta, Sweden, Norway, Japan, Turkey, Canada, Argentina, Uruguay, Chile and, of course, Spain.
Its main brands and stores are: ZARA, Pull & Bear, Massimo Dutti, Kiddy's Class, Brettos, Lefties, Stradivarius and Deep Blue Jeans.
The most important of all the brands of the Group is Zara, which was the first to be created. It is specialised in men, women and children wear.
Massimo Dutti is focused on young men and women who look for quality, whilst Pull & Bear is developed for youngers who prefer a casual way of dressing rather than the formal schemes of Massimo Dutti.
The last brand that the Group has created in Bershka for young disco-girls. This brand is very similar to the Stradivarius style (brand that Inditex acquired in October 1999) (El Correo Gallego Newspaper).
In 1973 Amancio Ortega Gaona, Inditex Group president and main shareholder, created a company specialised in producing dressing gowns and underwear. Two years later he opened the first Zara store in La Coruña.
That was when he started building the whole holding. During the 70's and the 80's he surrounded by cloth-designers who used to travel to the main catwalks in Europe, where they can copy the most original ideas.
The big growth of the company happened in the 90's, when the Group increased the supply with new brands. In 1991 Pull & Bear was created. On the same year they acquired the 65% of Massimo Dutti, percentage that has increased to a 100% in 1995.
During these last years Inditex Group has created the other brands such as Kiddy's Class, Brettos, Lefties, Bershka and Deep Blue Jeans. It also acquired Zara's competitor Stradivarius in October 1999.
The Group has about 800 outlets in 25 countries all over the world. Nearly 500 are opened in Spain where the market is almost saturated with all the different brands.
Zara's policy about how stores have to be, is the following:
The store has to be located in the very central and commercial streets of the city or inside very well-known shopping centres.
The minimum area of each store has to be 1500 squared metres; this was the main reason why they were not succeed in Italy.
Zara only establishes in cities larger than 100,000 inhabitants.
Motivations for going abroad
Firms can be classified into four different categories according to the motivations that make them moving overseas: Resource seeking, Market seeking, Efficiency seeking and Strategic Asset seeking.
Every company uses to follow at least one of these motivations, and furthermore, they tend to have more than one. In the case of Inditex, and particularly Zara, the main motivations are market seeking, as the Spanish market is saturated and they cannot grow any more; but also efficiency as they diversify their business. These two types of motivations will be clarify down bellow:
Corporations search for better opportunities to enter and expand in other markets, due to their experience and advantages that they can offer to these markets. This motivation can arise due to several different aspects and circumstances; as for instance since the customers are gone or the home market is saturated, the company moves abroad to retain business, or because production costs are cheaper in a foreign country than in the home country, or even due to a change of host government policies. Or, as in the case of Inditex Group, due to it has become crucial for the company the physical presence in foreign countries, they have to make sure that their brand names are familiar to these target markets.
The aim is to gain an advantage from operating in more than one economy, so they can profit from all the economies where the company is trading and at the same time, the company minimises the potential risks that might arise, therefore, for example, Inditex Group follows different strategies depending on the market they are operating in (Israel! Franchising, Germany! Joint Venture....).
Depending on the objectives that company has, it will follow one different strategy, although it is very common to use a combination of different strategies to move abroad, and particular ones depending on the country the company is moving into.
Inditex Group has always wanted to have the main control in all its operations since its main strategy is the wholly owned subsidiary formula, although in the last few years this policy has changed and some other strategies have been developed, such as joint ventures and franchising.
Wholly owned subsidiary
Using this strategy, the firm establishes an entity in a foreign country, paying all the costs incurred. To establish a wholly owned foreign subsidiary, an enterprise may acquire an existing company in the foreign country or build one from scratch, the so-called green field investment (this is the formula that Zara follows).
The corporation preserves absolute control and supremacy over the operation.
Since they do not have to discuss with a partner, enterprises have more flexibility to adapt faster to market demand.
Profits need not to be distribute with anyone outside the company.
The company is able to protect trade secrets.
The creation of bad atmosphere because profits are not shared with local people.
Government administrators in many countries tend to view wholly owned foreign investment in their nations as negative operations.
The risk is greater since the company is alone and new in the country.
In 1998 Inditex Group entered into the Latin American market, one of the largest in the world and with a great expectancy of growth in a close future.
This entrance started in Argentina, where the first outlet was opened in April 1998 in Buenos Aires, breaking all the schemes that were used by local textile retailers, with a large store following Zara's policy. The investment could not be more profitable, and this outlet is nowadays one of the most prosperous world-wide. The main reason why they have chosen Argentina at first was due to Argentinean preferences in cloths are very similar to the European ones.
This was a quite risky operation, if it had failed, lots of expectancies of the Group would have disappeared, but since it was worth enough to take that risk and it was a absolute success, Inditex Group decided to carry on opening Zara stores in the continent (Expansion Newspaper, 29-06-1998). Uruguay was their next target; although it is the less populated country in South America, it was a very tempting market due to it was the first foreign investment in the textile sector of this country.
They have also opened new stores in Chile, the most developed country in the continent, and the Group is also prospecting in Brazil, the largest market in the continent, and in Venezuela and Mexico too.
They still have not had any major problems with any government in the region, since these countries are looking forward to investments and to assure other developed countries that they are stable markets to invest in.
Joint venture with Benetton
A joint venture can be defined as an agreement between two or more companies through which they compromise to build a new firm to achieve a certain purpose.
This kind of strategy allows the company to expand with limited capital investment, and therefore, to limit the risk too. The company can also be benefited from the partner's experience in a certain field. And furthermore, making joint ventures with public foreign corporations can allow the company to start prosperous relationships with that certain market, and use them in the future.
This strategy has some disadvantages too. A lack of control might arise since the responsibilities of one and the other company are not well defined. It can also appear a division of interests, so one company might rather to achieve objectives that the other might not.
Inditex decided to establish a commercial alliance with the Benetton Group, one of its most fierce competitors, in March 1997, with the main aim of starting trading in the Italian market (Expansion Newspaper, 19-03-1999).
With 7000 franchises all over the world, Benetton is one of the most important textile distributors world-wide. Benetton is established in 120 countries and its turnover in 1997 was of 260,000 million pesetas (£ 1040 million)
So far, the only relationship between these two Groups was that Zara bought thread from Benetton to produce its jerseys.
It was the first time in the Inditex Group recent history, that they sought a foreign partner to share the Group's international expansion. Both companies signed a contract in which they compromise to build a new mixed company for the Italian market through a joint venture (www.excelsior.com).
The main reason why Zara did not carry on with its policy of working on its own in its international expansion, was that they were looking for a partner with enough knowledge in Italy, which can help them in this new and exigent market.
It was not clearly seen how could this alliance benefited Benetton due to Zara is a very strong enemy; but Benetton admitted that because of this potential competitiveness, they would prefer to have some control into this new Zara venture and also to have it as a partner and not as an enemy in the Italian market.
After nearly two years from the first contacts, the Inditex-Benetton joint venture was ended. The objective of Zara (following its opening policy) was to open its stores in the main cities of Italy, but the lack of large stores in the city centre of these capitals forced Zara to withdraw from this operation. As it was explained before, Zara used to have large stores with a minimum area of 1500 squared metres, and due to the especial historic urban structure of the city centres in Italy, these kind of stores could not have been found.
This does not mean that Inditex Group is no longer interested in the Italian market due to its similarities to the Spanish one, and they are looking for another way of entering into this market (El Mundo Newspaper, 30-01-1999).
Other Joint Ventures
In 1998 Inditex Group started an alliance with the German textile giant Otto Versand, creating the Zara Deutchland GmbH joint venture between the two companies, to start its expansion in Northern Europe and especially in Germany, one of the largest and most exigent markets in the world. Otto Versand is specialised in mail-order selling, a field completely new for Zara. In September 1999, the first German Zara store was opened in Cologne, and it is expected to open 3 new stores in Munich, Stuttgart and Nuremberg by the year 2000 (Expansion Newspaper, 09-09-1999).
At the beginning of August 1999, Inditex has started a new joint venture with the Canadian firm Reitmans, on which they resolved to create a new society, mostly participated by Inditex Group, with the aim of open Zara stores in Canada. The first outlets will be opened during this year in Montreal, Toronto and Vancouver, using the stores that Marks and Spencer has left due to its withdrawal from this market (Canadian News Wire).
In this strategy, the contractor provides a standard package of products, systems and management services; grants permission to use a certain product, including a special name of trademark (Rodrigues, C 1996).
Under franchising arrangements, the parent company retains a fair degree of authority; the franchisee has to follow the rules and policies of the corporation as for example on about the distribution of the cloths inside the store or the furniture to use.
One of the main reasons why companies use this formula is to minimise the risk of entering into another country. Through this strategy, they are able to be know in the country whilst they are reducing the risk of entering on their one to the minimum.
Zara has used the franchising formula in Israel due to the special characteristics of the country; Israel is seen as a risky country due to the problems between Jews and Palestinians; although this risk, the store of Israel is very profitable (www.galeon.hispavista.com, 16-03-1998).
The future: the Stock Exchange Market
Inditex Group is thinking on going into the stock exchange market at the beginning of the year 2000. The main reason why the Group is doing this so important operation is not due it needs of financing, but to ensure its own future as a multinational and to make sure the succession process, when Amancio Ortega retires in a few years since any of his 3 sons want to get in charge of the presidency of the company.
As it has just been said, the Group does not need this entrance into the stock market because of financing reasons. Inditex Group has enough capacity to generate its own resources to self-finance investments valued on 40,000 million pesetas (£160 million), that the Group forecasts to use in the next 5 years.
But of course, this will provide the company a huge amount of capital, that will be used to grow better and faster. It also offers a perfect window for the international market and other companies, allowing Inditex to be totally recognised overseas.
The valued of the Group has been calculated by the BSCH (Banco Santander Central-Hispano) as 1 billion pesetas (£4000 million), which locates it as the eighth enterprise in Spain by stock market capitalisation (Actualidad Economica, 08-11-1999).
Inditex Group is now developing new strategies which can allow them to grow faster and easier, using different formulas as what the Group was used to, such as franchising. These formulas has carried out very significant results and therefore the company should go on with this policy as it is looking forward to enter into new markets.
The group has also had to be cautious with its main competitors. As the Group has done with Benetton, they have to build alliances and good relationships in order to be able to forecast the potential movements and operations of these companies. As well, as with local governments, especially in the Latin American area, due to although any problems have arisen yet, they might appear in a few years time, when these governments determined that local economies should have more power in these foreign investments.
Czinkota, M; Rivoli, P; Ronkainen, I 1992 International Business (4th Edition) The Dryden Press.
Rodrigues, C 1996 International Management: A Cultural Approach West Publishing Company.
El Correo Gallego
www.excelsior.com (Financial Section)
www.newswire.ca (Canadian News Wire)
www.galeon.hispavista.com (Financial Section)