Feasibility of ZARA in Peru

Market Seeking Opportunity

Erin Bereit Tarun Hingorani Matthew Raffa Taras Sanow Jonathan Solis For Internal Discussion Purposes Only 1

Peru represents the next logical step in our strategy for the Americas

Macroeconomic Stability

  Stable exchange rates and low rates of inflation.

Continuous GDP growth per capita.

Existing Footprint

  We have operated in South America since 1998. Distribution centers in Argentina, Brazil, and Mexico.

Local Demand for Goods

  Lima population over 8 million.

Target customers annual clothing and footwear expenditure $390 million in 2010 and doubling in 10 years.

Profitable

  Store profitable within first 2 years of operation.

Total net benefit of $13.0 million over the first 7 years of operation.

For Internal Discussion Purposes Only 2

Overview of Inditex / ZARA



Inditex

   HQ in Arteixo, Spain $14.7 billion in operating revenues (2009) 4,607 stores, 8 brands, 74 countries 

ZARA

     Flagship brand of Inditex First Store in 1975.

1,680 stores in 72 countries (2009) $9.1 billion in operating revenues (2008) Goal of 80% of stores outside of Spain in 2020 (Current 55%).

For Internal Discussion Purposes Only 3

Inditex has been operating its ZARA brand in South America since 1998.

Country

Argentina Brazil Chile Colombia Uruguay Venezuela

Total ZARA Stores (FY 2008 Year End)

7 25 6 7 2 11

59 Regional Distribution Center(s)

Argentina Brazil Mexico Source: Inditex FY 2008 Annual Report.

For Internal Discussion Purposes Only 4

Inditex has been operating its ZARA brand in South America since 1998.

Country

Argentina Brazil Chile Colombia Uruguay Venezuela

Total ZARA Stores (FY 2008 Year End)

7 25 6 7 2 11

59 Regional Distribution Center(s)

Argentina Brazil Mexico Source: Inditex FY 2008 Annual Report.

For Internal Discussion Purposes Only 5

Why invest in Peru?

      Lima is 4 th largest city in Latin America Bilateral free trade agreements e.g. US, China, and EU (currently negotiating) Political stability Legal environment conducive to investment Investment grade bond rating Largest GDP growth in region in 2010 (6%) For Internal Discussion Purposes Only 6

Macroeconomic stability leading to…

10 5

Balance of Payments 2000 - 2009 (% GDP) (Source: Central Reserve Bank of Peru)

Current Account balance Capital Account balance Balance of Payments 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5

Inflation Level Annual Percentage Change 2000 - 2010 (Source: IMF World Economic Outlook Database 2009)

3.8

2.8

1.8

0.8

-0.2

7.8

6.8

5.8

4.8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Source: Central Reserve Bank of Peru)

50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 For Internal Discussion Purposes Only

Public Debt as % of GDP 2000 - 2009

7

Increasing FDI

For Internal Discussion Purposes Only 8

ZARA will operate in a unique, sustainable position within the Peru Clothing and Footwear Marketplace

Generic Domestic Retailer

Expensive

Topitop Mango

   Mango  HQ in Spain   Currently 5 retail stores in Lima (6 total in Peru) Currently pursuing a move in market position.

Topitop  HQ in Peru  Inexpensive semi fashionable retailer General Domestic Retailer  Provide service to mass market Cheap For Internal Discussion Purposes Only 9

ZARA – Resources & Capabilities Competitive Advantage

Effective Team of Designers 10,000 Designs Per Year Fashion & Cost Conscious Customers Presence at High-end Retail Locations Latest Trends Spotting Team Low Advertising Costs Frequent Apparel Updates Selective Outsourcing of Basic Manufacturing Fast Fashion Image Appearance of Scarcity Quick to Market Production in Europe Predominately Company-owned Distribution System For Internal Discussion Purposes Only 10

Proposed Operating Plan

1Q 10

      Company owned store Locate in Lima’s upper end shopping district (Larcomar) Country management team Local employees for day-to-day operations Utilize existing regional distribution centers Open 3Q 2011

2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 Recommend Market Expansion Country Management Team Real Estate Contracting Permitting Strategy Local Staff Construction Stocking Implementation Zara in Peru

11 For Internal Discussion Purposes Only

ZARA in Lima will break-even in 2 years and total net benefit of $13.0 million over the first 7 years of operation.

$40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000

Annual Profit After Taxes & Tariffs

Peru - Conservative Mexico Market Share Chile Market Share Scenario Market Shares for Total Clothing and Footwear Spending 2011 2012 2013 2014 2015 2016

Peru Conservative

0.1% 0.3% 0.35% 0.4% 0.4% 0.4%

Current Mexico

0.9% 1.8% 1.8% 1.8% 1.8% 1.8%

Current Chile

1.4% 2.7% 2.7% 2.7% 2.7% 2.7% $ 2011 2012 2013 2014 2015 2016 2017 2017 0.4% 1.8% 2.7% $(5,000,000)  Average cost of new store in new market is $1.6 million.

  Size of store = 1,380 square meters (firm’s system-wide average).

Annual cost of prime real estate in Lima is $37 per square meter ($51,000 per year).

 Ninety (90) employees are needed to service Peru.



Key Assumptions

Avg. monthly salary per employee is 3,500 Nuevo Sols ($1,100)  COGS is 43 percent of sales revenue.

 SGA is 20 percent of sales revenue.

 Corporate tax rate (existing and future) is 30 percent of profit.

 Tariff rate is 17 percent of the value of imports (merchandise)  Cost of capital is 6 percent.

 Amortization period is 20 years.

For Internal Discussion Purposes Only 12

Questions? ¿Preguntas?

Thank You Gracias

For Internal Discussion Purposes Only 13

Sources

Inditex. (2008). Inditex 2008 annual report. Retrieved f rom http://www.inditex.es/en/shareholders_and_investors/investor_relations/annual_reports Tiplady, R. (2006, April 4). Zara: taking the lead in f ast-f ashion.

Bloomberg Businessweek

, Retrieved f rom http://www.businessweek.com/globalbiz/content/apr2006/gb20060404_167078.htm?chan=innovation_branding_brand+prof iles

Zara

. (2010, April 2). Retrieved f rom http://www.zara.com/ Zara. (2010).

Wikipedia

. Retrieved (2010, April 28) f rom http://en.wikipedia.org/wiki/Zara_(clothing) [1] Kumar, N. (n.d.). How Zara worked on its supply chain to bring low-cost high f ashion to the shelves - at high speed.

Businessworld

, Retrieved f rom http://www.businessworld.in/index.php/Spanish-season.html

Cia the world factbook - peru

. (2010, April 16). Retrieved f rom https://www.cia.gov/library/publications/the-world-f actbook/geos/pe.html

Fmi: perú crecerá cerca del 6 percent en 2010 y será la envidia en la región. (2009, October 29).

La Republica

.

Ministerio de comercio exterior y turismo del peru

. (2010, April 17). Retrieved f rom http://www.mincetur.gob.pe

Central bank of peru

. (2010, April 28). Retrieved f rom www.bcrp.gob.pe

U. S. Department of State - Background Note: Peru. Accessed at http://www.state.gov/r/pa/ei/bgn/35762.htm on May 1 , 2010. Perspectives on the Peruvian Economy”. Ipsos APOYO. January 2010. Accessed at http://www.livinginperu.com/blogs/business/1246 on April 23, 2010.

About Doing business

. (2010, April 22). Retrieved f rom www.doingbusiness.org

Valez, P. (2009, December 16). Peru wins third investment grade rating.

Reuters

, Retrieved f rom http://www.reuters.com/article/idUSN1611592020091216 Vasquez, I. (2007, December 5). Peru may become latin america’s next success story. Retrieved from http://www.cato-at liberty.org/2007/12/05/peru-may-become-latin-americas-next-success-story/

Perspectives on the peruvian economy

. (2010, January). Retrieved f rom http://www.livinginperu.com/blogs/business/1246 Ghemawat, P, & Nueno, J. (2003). Zara: Fast Fashion. (2003). Boston, MA: Harvard Business School.

Mng by mango

. (2010, April). Retrieved f rom http://www.mango.com/pv/index.html

China remains mango's biggest challenge. (2010, April 8).

Fibre 2 Fashion

, Retrieved f rom http://www.f ibre2f ashion.com/news/fashion-company news/newsdetails.aspx?news_id=84474 14 For Internal Discussion Purposes Only

Sources

Topitop

. (2010, April). Retrieved f rom http://www.topitop.com.pe/home_retail.aspx?grp=2&len=2 Lima . (2010).

Wikipedia

. Retrieved (2010, April 1) f rom http://en.wikipedia.org/wiki/Lima#Economy South America: Peru. (2010).

The World Factbook

. Retrieved (2010, April 18) f rom https://www.cia.gov/library/publications/the-world f actbook/geos/pe.html

Zara

. (2010, April 2). Retrieved f rom http://www.zara.com/#/en_GB/shops/Store percent20Finder/ Inei: peru's economy up 3.63 percent in january. (2010, March 16).

Andean Air Mail & Peruvian Times

, Retrieved f rom http://www.peruviantimes.com/inei-perus-economy-up-3-63-percent-in-january/165328

Peru: incidence of total poverty

. (2010, April). Retrieved f rom www.inei.gob.pe

Cia the world factbook - peru

. (2010, April 16). Retrieved f rom https://www.cia.gov/library/publications/the-world-f actbook/geos/pe.html

Metropolitan lima: average monthly income from principal occupation

. (2010, May 2). Retrieved f rom www.inei.gob.pe

World bank development indicators

. (2010, March). Retrieved f rom www.worldbank.org/data Peru: Clothing & Footwear.

Euromonitor

. Retrieved (2010, April 18) f rom https://login.library.lausys.georgetown.edu/login?url=http://www.portal.euromonitor.com/Portal/DocumentView.aspx

For Internal Discussion Purposes Only 15

Market Expansion Considerations

    

Macroeconomic stability Urban economic development Relative ease of market entry Local demand for clothing Cost of doing business (taxes & tariffs)

  

Accessibility of distribution centers Availability of prime retail space Profitability within two years of operation

For Internal Discussion Purposes Only 16