¶ … Harvard Business School case - "Zara: Fast Fashion," due a hard copy submitted Oct. 7. In write-, address question: Q: Assess adding potential arbitrage Zara. Should Zara increase arbitrage considers expansion prospects U.S. I concise write- exceed single spaced pages. Zara: 'Fast Fashion' case study

Zara: 'Fast Fashion' case study

Assess the value adding potential of arbitrage for Zara. Should Zara increase its use of arbitrage as it considers expansion prospects in the U.S.

Arbitrage is defined as the practice of capitalizing upon a price differential that exists within two markets (Arbitrage, 2010, Business Dictionary). The Spanish-based clothing store Zara has based its business model upon volume-based trade in inexpensive clothing. Zara only stocks a few in-demand items and its inventory levels thus exhibit a high rate of turnover. Zara uses couture designs made from inexpensive fabrics and produces the items as cheaply as possible, with young, largely unknown Spanish designers. It also offers a small range of sizing with many choices of colors for the same trendy item, which suits the young, fit, fashion-conscious Zara consumer. Young people who buy fashionable, cheap, and disposable fashions are Zara's most loyal customers although older women may supplement their wardrobes with some wallet-friendly Zara pieces and accessories.

As befits its youthful image, Zara employs technology to maximize its profitability in the highly competitive fashion industry. Designers work quickly. To avoid stocking out-of-style designs, Zara's central headquarters are in constant contact with all of Zara's retail chains through PDAs to keep track of customer...

Overstocking unwanted designs means the clothing is sold at a heavy loss. "The constant flow of updated data mitigates the so-called bullwhip effect -- the tendency of supply chains (and all open-loop information systems) to amplify small disturbances. A small change in retail orders, for example, can result in wide fluctuations in factory orders after it's transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20% of their orders once the season has started, Zara lets them adjust 40% to 50%. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry" (Ferdows, Lewis & Machuca, 2005).
Zara is considering moving into the North American market, taking advantage of its lower-cost Spanish designers, production facilities, and input costs to arbitrage the price differential between Spain and America. However, North America is already super-saturated with discount clothing stores, spanning from big box American-based chains such as Target and Wal-Mart, fashion-focused chains for young women like Express and Forever 21 and even more heavily discounted purveyors like Marshall's and T.J. Maxx. "In the generally more price sensitive North American and Asian markets, it is unlikely that the current strategy of leveraging the comparatively low cost of Spain to charge a premium in other European markets to support expansion will be transferable" (Lessard 2008, p.16). Additionally, the low-cost UK chain of Top Shop and the European clothing department store H&M have recently established a presence upon America's shores, creating clear, early…