Shannon, Co. Clare, Ireland
When Gymboree Inc., a children's apparel and accessories company, decided to break into the European market with its upscale childrens' clothing stores, one of the first orders of business was establishment of a regional distribution center. It settled on the Shannon Free Zone in the southwest of the Republic of Ireland.

A primary reason for that decision was a highly favorable tax climate. Since 1981, Ireland has offered a 10 percent corporate tax rate for manufacturers, the lowest in Europe, an incentive that has attracted billions of dollars in foreign investment. Only Shannon, however, offers the same 10 percent tax treatment to logistics and other service providers. (Two small areas in Dublin extend the 10 percent rate to financial services.)

While Ireland's membership in the European Union, commitment to education and investment in telecommunications infrastructure all have played a role in its transfomation from a sleepy economy into the "Celtic Tiger," it is the low tax rate that has been indispensable in powering the country's blazing growth. The economy roared ahead at a rate of 6.75 percent in 1996 and will achieve a projected 7.7 percent growth for 1997.

"The first thing that makes anyone look at the Shannon Free Zone is the tax benefit," said Brian Walsh, Gymboree's distribution center manager in Ireland. "We committed to the free zone on the basis of a financial situation being developed in our favor."

Gymboree is "extremely happy with our partnership with Shannon Development Co.," added Walsh. "They are an excellent business partner. They assisted my colleagues in developing the project [and] did a tremendous amount of work in ensuring we set up legally to do business."

	Before selecting Shannon as the site for its distribution center, Gymboree studied a number of locations in the U.K. - Brian Walsh of Gymboree

The Shannon Free Zone is adjacent to the Shannon Airport, a half hour from Dublin by air and two and a half hours by highway. Permissible activities are governed by Section 39A of Ireland's 1980 Finance Act. It states that the 10 percent corporate tax rate is applicable at Shannon to "trading operations which contribute to the use and development of the airport and which are undertaken with qualified persons, not ordinarily resident in the State."

"This legislation, as you can see, is very broad," said Richard O'Sullivan, projects manager for the Shannon Development Co., which oversees the free zone. "Shannon Development, therefore can consider all applications, be they manufacturing or service, which contribute to airport activity, by way of employment and movement of goods or passenger movements." International logistics services, distribution and fulfillment, multilingual customer support, assembly and kitting, technical support and product customization all qualify for the 10 percent corporate rate.

Gymboree began operating from its Shannon Free Zone distribution center in May 1997. From there, it supplies stores on Dublin's Grafton Street, London's Regent Street and four other U.K. locations that comprise the company's first foray into Europe.

Based in Burlingame, Calif., Gymboree Corp. was founded in 1976 as a provider of interactive parent-child play programs. It opened its first retail store in 1986 featuring children's apparel and accessories that are "by design ... colorful, whimsical and fun, with added emphasis on functional features."

While it still is engaged in play programs, Gymboree realizes the vast majority of its revenue from retail sales. Including its U.K. and Ireland stores, the company had 435 retail outlets, mostly in the U.S., as of the end of 1997, and was on a pace to hit a 20 percent increase in gross sales by the time its fiscal 1997 year closed at the end of January 1998. Revenue for fiscal 1996 was $303m.

Growth through expansion is a staple of Gymboree's strategy, as is clear from the company's plans for Shannon. Currently, Gymboree is using slightly less than 17,000 square feet of a 26,000-square-foot warehouse originally built for manufacturing.

"We'll only be staying in this building short-term," said Walsh in his cramped office. "We plan to build within two years a purpose-built facility. We're looking at 50,000 to 60,000 square feet with the option of extension."

Enlargment of the Shannon distribution center will be in keeping with Gymboree's expansion of its retail network in 1998, when it plans to open another store in Dublin and 14 more in the U.K. Stores in other European locations are under consideration for the future.

Gymboree's permanent distribution facility will be fully automated, using conveyors and barcoding, as opposed to the current labor- intensive operation. That doesn't mean the company won't be adding employees, however. Gymboree's agreement with Shannon Development commits Gymboree to creating 40 jobs over five years. In turn, the company is receiving a grant of 10,000 Irish pounds per job that both Walsh and Shannon Development's O'Sullivan agree is on the high end of those made by the development agency. Three quarters of the front-loaded grant will be paid in the form of rent allowances, with the remaining quarter to be devoted evenly to training and capital expenditures. Creation of a minimum of 15 jobs over three years is necessary for new companies to qualify for the 10 percent tax rate.

Before selecting Shannon as the site for its distribution center, said Walsh, Gymboree studied a number of locations in the U.K. Crucial to its analysis was an ability to provide cycle times of 48 hours or less from store order to delivery, using truck and ferry. Its trucking partner, Irish Express, began an 18-month exclusive contract in January as Gymboree's carrier for store deliveries. Cycle time for some locations is well under 48 hours. "An order we receive at 2:45 in the afternoon will be delivered to our Manchester (England) store the next morning at 9:00," said Walsh.

Gymboree sources about 90 percent of its products from the Far East, with the remaining 10 percent originating in the U.S. and Mexico. Forwarder Kuhn and Nagel handles the bulk of Gymboree's inbound freight, which moves from Asia by container to Hamburg for transshipment to Cork. Overall, about 90 percent of the inbound arrives by sea and 10 percent by air through Shannon Airport. Generation of passenger and/or freight traffic for the airport is another prerequisite for the 10 percent tax rate.

The Shannon facility is essentially a pick-and-pack operation. Gymboree relies upon manufacturers to attach price tags to goods. Separate quality checks are not needed since the same goods from the same manufacturers are subjected to quality control in the U.S., which can flag any problems for the currently far smaller European network.

Walsh, an Englishman who spent 20 years in distribution in his native land with Coca-Cola, said the distribution center's inventory turnover will be two or three times per year, well under the four to five rate for the company in the U.S. But he sees the slower rate as an inevitable result of the startup and, as well, of a different approach to retailing from that of the U.S.

Gymboree typically introduces 36 new styles per year, clearing the shelves of older items with discounts of up to 30 percent. In the U.K. and Ireland, retailers traditionally have limited sales to January and July, a practice that Gymboree plans to follow.

"Gymboree is willing to learn in the market," said Walsh. "We'll be adapting to the local culture."

Prominent Neighbor
Among Gymboree's prominent neighbors in the Shannon Free Zone is Cabletron System, a manufacturer of computer networking systems based in Rochester, N.H. The distribution center it opened last April handles products that account for about a third of the company's sales, which totaled $1.4bn in the most recent fiscal year. That number will climb with the company's $430m acquisition of Digital Equipment Corp.'s networking operations.

Cabletron, with a local plant in Limerick, relocated its distribution center to the Shannon Free Zone in 1994 from Newbry, before moving last year to its new 55,000- square-foot zone facility, where it has room for expansion. The new facility supports all of Cabletron's business outside of the NAFTA region, with about 60 percent of the product it handles originating at the Limerick plant. Five percent flows from outside suppliers and the remaining 35 percent originates at Cabletron facilities in the U.S., according to Brendan Connors, distribution manager.

"We can deliver everywhere in mainland Europe the next day," said Connors. "It's a big advantage that we can take an order for any one of 1,500 SKUs up to 5:00 p.m. and make a DHL flight at 7:00. We couldn't do that when we were at Newbry." Cabletron ships a full range of networking gear from cables to high-end switches, primarily to 30 warehouses, all of which are reachable within 72 hours.

Cabletron's shipments break down about three-quarters road and one-quarter air. While DHL is Cabletron's preferred air courier, carrying everything weighing under six kilos in addition to expedited shipments, Cabletron deals with a variety of truckers. "Freight rates to the U.K. are particularly competitive," said Connors.

The Shannon Free Zone's proximity to the airport and ease of clearing customs offer Connors another advantage in processing the 40 to 50 tons per month received from the U.S.

"From the time a plane lands until a shipment hits our back door is no more than two hours," said Connors. "That would be days in the U.S."

Shannon Airport
Shannon Airport - and the creation of Shannon Development and the Shannon Free Zone - probably owes its existence to advances in jet technology that in the 1950s began to threaten the airport's very viability.

Shannon Airport originally was built to take advantage of the first suitable landfall for long-distance aircraft traveling from the U. S. to Europe. As planes became more capable of flying longer distances, however, traffic diminished, leading the Irish government in 1959 to create the Shannon Free Airport Development Co. Its mission: to develop an alternative basis for a continuation of air transport activity at Shannon.

The Shannon Airport now handles 1.5 million passengers a year. Freight moving through the airport was up between 10 percent and 12 percent to 37,000 tons in 1997, according to Tommy Greene, cargo development manager for Aer Rianta, the semi-state company that manages Shannon Airport as well as the main airports at Dublin and Cork. Greene predicts another 10 percent increase in cargo traffic in 1998.

	Shannon Airport originally was built to take advantage of the first suitable landfall for long-distance aircraft traveling from the U. S. to Europe.

Shannon Development today remains Ireland's only regional development company and its focus continues to be job creation for an area that encompasses all or parts of five counties and a tenth of Ireland's total area and its population. Along with managing and promoting the Shannon Free Zone, Shannon Development oversees the National Technological Park in Limerick, promotes tourism and industrial development throughout the Shannon Region, and even offers consulting services on regional development to a number of clients, many in Eastern Europe.

The value of exports from the 600-acre Shannon Free Zone topped 1bn Irish pounds in 1996, growing to 1.055bn pounds (about $1.7bn) or 81 percent over 1995's $928m in the value of goods exported in 1995. More than 120 companies, employing more than 6,000 people, now operate in the zone. GE Capital Services soon will boost the zone's employment figure by 515 as it begins operation of a pan-European call center in the free zone to encourage payment of past-due consumer debt.


The Shannon Free Zone's main selling point, the 10 percent corporate tax on services is guaranteed by both the European Union and the government of Ireland through the year 2005. The 10 percent rate on manufacturers nationwide is guaranteed through 2010. After 2005, Shannon could well lose its tax advantage, thanks in large measure to pressure from other EU countries that have noticed the role low taxes have played in fueling the growth of the Celtic Tiger.

Other EU countries have taken exception to the 10 percent rates as an unfair preference to selected industries that is costing them industrial development and jobs. The Irish response has been a proposal to remove the preference by equalizing tax rates, after the 2005 and 2010 expiration dates, for all corporations, but at a 12.5 percent rate that likely would continue to be far lower than that prevailing in other EU nations.