Castro Model Ltd.

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Castro Model Ltd.

31 Ort Israel Street
Bat Yam, 59590
Israel
Telephone: (972 03) 555 45 55
Fax: (972 03) 555 45 54
Web site: http://www.castro.co.il

Public Company
Incorporated: 1948
Employees: 1,105
Sales: ILS 421.68 million ($310.88 million) (2005)
Stock Exchanges: Tel Aviv
Ticker Symbol: CAST
NAIC: 448110 Men’s Clothing Stores; 448120 Women’s Clothing Stores

Castro Model Ltd. is Israel’s leading fashion designer and retailer. The Bat Yam-based company operates 86 stores throughout the country, including 47 women’s fashion Castro stores, and 39 Castro Men stores. These stores tend to favor a small format in choice city center locations, as well as in shopping malls, with the exception of the company’s three-story flagship store in Tel Aviv.

Castro has also teamed up with the United Kingdom’s DCK Concessions to build a 30-store chain of Diva accessories shop in Israel. Castro has held the leadership position in the Israeli ready-to-wear market for nearly 60 years. For much of that time, however, Castro was just about the only ready-to-wear producer in the country, protected by the high import duties imposed by the Israeli government until the late 1990s.

Nonetheless, Castro Model has successfully negotiated the onslaught of foreign competitors, going head to head with such major international players as Zara, the Gap, H&M, and others to maintain its place as a market leader. As part of its defense strategy, the company abandoned its domestic manufacturing and has instead adopted the outsourcing model favored by most of its competitors. At the same time, Castro, facing limited future growth prospects at home, has taken steps to enter the international market. For this effort, the company has targeted the Western and Eastern European markets, and has teamed up with German retail and mail-order powerhouse Otto GmbH & Co. to form the Castro Deutschland joint venture, held at 49 percent by Castro. This has enabled the company to expand into the German retail clothing market, as well as providing a springboard into other markets, including Switzerland, Russia, Ukraine, Latvia, Romania, and Thailand. In time, the Castro Deutschland joint venture is expected to become the group’s major revenue generator. Castro Model has been listed on the Tel Aviv Stock Exchange since 1992 but remains controlled at 64 percent by the founding Castro family. Castro’s revenues topped ILS 421 million at the midpoint of the first decade of the 2000s.

FROM FASHION SALON TO CLOTHING BUSINESS IN 1948

Aharon Castro was born in 1926 in Saloniki, Greece. He moved to Tel Aviv with his family in 1933. There, Castro’s mother, a graduate of the Greek School of Fashion, established her own fashion salon in the family’s apartment. Over the next decade, Anina Castro’s small business grew to include some 15 seamstresses. With this background, Aharon Castro naturally followed his mother into the fashion industry. In 1948, Castro opened the family’s first store, a small corner shop in Tel Aviv. Castro named the store Nina after his mother, who continued to oversee production of her own and her son’s clothing designs.

From the beginning, the company sought to offer quality garments at low prices during a period when Israel struggled to gain its feet financially. The company’s ready-to-wear fashions quickly found a market, gaining a reputation for its stylish designs during a period when Israel’s clothing market remained relatively underdeveloped. Government-backed trade protection policies, including high import duties, prevented the entry of foreign competitors, while the Castros enjoyed what amounted to a de facto monopoly of the ready-to-wear market. The company’s success enabled it to grow strongly through the 1950s, and the company expanded its production from its team of seamstresses to develop a veritable factory in the basement beneath its shop.

The increase in production enabled the company to begin supplying Israel’s department store groups, including the major retail chains Shekem and Hamashbir, as well as other clothing merchants. By the beginning of the 1960s, the company had changed its name to Castro, and Aharon Castro took over the direction of the company’s designs. This led to a new era based on more youth-oriented fashions, using bold colors, batik fabrics, and other hallmarks of the 1960s.

The company remained a major supplier to the retail market into the 1970s. The company had launched its first direct sales operations, creating the Rio factory outlet in Tel Aviv in 1965. This operation was run by Aharon Castro’s wife, Lina. Into the next decade, Castro became synonymous with Israeli fashion, with its clothing featured on the country’s top models of the day. The company also kept abreast of international fashion trends, bringing back popular designs to Israel. By building its own brand, the company was able to resist the new and fast-growing design label trend, which took off in Israel as elsewhere from the mid-1970s. Castro also launched an export operation, shipping its clothing to retailers in Europe and the United States.

PUBLIC COMPANY IN 1992

The recession in Europe in the early 1980s, and runaway inflation in Israel, soon put an end to Castro’s effort to expand its export operations, however. Instead, the company decided to focus its growth on the domestic market, where the government’s import tariffs continued to protect the company’s position. In 1985, Castro developed a new retail format under its own name. The company opened its first store on the Dizzengof, the main shopping street in Tel Aviv, then quickly added other locations in the city. By the end of the decade, Castro had launched its expansion elsewhere in the country, targeting especially the growing number of new shopping malls appearing at the time.

In order to fuel its expansion, Castro went public in 1992, listing its shares on the Tel Aviv Stock Exchange. The company, which by then posted sales of more than ILS 30 million per year, sold a little more than 18 percent of its stock. The offering, oversubscribed by some 270 times, raised ILS 8.3 million for the company.

Castro entered a new growth phase, spreading its successful retail format throughout the country. By the end of the decade, the company boasted more than 40 women’s fashions shops, and the Castro name had become synonymous with Israeli fashion. The company’s sales jumped accordingly, more than quadrupling by mid-decade. Aiding the company’s growth during this period was its expansion into cosmetics, which were produced under license for the company. The company’s cosmetics line was launched in 1994.

COMPANY PERSPECTIVES

Over the years, Castro has developed a winning combination of traits, making it a fashion leader while upholding international standards, with special emphasis on constant improvement and innovation. The Castro group designs and produces fashion for young men and women, and markets its products via a chain of stores bearing the “Castro” and “Castromen” brand name.

Yet Castro soon began to feel the pressure from the changing Israeli retail landscape. In the late 1990s, as the country’s inflation at last came under control, the government announced its decision to eliminate the trade barriers that had sheltered the company for so long. Castro faced the promise of an entirely new era of competition, as a growing number of international retailer groups—with top names such as The Gap and Zara among them—announced their intentions to establish retail operations in the country. Overnight, the company founded itself crowded out by a new breed of larger, cash-rich rivals.

Aharon Castro recognized that the company stood little chance of survival in its present form and the company briefly planned to close down its operations. Instead, Castro’s daughter, Etti, and husband Gabi Rotter, who had joined the business sometime before, launched a dramatic restructuring of the company. The centerpiece of the reorganization was the decision to exit the manufacturing sector and instead adopt the outsourcing model that had fueled the growth of most of its major international competitors. Castro had made an earlier attempt to outsource part of its clothing manufacture, shifting part of its production to Jordan in 1996.

Into the end of the decade, however, Castro went further, shutting down all of its manufacturing operations in Israel and converting entirely to an outsourcing model. Launched in 1997, the restructuring of the group’s supply chain took some four years to accomplish. By the early 2000s, the company had set up a new international manufacturing network, shifting its production to partners in Poland, Turkey, Portugal, Spain, Hong Kong, and Italy.

Accompanying the restructuring of its manufacturing and logistics operations, Etti and Gabi Rotter also took steps to revitalize the group’s brand image. The company set out to recast the Castro brand toward a more youthful consumer group, targeting a trendy yet affordable image. This effort, which included an overhaul of the group’s clothing designs, was backed by a countrywide advertising campaign.

INTERNATIONAL BRAND FOR THE NEW CENTURY

By 2000, the company had added a new facet to its retail strategy. In that year, the company launched a new retail format, Castro Men, targeting the men’s clothing market for the first time. The first Castro Men store opened in 2000, and proved a strong success. This led the company to a full rollout of the chain, building up a national network of nearly 40 stores by the end of 2006. By then, too, the company had boosted its Castro women’s fashions chain to 47 stores.

Joining the company’s retail clothing operations during the first half of the decade was an extension into the new market of retail accessories. This was accomplished through the creation of a partnership with the United Kingdom’s DCK Concessions. The joint venture then opened the first Diva accessories store in Tel Aviv in 2005. Again, Castro was quick to roll out its new format—by the end of that year the company had opened eight Diva stores, which were joined by 20 more stores through 2006.

Yet by then the Israeli retail clothing market was more or less saturated, leaving Castro with little room for future growth. So, the company set its sights on redeveloping itself as an international retail brand in its own right. To that end, the company identified the European market, and more specifically Germany, as its initial expansion target.

In 2004, Castro’s expansion plans received a major boost when the company signed a joint venture partnership agreement with Germany’s Otto group, one of the world’s leading mail order and retail sales conglomerates. Under the agreement, Castro took a 49 percent of the joint venture, called Castro Deutschland, supplying its fashions to a new chain of stores to be rolled out first in Germany, and then in other European markets.

KEY DATES

1948:: Aharon Castro and his mother Anina Castro set up Nina clothing store in Tel Aviv.
1960s:: Company becomes major clothing supplier to department stores and other retailers in Italy.
1975:: Company launches attempt to develop export clothing sales to European and U.S. markets.
1985:: Company enters direct retailer segment again, establishing Castro clothing store chain.
1992:: Castro Model goes public on Tel Aviv Stock Exchange.
1997:: Company exits manufacturing and begins outsourcing clothing designs in Turkey, Portugal, India, and elsewhere.
2000:: Castro Men retail format is launched in Israel.
2004:: A joint venture agreement with Otto to launch Castro retail format in Germany is signed.
2005:: Company opens first Diva retail accessories chain in Israel in partnership with DCK Concession in the United Kingdom.
2006:: Retail network extends to Switzerland, Latvia, Russia, Ukraine, Romania, and Thailand.

As part of its effort to crack the new market, Castro set to work redesigning its collection to correspond to the needs of a more northern consumer market, as well as adapting its sizing for its new consumer population. The rollout proved successful, and by 2007 the company had opened in Cologne, Berlin, Stuttgart, Oberhausen, and Münster.

At the same time, Castro made good on its wider European expansion plans, rolling out a new wave of store openings in 2005. The company quickly built up a presence in Switzerland, Romania, Ukraine, Latvia, Russia, and as far away as Thailand, with more than 14 stores in these markets by mid-decade. While the company remained under pressure at home—notably from the growing levels of less expensive Asian import goods arriving in Israel—Castro Model appeared to have found a model for its future as an international retail fashion brand.

M. L. Cohen