ZARA: Fashion Follower, Industry Leader

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

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

a Spanish-based chain owned by Inditex.8. “was considered Inditex’s closest competitor. To support this inference. 5). There is a disparity between the working capital6 of Inditex and H&M. H&M’s high employee to store ratio is partially to blame for their high cost of goods sold. This does not mean.6% and H&M’s is 13. are fashion forward at lower price retailers. This is because Inditex is building more stores based on projections and anticipated future value. This is because Inditex invests more than H&M in fixed assets7. due to the fact that they have higher margins. Inditex only has 20 million euros of working capital as compared to H&M's 1035 million euros. The key similarities for comparison between Zara and H&M are that they are European based companies.1%. who as the case study states. Also. and companies are evolving to meet these demands. consumers are changing. as is their net income. 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. The current ratio1 shows that for every euro in short-term debt. H&M however.7 to Inditex’s 20. Zara has the competitive advantage to be sustainable. has 3.4% of H&M. As long . Inditex owns 1228 million euros in property. and equipment and H&M only owns 661 million euros. it is important to understand and compare the financial differences of Inditex. and its major competitor. 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. and have a strong international expansion strategy (1. which is the money available to meet current obligations. Inditex’s higher operating income4 is a result of keeping their costs of goods sold and operating expenses much lower than H&M’s.42 times per year. In order to maintain that advantage and growth they must confront certain challenges that face traditional retailers in the apparel industry. Inditex is more efficient in generating a greater profit per euro of sales than H&M. globalization and new technologies have allowed consumers to have more access to fashion. The operating profit margin3 was calculated to measure the efficiency of the companies’ profit per euro of sales. Financial Analysis and Comparison To prove Zara has the prospect of sustainable growth in the international apparel market. Their operating profit margin is approximately 1. H&M only has 771 stores to Inditex’s 1. Inditex is efficient in its operating economics. that H&M is more efficient due to its liquidity. [with] a number of key differences” (Ghemawat 5). Inditex has 1.40 million euros in current assets for every euro in short-term debt. spend more money on advertising.8% as compared to 76. the inventory turnover ratio2 was calculated that Inditex turns over its inventory 4. H&M is not making good use of the cash that they have because cash not invested does not generate a return. its parent company. H&M differs from Zara because they outsource all of their production. 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. Just looking at Exhibit 6 from the case it is easy to see that their financial status is are comparable (24). plant. as compared to H&M. however.02 million euros in current assets. Inditex’s operating profits per store8 is 54. but has a higher number of employees per store5. With their unique strategy.The global apparel market is a consumer-driven industry. and is price-oriented. lower advertising expenses and keeping a cost-effective number of employees per store. Inditex’s operating profit margin is 21. Zara. Their net operating revenues are closer to each other than that of Benneton or the Gap. Inditex’s decreased costs are made possible by in-house production. possibly because they have more fixed assets and turn their inventory over quickly. 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. competition is fierce. 29. As a result.284.5 times higher than that of H&M. The most interesting of Zara’s competitors for comparison is Hennes and Mauritz (H&M). From this we can infer that Inditex is less liquid. is a retailer who has taken a new approach in the industry.

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

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

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

Zara has the opportunity to be one of the trendiest/low priced retailers that America has seen recently. That form of direct marketing will reach more consumers faster and easier. Also. since Zara is looking to expand in the U. Though. Zara is a familiar face with consistently trendy. In conclusion. 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. the Inditex branch is researching and developing new methods for expansion. 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. 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. Though Zara is wary of overexposure. To Americans. The close proximity of the distribution center to the American market will allow them to effectively interpret the particular American fashion. Recommendations The best way for Zara to maintain their sustainable growth is to seek new opportunities in the apparel market. market. A final recommendation for Zara is to offer specialized products for different geographic locations within the same city. Zara has the potential for sustainable growth due to its competitive advantage and its ability to face the challenges of the apparel industry. the company must continue to re-invent and innovate themselves in order to stay fresh in the apparel industry. it is a company that is just getting its feet wet in the American market. it may prove profitable for shoppers to purchase a moderate selection of trendy Zara pieces along with some of their staple basics. many companies are looking to Zara as the new industry standard for how to run a retail business.S. 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).S. Though it may be difficult to display all of Zara’s ever-changing fashions online. 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. Another market opportunity for Zara is to invest in Internet retailing especially directed toward the U.each other especially if multiple locations are within the same city.S. 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. That way sales wouldn’t be stolen from their own Zara stores. has a strong and unique business model. and has various opportunities for expansion in the retail industry. department stores suffering. With changing consumer behaviors as a result of globalization. there are growth options available for specialty retailers like Zara. 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 . Today. Americans like to be able to purchase all goods including apparel from the comfort of their own homes at any time they chose. which shows that Zara’s business model is becoming the wave of the future. Brazil or Mexico. In some cities the company is possibly experiencing cannibalization because there are too many Zara stores that carry the same product within one city. market they could realize the potential for a direct Internet selling strategy. decreasing cannibalization for the chain. and U. The company keeps its operating income elevated. To many Europeans. Therefore. Their second central distribution facility should be an expansion of one of their smaller distribution centers located in Argentina. well-priced new apparel every week. Zara could differentiate its product from location to location to increase shopper traffic.

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