Zara

What is ZARA (INDITEX GROUP) operational features that make them so unique in its industry? What is ZARA (INDITEX GROUP) concept? The main features Zara (Inditex group) has that makes them unique is that they are focusing on internal development. With major investments in manufacturing, logistics, and IT responsible for their rapid expansion, the centralized logistics model, and a solid distribution network sets Zara apart from their competition. Zara’s product merchandising policies emphasized broad, rapidly changing product lines, relatively high fashion content, and reasonable, but not excessive physical quality. Zara created two basic collections each year that were phased in through the fall/winter and spring/summer seasons, adapting to trends and differences across markets. What has made ZARA (Inditex group) a success story in such competitive market? The success story of Zara begins by saying that the company is always on top of each fashion trend in the market. The target market Zara focuses on is a frugal and value-minded customer that demands the latest trends of the catwalk as soon as possible. Zara is able to respond to the customer’s needs to quickly is because of the supply-chain it uses and the inventory policies they hold in place. Zara is a company that is flexible with their production, if they notice a new change in the market, they are able to respond to it in less than two months sometimes. The Zara customer is always kept on their toes. The reason for this is that the products sold in Zara stores have a limited amount of inventory and many times won’t be reproduced again. The customer is in that way encouraged to frequently visit a store to make sure they didn’t miss an item that they desired. This also leads to never having an excess of inventory around the world. A product that sold well in the United States but not in Japan, can easily be transported to a location where it was able to sell or to a new market the product wasn’t sold before. This way, Zara can reduce its excess inventory and doesn’t have to mark down to many products. Because of the frequent visitations customers make, Zara makes sure that they have the best locations in all the important cities. They make sure that their stores are remember able and are made so that they can never be unnoticed. To conclude, Zara (Inditex group) has been successful due to the fast fashion ideal using a just-in-time manufacturing system. Their success story comes from their “medium quality fashion clothing at affordable prices” with their short cycle times. From a strategic point of view, what is ZARA (INDITEX GROUP) doing well? Not doing well? Or just not doing? The Inditex group, more specifically the Zara chain, is doing well from a strategic point of view. By “controlling less” from the location of headquarters, Zara exceeds at leaving decisions and responsibilities for others. For example, managers make important decisions when it comes to running the stores. Managers are responsible for determining what works and dictates which items are doing good or bad. Based on the in-store manager's perspective and expertise within their stores they determine which items of clothing to reorder or discontinue. Another example is Zara leaves it to the experts. In larger, more important markets with typically more barriers than most, Zara forms Joint Ventures. This has occurred in places like Germany and Japan. Also, with more different and more complex markets, Zara forms franchises to leave their stores in the hands of locals. This can be seen in markets like Iceland, Poland, and the Middle East. Could Inditex cope with the complexity of managing multiple brands especially since its geographic scope is so broad? Inditex has a system that decreases the level of complexity and gives them the ability to manage multiple brands. Under the scope of Inditex the brands consist of Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. All brands are separated into separate business units. Each unit consists of a variety of business support areas: raw materials, manufacturing plants, logistics, real estate, expansion, and international. Each chain operates independently and is responsible for itself. This system allows Inditex to cope with the levels of complexity relative to multiple brands under a broad geographic scope.  Looking Exhibit 1 Buyer-Driven vs. Producer-Driven Global Chains? What strategy should ZARA (Inditex) take? And Inditex competitors? Why? Inditex uses a Buyer-Driven chain, to generate profits from multiple aspects of the company to distinguish them from the vertical structure of commodity chains in the apparel market. These aspects consist of “combinations of high-value research, design, sales, marketing, and financial services that allow retailers, branded marketers, and branded manufacturers to act as strategic brokers in linking overseas factories”. Inditex consists of six retailing chains that are created as separate business units, such as Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. These retail chains receive support from six business support areas and nine areas of responsibility. Each retail chain operates independently but the group management creates the strategic vision for Inditex but also reviews the strategies created by the individual chains. The strategies that are created for each chain adjusted by the group in case if it doesn’t follow the vision of the group or if the strategy isn’t strong enough for their competitors. Inditex has three main competitors; The Gap, Hennes and Mauritz (H&M), and Benetton. The Gap is an organization that was founded in 1969 in the United States and achieved immense growth for the first twenty years after they were established. This retail chain focuses on creating a vast-range of “smart casual” work clothes. The Gap faced issues after 1987, when the company decided to expand internationally. The company faced issues finding the right locations in United Kingdom, Germany, and Japan; adapting to the customer’s needs (sizes and preferences), and pricing pressures that had harsher conditions than in the United States. The Gap is a Buyer-Driven Global Chain.  Hennes and Mauritz (H&M) was established in 1947 in Sweden, as an apparel retailer. H&M is seen as Inditex’s nearest rival in the market. However, there were still contradictions between the two brands. These contradictions are: H&M has a longer lead time than Zara, even though they hold industry standards. H&M started 10 years earlier than Inditex with internalisation. H&M has a more focused approach to entering a new market. H&M employs 60% less designers than Zara, even though H&M is larger than Zara. Hennes and Mauritz is a Buyer-Driven Global Chain. Benetton was stabled in 1965 in Italy, with a focus on brightly coloured knitwear. Benetton was able to achieve importance in the market during the 80’s and 90s by creating a network organisation that outsourced activities that were too labour-intensive or scale insensitive to the company. Having said that, the company still invested an enormous amount in production activities. Benetton invested a little amount in the downstream. Benetton is a Producer-Driven Global Chain. The strategy Zara uses to differentiate themselves from their competitors. Zara has more designers than any other brand and this aspects leads to a numerous amount of product and variations of exciting products that enter the stores. Zara releases a new collection every few weeks, this means that they have a short cycle time for their products. Because of this short amount of time, they only produce a small amount of each product. this comes down to a low amount of inventory in their stores.  Is ZARA (INDITEX GROUP) management team a key factor of success? Why, why not? What about employee job and store rotation? The rotation of the Zara stores is done after analyzing the evolution of the commercial districts and the traffic patterns of the locations. in turn, Zara makes an Updates and relocations of their oldest stores, since Zara is in constant growth with the years and they improved the amplitude and at the same time the attraction to the clients. Zara's location strategy is to position its stores as close to the luxury brand stores of the market, to sell its brand as high fashion at a low price. In turn, luxury brands try to stay as far away from Zara as possible. The main advantage of the Zara stores is its software to analyze the current fashion trends of each of its hundreds of stores around the world. Thanks to this software, Zara stores, and their strategic locations provide vital information for the success of it. The software lets you know which designs are duplicated and which ones you should let die before your competitors. Zara has a great management team that gives mutual support to each other. Zara has a strategy of "store managers", those who receive training at the headquarters that act as "intermediaries" between the top management at the headquarters and the store managers at the local level. The strategy of the top management was to promote the performance of the store with incentives for variable compensation depending on the performance of the store and make each manager feel as if they were running a small business.  What about margins? Can they be preserved as well—potentially a challenge given some of the threats to the sustainability of Inditex’s competitive advantages? The margins that Inditex held in 2001 were: Gross margin of 52% Operating expenses of 30% of the revenues Includes: Personnel And operating margins of 22% Net margins of 11% Depreciation of fixed assets of €158 million Taxes of €150 million Operating profits of €704 million Net income of €340 million Even though the net margin of Inditex is the high, the company isn’t the highest profitable retail chain in the market. The margins that Inditex holds, have to be preserved because of certain threats occurring in the market such as sustaining Inditex’s competitive advantage.  Is current ZARA (INDITEX GROUP) distribution strategy the correct one? Would you change it? Why, or why not? The secret of Zara and the Index group for success is its business model and his distribution strategy. Yes, it is the correct way to distribute your merchandise, since they do not have clothes in the inventory. Its strategy is based on: Sell ​​quality products, trends and innovative designs in the market. They have an exhaustive control of the creation process, this includes the production, distribution and even the logistics carried out in the company. This makes an increase in flexibility and production time. Your online platform model is one of the most effective ways to promote your new products and in turn distribute them and change production garments every two weeks. Clothing is only kept for a few hours, 3 days maximum. It would not change its distribution mode because they are constantly acquiring new clothes in the market without having an inventory that has the potential to become obsolete. Thanks to this system, they have a high turnover of production and change their merchandise constantly and remain current trends. That Zara does not have an inventory gives the advantage by saving time, space and personnel. Zara only produces what is going to be sold and thus the risks of loss decrease. Zara, thanks to its high product rotation strategy, does not have to carry out large advertising campaigns and already has a high global reputation. 5 keys of Zara production success: Material Team Design Team Testing stores Production Facility Sales network Customers  Build a SWOT analysis taking into consideration Porter’s 5 forces. STRENGTHS Affordable prices Distribution Designs Supply Chain Location of stores Ability to recreate fashion High turnover of product Active use of stores WEAKNESSES Lack of advertising Low safety stock Dependence on European market Low quality Limitations on services Repeated sales out of stocks OPPORTUNITIES Market Expansion Online sales Global fashion product Growth of fashion market Diverse culture Area THREATS Competition Fast fashion trend Emerging net commerce Limitation of design Copies  From a financial point of view, what is ZARA (INDITEX GROUP) major strengths and weaknesses? Growth Ratio Revenue / Net Income Inditex generates every year a growth in revenue above the 20%, which is for a company that has started in 1975 a decent growth. The growth between 1997-2001 is 222% and the forecast is that it will keep growing. Additional, the growth ratio of the Net Income has increased with 368% as a result of the better Net Margin ratio that has increased to 10,47%. Debt to Equity Ratio = Total Liabilities / Total Shareholder’s Equity The ratio is seen as a measure of the degree by which a company is financing its operations through debt versus own funds. A high Debt/Equity ratio is often associated with high risk, as it means that the firm has been vastly aggressive in financing its growth with debt. Typically, a D/E ratio greater than 2.0 indicates a risky scenario for the company. The company was very risky regarding the debt/equity ratio, but has changed in 2001. The decrease in Total Liability of $989,30 million helped Inditex generating this more decent ratio. The reason for this decrease is the launch on the stock market list, which gave the company money to pay the bills. Efficiency Ratios All the ratios of Zara have increased in the last 5 years, which means that the company works more efficient. However, since 1997 stagnation in the ratios occurs. For instance, ROE has a growth of 5%, but didn’t reach this growth percentage in the next years. Nevertheless, should INDITEX be satisfied that those ratios did not decrease over the last several years and still have growth. The main reasons for those positive ratios are the efficiency and the JIT. The JIT model helps the company with having low inventory costs and therefore less funds.  From a comparative point of view, how is ZARA (INDITEX GROUP) financial performance versus the competition? The figure displays the difference in size and revenue of the four apparel companies in 2001. Benetton has the most store locations divided in 120 countries, however the company has the lowest revenue. Thereafter is GAP the company with revenue of $15,559 million, with 3,097-store locations. Inditex and H&M are in both variables close to each other, although H&M has fewer locations but higher revenue. According to those results is H&M the best scoring company. Market Value   Listed Stock Exchange Market Value (Million) Change in Value Inditex 2001 $13.433,00 47% GAP 1976 $12.667,00 -60% H&M 1975 $15.564,00 8% Benetton 1980 $2.605,00 -20% The figure shows us the date that the companies listed their shares for the first time, market value and the change in value the last year. The market value can be calculated by multiplying the current market price by the total number of shares outstanding. Zara has a market value of $13.433 and a growth of 47% over the last year, which means that they have the biggest growth. A plausible reason for this growth is that Inditex listed shares for the first time in 2001. H&M is worth most of the four companies, with a growth of 8%. Return on Sales = Net Income / Revenue The Return on Sales Ratio shows the efficiency of the companies generating profit compared to its revenue. Inditex is the most efficient apparel company is this case, with a ratio of 10,46%. GAP has the most revenue of the four companies, however is the Net Income negative. Therefore, GAP has the most worse ratio, which is -0.06%. Additional, H&M has slightly more revenue and profit compared to Inditex, with a revenue of €4,269 and a profit of €410. This makes an outcome of the efficiency for H&M a ratio of 9,60%. Zara has the highest efficiency of 10,46%, as a result of fast fashion strategy. Return on Equity = Net Income / Shareholders Equity When the Return on Equity is higher for a company than its competitors, it is easier for them to generate profit without needing much capital. GAP has the highest equity of the four companies, but also the lowest profit. Nevertheless, the market book value of GAP has decreased last year with 60%. H&M scores the highest Return on Equity, with a ratio of 24,85%. Normally, a Return on Equity Ratio between the 15%-20% considered as a good result. The ratio of Inditex is close that of H&M, only 1,97% lower. Both companies are doing a very good job, with scoring above the standards. Return on Assets = Net Income / Total Assets This ratio gives an indication of the capital intensity of all the operational processes, whereby companies that need larger initial investments will generally have a lower return on assets. Regarding to GAP that has the lowest Net Income, but the highest Total Assets of €8,566 million. It shows us that the company needs a lot of money to fulfill the operational processes. Normally, a company has a serious problem when the ratio is below 5%. Benetton scores a doable Return on Asset, nonetheless much lower than Inditex and H&M. While Inditex has more property/plants/equipment their Net Income is lower than H&M. So, this results in a better ratio for the apparel company H&M. Conclusion On this moment H&M is the biggest company, with very good efficiency ratios. However, Inditex could reach or overtake H&M in a few years. The growth of the Market value and the Return on Sales ratio are two variables that could help the company keep growing. Additional, the choice from Inditex to list the shares on the market could help them to grow in efficiency, stores et cetera. 1 1