Business

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, Industry Leader

Table of Contents

Introduction............................................................................1

Financial Analysis and

Comparison.............................................................................1

Strategic

Advantages...........................................................................2-3

Strategic

Drawbacks........................................................................... 3-4

Possibilities for

Failure....................................................................................4

Recommendations/Conclusion......................................................5

Calculations and Financial

Statements.................................................................Appendix A

Articles: The Recent Status of

ZARA.......................................................................Appendix B

Works Cited

Works Referenced

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

ratio1 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 ratio2 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 margin3 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 income4 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 store5, 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 capital6 of Inditex and H&M, which is the

money available to meet current obligations.