ZARA: Fashion Follower, Industry Leader

Business of Fashion Case Study Competition Amanda Craig, Charlese Jones and Martha Nieto Philadelphia University April 2, 2004

……………………………………….…………………..ZARA: Fashion Follower.1 Financial Analysis and Comparison……………………………………………………....…...Appendix B Works Cited Works Referenced .4 Recommendations/Conclusion………………………………………………5 Calculations and Financial Statements……………………………………….... 3-4 Possibilities for Failure…………………………………………………………………..……………….2-3 Strategic Drawbacks…………………………………………………………….Appendix A Articles: The Recent Status of ZARA. Industry Leader Table of Contents Introduction………………………………………………………………….1 Strategic Advantages……………………………………………………………….…..…………..

Their relative capital efficiency is lower due to the fact that their working capital and their profits per store are much less than H&M’s. Their net operating revenues are closer to each other than that of Benneton or the Gap. lower advertising expenses and keeping a cost-effective number of employees per store. Financial Analysis and Comparison To prove Zara has the prospect of sustainable growth in the international apparel market.The global apparel market is a consumer-driven industry. Inditex is more efficient in generating a greater profit per euro of sales than H&M. This is because Inditex invests more than H&M in fixed assets7.8% as compared to 76.4% of H&M. There is a disparity between the working capital6 of Inditex and H&M. competition is fierce. the inventory turnover ratio2 was calculated that Inditex turns over its inventory 4. H&M only has 771 stores to Inditex’s 1. spend more money on advertising. who as the case study states. its parent company. The operating profit margin3 was calculated to measure the efficiency of the companies’ profit per euro of sales. however. Inditex’s operating profit margin is 21. Inditex only has 20 million euros of working capital as compared to H&M's 1035 million euros. Zara. 29. To support this inference. Also. The key similarities for comparison between Zara and H&M are that they are European based companies.40 million euros in current assets for every euro in short-term debt. and equipment and H&M only owns 661 million euros. The best way of comparing Inditex and H&M’s financials is by using ratios and not merely a visual assessment of the financial statements given. As long . possibly because they have more fixed assets and turn their inventory over quickly. as compared to H&M. From this we can infer that Inditex is less liquid.42 times per year. H&M’s high employee to store ratio is partially to blame for their high cost of goods sold. but has a higher number of employees per store5.284. Inditex owns 1228 million euros in property. This does not mean. “was considered Inditex’s closest competitor. Inditex’s higher operating income4 is a result of keeping their costs of goods sold and operating expenses much lower than H&M’s. consumers are changing. H&M differs from Zara because they outsource all of their production. Zara has the competitive advantage to be sustainable.8. plant. and is price-oriented.7 to Inditex’s 20. This is because Inditex is building more stores based on projections and anticipated future value. The current ratio1 shows that for every euro in short-term debt. has 3. In order to maintain that advantage and growth they must confront certain challenges that face traditional retailers in the apparel industry. as is their net income.1%. Having a small amount of working capital could potentially hurt Inditex because it could affect their ability to meet any liability obligations that may arise. is a retailer who has taken a new approach in the industry. which is the money available to meet current obligations.02 million euros in current assets. The most interesting of Zara’s competitors for comparison is Hennes and Mauritz (H&M). a Spanish-based chain owned by Inditex. Their operating profit margin is approximately 1. and its major competitor. [with] a number of key differences” (Ghemawat 5). Inditex’s decreased costs are made possible by in-house production. Inditex is efficient in its operating economics. that H&M is more efficient due to its liquidity. H&M’s excessive inventories may be the main contributor to its high current ratio because they do not own manufacturing facilities and have to store products in a warehouse. and have a strong international expansion strategy (1. H&M is not making good use of the cash that they have because cash not invested does not generate a return. due to the fact that they have higher margins. 5). As a result. Inditex’s operating profits per store8 is 54. and companies are evolving to meet these demands. With their unique strategy. H&M however. Just looking at Exhibit 6 from the case it is easy to see that their financial status is are comparable (24).5 times higher than that of H&M. are fashion forward at lower price retailers. Inditex has 1. it is important to understand and compare the financial differences of Inditex. globalization and new technologies have allowed consumers to have more access to fashion.6% and H&M’s is 13.

Mr. fashionable. Traditional retailers are obligated to place production orders to manufacturers overseas at least 6 months in advance of the season. Amancio Ortega. which are: freedom. Zara’s product development teams are constantly researching the market by traveling to universities. Zara’s unique quick response system. who focuses on the ultimate consumer. In contrast. It is extremely important for Zara to speed the information flow of consumer desires to their apparel designers. This strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer. In the manufacturing environment. Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Zara’s product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Vertical integration. composed of human resources as well as information technology. Zara’s quick response communication strategy is effective due to its management and corporate culture. Zara is able to be flexible in the variety. For that reason. the founder of Inditex. Fashion retailers and apparel manufactures are always seeking to lower costs by outsourcing production to developing countries where the lowest labor rates are found. Zara’s in-house production purposely creates a rapid product turnover since its “runs are limited and inventories are strictly controlled” (12). a distinctive feature of Zara’s business model.S. By owning its in-house production. and international staff helps to interpret the desire of the moment (Zara). they will be able to have sustainable growth because they will have the money to invest and pay expenses. Ortega has effectively transmitted the values of the company. Strategic Advantages Zara has been able to achieve excellent financial status due to its core competencies that provide the chain with a competitive advantage over traditional retailers in the industry. Generally. Therefore. and the store trends to the designers. Also. . In the retail environment. Zara’s managers and sales associates are in charge of transmitting the sales analysis. Furthermore. perfectionism. 85% of this production is done through the season.as Inditex’s profit margins are high. This is due to the fact that the global apparel industry is “highly-labor intensive” rather than capital intensive (2). This allows the designers in Spain to develop the right products within the season to meet consumer demand (Ghemawat 10). The climate also increases the frequency and rapidity with which consumers visit the stores and buy the products. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. specialty retailer group). Zara. Zara manufactures 60% of its own products. Zara is an apparel chain that works differently from traditional retailers. Traditional retailers lack this flexibility. places “more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies” (12). This rapid product turnover creates a climate of scarcity and opportunity in Zara’s retail stores. amount. outsources all of its production while focusing on distributing and retailing those goods. Zara is a chain that has developed a successful diverse method of doing business in the fashion industry. The transfer of this communication is also accelerated by IT software that is specifically designed for Zara’s diverse business (Zara). a traditional retailer such as Express owned by Limited Brands (a top U. the product life cycles. which allows the chain to constantly provide its costumer with very updated products (Ghemawat 9). the young. still owns 60% of Zara’s shares. Zara by working through the whole value chain is very vertically integrated and highly capital intensive. Zara has human resource teams in the retail and manufacturing environment that work exclusively toward this goal. and frequency of the new styles they produce. and clubs around the world to track customer preferences. Also throughout the season. Zara’s scarcity climate allows the company to sell more items at full price. allows Zara to respond to the demand of its consumer better than the competition. has allowed the company to successfully develop a strong merchandising strategy (Herreros). Additionally.

to his management team (Zara). having a strong production and distribution facility in their home country in order to have short production and lead times. this department is responsible for the frequent refurbishing of store layouts. The constant flow of information between managers allows the company to keep its customers happy. Zara has not invested in distribution . fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel. This may be due to American tastes that differ from European preferences. Zara’s advertising investment is 0-. like they have in Europe. Sao Paulo or Madrid since fashion has become more globally accessible (Zara). as well as the creation of a common window display for Zara’s global stores. people around the world through various communication devices have more access to information about fashion. Zara also has an inability to penetrate the American apparel market. Zara’s target market is a young. These divisional headquarter teams are composed of a head country manager who is constantly communicating with local managers and reporting to top management (Ghemawat 18). and land. Zara has a department. to increase delivery speed. This is due to the fact that Zara’s marketing teams believe that a product that sells well in a fashion capital such as New York will most likely sell well in another such as Milan. Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara’s centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods. which exclusively works in acquiring global prime real estate locations. 80. products are inspected and immediately shipped. Therefore. In the distribution center. Inditex is putting all of their eggs into one basket by sinking a great deal of capital into Zara. Then. the shipments are scheduled by time zones and shipped by way of air. Inditex has contributed their extensive international sales to Zara and said “Zara was the principal reason Inditex’s sales were increasingly international” (15). Zara holds around 86% of Inditex’s total international sales-a significantly high number for an organization that has 7 other chains (Ghemawat 15). For that reason. Due to this. Moreover. Today. educated one that likes fashion and is sensitive to fashion. rapidness. This is cost-effective due to the close proximities of the distribution center in Arteixo and their factories in Coruña. Zara has not been able to develop a strong supply chain strategy in the U. With that. which make the international expansion more economical (16). flexibility and respect to others. Zara’s managers work in teams in the countries where the chain is located.3% as compared to traditional retailers who expends 3 – 4% (13).responsibility. this has allowed the company to work horizontally with an open communication environment rather than a hierarchal one.S. Also. Inditex will have to totally re-formulate their firm’s strategies and may possibly face an internal meltdown. Strategic Drawbacks Although Zara has a successful business model that differs from that of traditional retailers. If Zara fails in the future. Zara’s internally or externally produced merchandise goes to the distribution center. since Zara’s distribution center is a place where merchandise is moved rather than stored (12). In addition. Their European strategy includes. The typical delivery time within and outside Europe is between 24 to 48 hours (11). however. For that reason. Due its model. The display positions Zara in the industry with a prestigious and elegant image (Zara). Zara’s weaknesses also differ from the traditional retailer. Zara’s cuts in advertising investments reduce total expenses. This has created a very autonomous and flexible corporate culture for Zara.85% of the products that Zara offers globally are relative standardized fashionable products. which results in increased sales. This also signifies that Zara relies mainly on its stores to project their image. Zara also has an advantage over its competitors due to its low advertising costs. By targeting a broad market Zara has an international advantage over its competitors. it also has disadvantages that can affect its sustainable growth. More importantly.

That means Zara is trying to sell the same exact merchandise to the same people that reside in that city. That also means that employees must be trained in order to use the new manufacturing techniques. A final threat to Zara is the issue of cannibalization. Zara offers clothing and accessories for men. This threat of the euro may also create a threat of decreased sales because apparel prices will be too high for the traditional Zara shopper. Traditional retailers who outsource goods can benefit from greater access to less expensive manufacturing.S. Zara has a threat of failure that can harm its sustainable growth. but not as much as the Gap. than production costs will increase for European producers. which again leads to increased costs. H&M also uses more advertising than Zara. H&M builds distribution centers in their international locations in order to cut down lead times and potential logistical costs. Almost any retailer can be a threat to Zara due to their wide range of merchandise categories. which may aid them in entering new markets successfully because the local customer is aware of H&M’s merchandise mix. For example. 4). Zara’s extensive location strategy involves putting multiple Zara stores that carry the same merchandise in the same cities. Zara will suffer from a high euro and the threat of its competition offering more inexpensive products. especially when expanding into new geographic territory. children. Traditional retailers do not experience higher costs in all of these areas. Another threat lies with the quota elimination under the World Trade Organization agreement on textiles and clothing expiring in 2005. The euro switchover will increase Zara’s cost of production. they may not be able to supply more retail locations due to their “centralized logistics model” (12). and baby. which allows them to gain sales in countries outside their native Sweden (Ghemawat 5). H&M also is more attentive when entering new markets and tends to enter one country at a time. Possibilities for Failure Like traditional retailers. Many other retailers also offer goods to one or all of those merchandise groupings. Inditex also has to support their own high capital investments for their chains and be able to financially back their “technology and skills beyond those currently available within the organization” (David 145). Higher costs are then incurred for the Inditex Corporation. women. This may make them “subject to diseconomies of scale”. If the euro becomes stronger against the American dollar. which is a threat to their U. as opposed to Zara who multitasks globally (5). Zara’s strategy also creates some weaknesses. the two hundred and twenty-five Zara stores in Spain can cannibalize sales from . Another threat to Zara is that H&M carries trendy clothing choices that they have designed based on the melding of international apparel tastes. That cost increase will be carried over to the consumer with higher prices. which means that though are aware of how to quickly supply 1. Zara’s direct competition may be their largest threat. Zara’s speedy and recurrent introduction of new products incurs increased costs as well.facilities in the Americas. In July 2002 the euro was the only currency accepted for all transactions in member countries of the European Union (“Euro”). They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. They too have been quick to “internationalize”. which means they cannot gain the advantages of producing large quantities of goods for a discounted rate. makes up 29% of the total apparel market (19. maternity.S. They have higher research and development costs. H&M (Hennes and Mauritz) is probably Zara’s most similar and threatening competitor. The Gap is one of these competitors because they are also international and sell the same range of merchandise with a less trendy style. Vertical integration often leads to the inability to acquire economies of scale. Their vertical integration has more advantages than drawbacks but it is important to recognize its limitations. The European switchover to the common currency called the euro has created the potential threat for the Spanish Zara chain. selling abilities since the U.000 stores. H&M offers these styles at a cheaper rate than Zara (5). However.

has a strong and unique business model. This would work because shoppers would hear about new/different products (possibly from word of mouth or increased advertising) that another Zara store is carrying across the city and they would be intrigued to pay a visit. The distribution center will also allow them to have additional funds to spend in other areas of business such as advertisements: a necessary feature to penetrate the American market.S. it may prove profitable for shoppers to purchase a moderate selection of trendy Zara pieces along with some of their staple basics. market they could realize the potential for a direct Internet selling strategy. and U. since Zara is looking to expand in the U. the company must continue to re-invent and innovate themselves in order to stay fresh in the apparel industry. Zara has the potential for sustainable growth due to its competitive advantage and its ability to face the challenges of the apparel industry. Zara should most likely develop a second central distribution center in the Americas to decrease logistics in order to deliver fashionable goods in a faster manner. With changing consumer behaviors as a result of globalization. department stores suffering. That form of direct marketing will reach more consumers faster and easier. Also. The company keeps its operating income elevated. Americans like to be able to purchase all goods including apparel from the comfort of their own homes at any time they chose.S. which shows that Zara’s business model is becoming the wave of the future. Though it may be difficult to display all of Zara’s ever-changing fashions online. decreasing cannibalization for the chain. Their second central distribution facility should be an expansion of one of their smaller distribution centers located in Argentina. Zara could differentiate its product from location to location to increase shopper traffic. the other 544 Inditex stores located in Spain can cannibalize Zara’s sales since the majority of the chains have a similar target market to Zara. The close proximity of the distribution center to the American market will allow them to effectively interpret the particular American fashion. and has various opportunities for expansion in the retail industry. market. 1 2 See Appendix A See Appendix A 3 See Appendix A 4 See Appendix A 5 See Appendix A 6 See Appendix A 7 See Appendix A 8 See Appendix A . Zara is a familiar face with consistently trendy. Zara has the opportunity to be one of the trendiest/low priced retailers that America has seen recently. Though Zara is wary of overexposure. In conclusion. Today. Recommendations The best way for Zara to maintain their sustainable growth is to seek new opportunities in the apparel market. it is a company that is just getting its feet wet in the American market. many companies are looking to Zara as the new industry standard for how to run a retail business.S. well-priced new apparel every week. the Inditex branch is researching and developing new methods for expansion. To many Europeans. That way sales wouldn’t be stolen from their own Zara stores. Brazil or Mexico. Therefore. Zara already does this to an extent for different international preferences but more specialization will increase consumer demand and will motivate them to visit more Zara locations within their own region. This is similar to the challenges faced by the Gap versus Old Navy: Gap’s sales were cannibalized by Old Navy’s lower prices (Lee). To Americans. Though. Another market opportunity for Zara is to invest in Internet retailing especially directed toward the U. there are growth options available for specialty retailers like Zara. In some cities the company is possibly experiencing cannibalization because there are too many Zara stores that carry the same product within one city.each other especially if multiple locations are within the same city. A final recommendation for Zara is to offer specialized products for different geographic locations within the same city.