Zara: Fast Fashion

Zara: Fast Fashion

Report Questions

1) With which of the international competitors listed in the case is it most interesting to compare InditexÐ'Ò's financial results? Why? What do comparisons indicate about InditexÐ'Ò's relative operating economics?

Financial results of Inditex Group and its competitors GAP, BENETTON, and H&M (Table 1) have to be evaluated under a common bases, in other words, identifying variables that are common for the four companies due to at the end the business strategy of each one are different. For example, the format of each of the stores varies per company, and so the market where they are located . Figure 1, shows the product market positioning map of Inditex stores and its competitors.

Source: Exhibit 5. HBS case Zara: Fast Fashion

As it is stated in the HBS Case ZARA: Fast Fashion, the main characteristic that differentiates Inditex from the rest of the group is that the vertical scope of Zara is wider that the other three competitors, a result of that Zara owns much of its production and most of its stores . Characteristics of each of the four companies that analysts consider comparables are identified in Table2.

Table 2. Key Issues of Inditex Closets Competitors.

Concept Inditex GAP H & M Benetton

Production Own most of production Outsourcing Outsourcing Outsourcing

Stores Most owned Most owned Most Owned Franchise

Area of focus on sales Europe 77% USA 87% Europe 96% Europe 78%

Lead times Short 5-6 weeks Too long (Months) Significantly longer than Zara

Stores type Multiformat Single format, Outlets Single format Single format + Outlets

Source: Case data

Based on the considerations presented above and the data provided by the case (Table 1) we calculated a series of financial indicators for the companies in order to compare them and select which could be comparable to Inditex. There were some important indicators that could help us to evaluate the efficiency of the business model of each company, especially the supply chain performance, but data as inventory levels were not available. Table 3 shows results of some indicators that help in the objective of finding similarities among the companies.

For the purpose of this analysis we selected the indicators ROA, ROE (considering book and market value of equity), Debt/Equity, gross, operating, and net margin, and average sales per store and per square meter, as the ratios to compare among the four companies because they minimize the distortion that could result from the different business model each company operates. Indicators as ROE at market value, average sales per square meter and gross margin show the efficiency of the business in a basic ground due they compare each business with itself and provides information about how effective is the model selected. These indicators might minimize the effect of business decisions like owning or leasing stores, direct retail operations or franchise, vertical integration or outsourcing, wholesale or retail activities, among others. The effect of decisions like the detailed are reflected on the size of current assets and liabilities, long term liabilities and split of the equity (information not provided). We complemented the comparison with ROA, Debt/Equity ratio, operating and net margin to see the effect of the financing and the administrative and selling expenses in the result of the companies.

Comparing the financial data and the indicators calculation Ð'-despite of differences in the approach of the companies as shown in table 2- Inditex and H&M are comparable in terms of the financial results, with similarities in performance indicators like average sales per square meter (Euro 4,924 Inditex vs Euro 4,610 H&M), close ROE at market value (about 2.5% each one), and similar gross margin (52% approx.) Both companies have most of its stores located in Europe (86% Inditex, 96% H&M) but H&M are more dependent on the sales on home continent (96% vs 77%). But there are differences on both companies that show a most efficient business model and organizational structure of Indetex. The average size of the store is 57% smaller than H&M which compared to the average sale per square meter shows that product mix offered in Zara and its partner stores are more attractive to the customer. Also the operating and administrative expenses of H&M are higher than those of Inditex with 513 less stores (771 vs 1,284) and less countries of operation (14 vs 39): 37.8% of sales vs 30.2%. On the other hand, due to less stores and sales in the other areas rather than home country, H&M is less exposed to exchange rate variations which might explain the higher market value and lower size in total liabilities when they are compared to the figures of Inditex for 2001 (Euro 15,564 mio vs Euro13,433 mio and Euro 532 mio vs Euro 1,119 mio, respectively).

In summary, for 2001, the Inditex business model (vertical integration in most time-sensitive items, short production cycle, quick response, and the customer as the center of the business) has a higher operating economy due to its success in configuring a efficient supply chain which starts from the customer needs and includes all the areas of the company, as it is explained in the Annual Report 2006:

"The customer, an essential reference for the Inditex modelÐ'... Inditex locates the customer at the centre of its activity, in such a manner that all the processes of the business model -manufacture, design, distribution and sales in our own managed stores- are organized so as to offer the customer the best possible experience in his or her visit to our stores. As a result, the Inditex business model has a vertical organization, in which the decisions