Zara Fashion

1. How would you describe Zara’s financial performance?

Since only Inditex historical financials are shown in the case, we took the financials of Inditex to describe Zara’s financial performance. It is reasonable to take Inditex financial data because Zara made up 76% of Inditex’s sales in 2001.

Zara (Inditex) Financial Performance in 1996-2001

1996 1997 1998 1999 2000 2001

Liquidity Ratio

(current ratio) 0.81 1.00 0.88 0.87 0.90 1.02

Leverage Ratio

(debt/ equity) 1.98 1.84 1.97 1.98 1.80 0.75

Profitability

(ROA) 8.86% 12.01% 11.54% 11.55% 12.30% 13.07%

Profitability

(ROE) 17.52% 22.16% 22.72% 22.92% 22.14% 22.90%

Profitability

(ROS) 7.21% 9.64% 9.48% 10.06% 9.91% 10.47%

The liquidity ratio was slightly less than 1 in most years. It is not a good sign since Zara may not be able to use its current assets to cover its liabilities. The leverage ratio generally has a decreasing trend. It shows that Zara is turning to use more of its own equity to support its operation and development rather than financed by other sources. There is an increasing trend in profitability. This is a good sign showing that Zara is growing well.

Financial comparisons among the 4 main competitors in 2001

Zara (Inditex) Gap H&M Benetton

Liquidity Ratio

(current ratio) 1.02 1.48 3.40 1.63

Leverage Ratio

(debt/ equity) 0.75 1.52 0.32 1.27

Profitability

(ROA) 13.07% -0.11% 18.78% 5.25%

Profitability

(ROE) 22.90% -0.27% 24.85% 11.93%

Profitability

(ROS) 10.47% -0.06% 9.60% 7.05%

The liquidity ratio of Zara is lower than the other three competitors. But liquidity ratio is not always the higher the better, maybe Zara has a just right liquidity ratio in this case. As long as the liquidity ratio is larger than 1, it is good. Zara’s profitability is generally as good as H&M and is significantly higher than Gap and Benetton. It shows that Zara is doing better than Gap and Benetton.

2. Did Zara have any sustainable competitive advantages? If so, what are they and why? If not, what areas do you think can serve as potential advantages?

After our analysis on the case of Zara, it is observed that this company has two main sustainable competitive advantages (SCAs). They are a centralized distribution system and quick-response to fashion. These two capabilities are indeed interrelated and they both contribute to Zara’s superior performance.

Below is a table showing the analysis on the extent to which the two capabilities belong to an SCA.

Short-cycle Time

(Technological) Centralized Distribution System

(Technological)

Valuable H H

- It leads to quick release of new merchandise. - Allocation decisions can be made efficiently through this system.

Uniqueness H H

- Only World Co. of Japan has comparable cycle time with Zara. - Zara’s competitors mostly outsource their distribution.

Legal Restriction L L

- Other companies can imitate its short-cycle time without barriers. - Other companies can imitate its system without barriers.

Complexity H H

- It requires a lot of coordination among the distribution center and the stores. - A lot of procedures are required in order to bring a good centralized system.

Specificity L L

- It can be applied in other industries such as the F&B industry. - This system can be applied in other industries such as the F&B industry.

Tacitness L L

- Other companies can have such cycle time by following certain procedures. - Other companies can set up such a system by following certain procedures.

Is it a strong SCA? YES YES

From the above table, it can be seen that the two capabilities are not of high degree of legal restrictions, specificity and tacitness. However, explanation from another point of view could support that they are actually strong SCAs.

In the first place, Zara has short-cycle time which enables quick release of new merchandises. This rapid product turnover