ZARA: Fashion Follower, Industry Leader
The global apparel market is a consumer-driven industry. Also, globalization and new
technologies have allowed consumers to have more access to fashion. As a result, consumers are
changing, competition is fierce, and companies are evolving to meet these demands. Zara, a
Spanish-based chain owned by Inditex, is a retailer who has taken a new approach in the industry.
With their unique strategy, Zara has the competitive advantage to be sustainable. In order to
maintain that advantage and growth they must confront certain challenges that face traditional
retailers in the apparel industry.
Financial Analysis and Comparison
To prove Zara has the prospect of sustainable growth in the international apparel market,
it is important to understand and compare the financial differences of Inditex, its parent company,
and its major competitor. The most interesting of Zara’s competitors for comparison is Hennes
and Mauritz (H&M), who as the case study states, “was considered Inditex’s closest competitor,
[with] a number of key differences” (Ghemawat 5). H&M differs from Zara because they
outsource all of their production, spend more money on advertising, and is price-oriented. The
key similarities for comparison between Zara and H&M are that they are European based
companies, are fashion forward at lower price retailers, and have a strong international expansion
strategy (1; 5).
Just looking at Exhibit 6 from the case it is easy to see that their financial status is are
comparable (24). Their net operating revenues are closer to each other than that of Benneton or
the Gap, 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
ratio
shows that for every euro in short-term debt, Inditex has 1.02 million euros in current
assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt.
From this we can infer that Inditex is less liquid, possibly because they have more fixed assets
and turn their inventory over quickly. To support this inference, the inventory turnover ratio
was
calculated that Inditex turns over its inventory 4.42 times per year. This does not mean, however,
that H&M is more efficient due to its liquidity. H&M is not making good use of the cash that
they have because cash not invested does not generate a return. 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.
The operating profit margin
was calculated to measure the efficiency of the companies’
profit per euro of sales. Inditex’s operating profit margin is 21.6% and H&M’s is 13.1%. Inditex
is more efficient in generating a greater profit per euro of sales than H&M. Inditex’s higher
operating income
is a result of keeping their costs of goods sold and operating expenses much
lower than H&M’s. Inditex’s decreased costs are made possible by in-house production, lower
advertising expenses and keeping a cost-effective number of employees per store. H&M only has
771 stores to Inditex’s 1,284, but has a higher number of employees per store
, 29.7 to Inditex’s
20.8. H&M’s high employee to store ratio is partially to blame for their high cost of goods sold.
There is a disparity between the working capital
of Inditex and H&M, which is the
money available to meet current obligations. Inditex only has 20 million euros of working capital
as compared to H&M’s 1035 million euros. This is because Inditex invests more than H&M in
fixed assets
, Inditex owns 1228 million euros in property, plant, and equipment and H&M only
owns 661 million euros. 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.
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 an
apparel chain that works differently from traditional retailers. Generally, a traditional retailer such
as Express owned by Limited Brands (a top U.S. specialty retailer group), outsources all of its
production while focusing on distributing and retailing those goods. This is due to the fact that the
global apparel industry is “highly-labor intensive” rather than capital intensive (2). Fashion
retailers and apparel manufactures are always seeking to lower costs by outsourcing production to
developing countries where the lowest labor rates are found. In contrast, Zara is a chain that has
developed a successful diverse method of doing business in the fashion industry. Zara by working
through the whole value chain is very vertically integrated and highly capital intensive.
Vertical integration, a distinctive feature of Zara’s business model, has allowed the
company to successfully develop a strong merchandising strategy (Herreros). This strategy has
led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara
manufactures 60% of its own products. By owning its in-house production, Zara is able to be
flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this
production is done through the season, which allows the chain to constantly provide its costumer
with very updated products (Ghemawat 9). Traditional retailers lack this flexibility. Traditional
retailers are obligated to place production orders to manufacturers overseas at least 6 months in
advance of the season.
Zara’s in-house production purposely creates a rapid product turnover since its “runs are
limited and inventories are strictly controlled” (12). This rapid product turnover creates a climate
of scarcity and opportunity in Zara’s retail stores. The climate also increases the frequency and
rapidity with which consumers visit the stores and buy the products. Regular customers know that
new products are introduced every two weeks and most likely would not be available tomorrow.
Therefore, Zara’s scarcity climate allows the company to sell more items at full price. This
strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise
compare to a traditional retailer.
Furthermore, Zara’s unique quick response system, composed of human resources as well
as information technology, allows Zara to respond to the demand of its consumer better than the
competition. Zara, who focuses on the ultimate consumer, places “more emphasis on using
backward vertical integration to be a very quick fashion follower than to achieve manufacturing
efficiencies” (12). It is extremely important for Zara to speed the information flow of consumer
desires to their apparel designers. For that reason, Zara has human resource teams in the retail
and manufacturing environment that work exclusively toward this goal.
In the manufacturing environment, 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. Also throughout the season, Zara’s product development teams are constantly
researching the market by traveling to universities, and clubs around the world to track customer
preferences. Additionally, the young, fashionable, and international staff helps to interpret the
desire of the moment (Zara).
Possibilities for Failure
Like traditional retailers, Zara has a threat of failure that can harm its sustainable growth.
The European switchover to the common currency called the euro has created the potential threat
for the Spanish Zara chain. In July 2002 the euro was the only currency accepted for all
transactions in member countries of the European Union (“Euro”). If the euro becomes stronger
against the American dollar, than production costs will increase for European producers. The
euro switchover will increase Zara’s cost of production. That cost increase will be carried over to
the consumer with higher prices. 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. Another threat lies
with the quota elimination under the World Trade Organization agreement on textiles and
clothing expiring in 2005. Traditional retailers who outsource goods can benefit from greater
access to less expensive manufacturing. Zara will suffer from a high euro and the threat of its
competition offering more inexpensive products.
Zara’s direct competition may be their largest threat, especially when expanding into new
geographic territory. Almost any retailer can be a threat to Zara due to their wide range of
merchandise categories. Zara offers clothing and accessories for men, women, maternity,
children, and baby. Many other retailers also offer goods to one or all of those merchandise
groupings. The Gap is one of these competitors because they are also international and sell the
same range of merchandise with a less trendy style. H&M (Hennes and Mauritz) is probably
Zara’s most similar and threatening competitor. They too have been quick to “internationalize”,
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, as
opposed to Zara who multitasks globally (5). H&M builds distribution centers in their
international locations in order to cut down lead times and potential logistical costs. Another
threat to Zara is that H&M carries trendy clothing choices that they have designed based on the
melding of international apparel tastes. However, H&M offers these styles at a cheaper rate than
Zara (5).
H&M also uses more advertising than Zara, but not as much as the Gap, which may aid
them in entering new markets successfully because the local customer is aware of H&M’s
merchandise mix.
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