Competitors It is most interesting to compare Inditex’s financial results with H&M. Similarities Low prices and relatively high fashion content Both are mainly European based Strong international expansion strategy Both have reasonable but not excessive physical quality In terms of positioning, Gap and Benneton are less fashion driven and more expensive Differences: H&M mainly outsources its production (outsources 50% of its production in Europe as well, but has slightly longer lead times) H&M spends more on advertising
H&M is more price-oriented However, the operating revenues of H&M are more similar to those of Inditex compared to Benetton and Gaps Question 1. 2 – Operating Economics Comparisons indicate that: Inditex is less liquid than H&M, as it has more fixed assets and quick turnover Inditex is more efficient in generating a greater profit per euro of sales; that is because COGS and operating expenses are lower than those of H&M Mainly because of in-house production and lower advertizing expenses
Question 1. 3 Capital Efficiency Inditex’s relative capital efficiency is lower than that of H&M due to the fact that Inditex’s working capital and profits per store are much less than those of H&M Inditex is opening more stores based on projections and anticipated future value of the buildings As long as Inditex’s profit margins stay high, they will have the money to invest and pay expenses. Question 2. 1 – Advantages Compared to Average Retailers Zara follows fashion closely.
Zara is better able to react to actual consumer demands (fashion), instead of forecasting it Due to its high response capability with regard to production, combined with trials of entirely new (risky) items in key stores, its IT enabled system to track sales, and store managers feedback on customer preferences/demands. Design and production is done throughout the sales period, as such the customer is provided with very updated products. Question 2. 1 Continued…
Zara can produce in small batches, with vertical integration into the manufacturing of the most time-sensitive items. Zara’s centralized distribution facility minimizes the lead time of their goods, in general products are in the facility for about 3 hours, and never longer than 3 days. ? less uncertainty/risk + fast response + a deliberate degree of undersupply in stores ? less inventory to be sold at mark down during the sales period Question 2. 1 continued… Zara’s business model makes it more profitable then any other retailer.
While retailers get about half the price of the product sold, Zara gets a larger share of the added value since it is both the manufacturer and the retailer. Because of Zara’s strategy of creating scarcity and opportunity in their stores, Zara has a quick product turnover, which increases frequency of customer visits (17 times vs. an average of 7). This allows Zara to sell more items at full price and reduces inventory to be sold at mark down during the sales period.
Additionally, Zara, thanks to its global presence, can sell “unpopular” products in other regions, where they will sell. Question 2. 2 – Disadvantages compared to Average Retailers Zara makes up around 86% of Inditex’s total sales volumes, if Zara fails in the future this will have severe implications for Inditex’s financial performance. Furthermore, due to their centralized logistics model, they may not be able to supply more retail locations in the future. Vertical integration, may limit the ability to acquire economies of scale.