In the retail fashion industry, competition is getting more and more intensive due to reducing quotas of tariff and increasing reliance on imports. International apparel retailers are regarded to be one of the key drivers of globalization via global sourcing. On the other hands, Inditex, the parent company of Zara, is one of most successful fashion retailers in the clothing industry. Inditex’s unique business model mainly focuses on vertical integration and in-house production, while at the same time outsourcing is becoming a popular trend in clothing industry. Inditex’s closest comparable competitors had narrower vertical scope than Inditex but outsourced all productions. In today’s competitive business environment, more and more company choose to send out non-core operations or manufacture sector to supplier in order to reduce the cost by specializing and making the firm focus on its core operation. This is due to the low labour cost in some developing countries such as China and Vietnam. On the other hand, there are some company constantly try to gain control over as many sections as possible within entire value chain, usually by in-house production.
The purpose of this dissertation is to further analyze the reasons why Inditex, who are competing in the same business field and under the same conditions as rivals such as H&M, next, Gap and Mango, choose different business models. What are competitive advantages derived from Inditex’s business model and the negative sides of business models.
In order to successfully carry out this dissertation I will firstly identify Inditex’s business models and analyze the key factors resulting in its competitive advantages.
2.1 Industry Analysis
the culture of fashion has been changed from haute couture and ready-to-wear to fast fashion. Generally, fast fashion retailers do not heavily invest in creating a fashion trend and designs, but instead are inspired by the most attractive and promising trends spotted at fashion shows and by cues taken from mainstream consumers (Agins, 1999; Reinach,2005). They can catch up these new fashion trends and add them into their products that can be provided on the market almost immediately with relatively lower price. Fast fashion is dominating the industry on the premise of several conditions. Firstly, short lead times and development cycles is one of key precondition of fast fashion. Secondly, considerable number of retail stores can reach potential customers. In addition , a very fast supply chain is required to connect customers demand with upstream operations from design, manufacture to distribution.
Nowadays . more and more fashion retailers across the world engaged in such a”fast fashion”race. They make every effort to maximize the time to response fashion trend and the speed of their supply chains. For examples, Spanish Inditex (Zara) , US GAP, Swedish company Hennes &Mauritz (H&M). British Topshop and Next, all focus on fast fashion model. These fast fashion retail could be divided into two categories: some with factories to produce its products represented by Zara ( Inditex); some without manufacturing competencies of their own such as H&M and Gap. They outsource production to larbor intensive countries.
http://joeg.oxfordjournals.org/content/early/2007/10/23/jeg.lbm035.full J Econ Geogr (2007)
Fashion apparel is a highly competitive business that has no national boundaries due to its internationalization. The fashion retail industry is a large, mature and high competitive industry. the annual growth rate of the market was about in the past decade. In 2009, total apparel sales was billion. However, high fragmentation gives rise to intensive competition and price pressure in this market. Porter’s Five-Forces Model will be used to illustrate business environment of apparel industry.
Threat of entry
Threat of entry to the apparel industry is low. But the economies of scale in production has significant impact on the entrant. It forces the entrants either to accept cost disadvantage or produce in a large scale. On the other hand brand identification and production differentiation plays the significant role, because brand identification creates a barrier to entry.
Threat of substitutes
Threat of substitution in this market is very high. Threat comes from other apparel retailers, designer clothes and tailor houses. On the other hand, Generic substitution is more likely to be threats by offering products at lower price.
Power of buyers
Today’s buyers have more purchasing power than ever before. customers demand high quality, many variety and more frequent changes in choice available to them. They are looking for immediate perfect matching set of garment, accessories in their preferred color and size in same store. because retailers differentiate its product to satisfy the consumer’s needs, alternative sources of supply available for consumer and the cost of switching is almost zero.
Power if suppliers
Power of suppliers in apparel market is low because most of fashion retailers outsourced the production section to developing countries, switching costs are low, buyes’ brands is powerful enough to get strong bargain power. there exists the possibility of forward integration and supplier’s customers are not fragmented.
The apparel industry, due to its low barriers of entry and declined obstacles to trade among nations, is one of the most highly competitive industry in the world.
The company overview
Inditex ( Industria de Diseno Textil) is a global fashion retailer and has expanded rapidly to become one of the largest fashion retailers in the whole world. The company designed, manufactured and retail apparel, footwear and accessories for women, men and children through its seven apparel retail chains: Zara, Bershka, Stradivarius, Massimo Dutti, Oysho, Pull and Bear, Skhuaban. Each of these brand is targeting various market in terms of age and disposable income segments. The group owns more than a hundred companies involved in different textile, manufacturer, infrastructure and distribution businesses. At the end of the 2009, the group operates stores around the world. At the beginning, Inditex’s operations mainly in its domestic market Spain, until the first Zara shop was opened in 1975, the company has expanded internationally quiet quickly within clothing sector. there it established a competitive advantage: just in time fashion taken directly from the street, nightclubs or fashion weeks which 15 days after is ready to satisfy costumer’s desires (Blanco and Salgado 2004).
3.2 History of Inditex
Exhibit 1 Timeline of Inditex
In 1963, Amancio Ortega Gaona, Inditex’s founder, founded confecciones Goa to manufacture products such as housecoats. As the demand increased, the company integrated forward into retailing, then the first Zara store was opened in 1975. Zara stores expanded quickly within Spain market. In 1985, Inditex was founded as the holding company of the group of business operating at the time. In 1988, Zara opened its first store outside of Spain and began to expand internationally. Pull& Bear is founded, and inditex bought 65% of the Massimo Dutti Group in 1991. Shortly afterwards, Inditex acqucisited 100% of Massimo Dutti Group and launched its first shop in 1995. Inditex launched the bershka chain and acqusitited Stradivarius respectively in 1998 and 1999. Soon after, the group launched Oysho chian in 2001 and Zara home in 2003. Zara home was intrudeced as inditex’s first online store in 2007.
Over past few decades, Inditex has build its own multi-brand portfolio, which has allowed Inditex to target various market segments more effectively. The group uses a multi-brand name strategy to diversify senven endorsed and one extended brands. Zara is . Although Pull and Bear and Massimo Dutti are both fashion brands for women and men, their target market is different. The former brand target younger group with more leisure and sport design, while the latter one target for men and women from 24 to 45 with higher quality. Bersha and stradivarius provide elegant and latest fashion for only young woman.
Exhibit 2 Inditex’s brand portfolio
Hennes and Mauritz ( H&M)
Hennes and Mauritz, was founded in Sweden in 1947, is another high performing fashion retailor. Today H&M has expanded to stores acorss the world with more than 60.000 employees. H&M offers similar product mix with Inditex in the same market, such as clothes, accessorise, nightwear and underwear to women, men and children. While H&M is considered as the closest rivalry to Inditex, there are many key differences. First of all, H&M outsourced all its production section. Moreover, H&M tends to offer slightly lower price than Zara byâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦
Beyond store-based retailing, H&M also ventured into online shopping and Internet retailing.
Inditex has been relatively slow to develop its online selling. However, H&M has relied almost exclusively on only one brand. Inditex has more broad brand portfolio, which is made up of eight brand in order to reduce risk and refine the company’s targeting of specific consumer groups
The Gap is American fashion retailer founded in 1969. The company has five brands: GAP, Old Navy,Banana Republic, Piperlime and Athleta. At the beginning, Gap’s merchandise consisted of other brands such as Levi’s and LPs. After Gap continuing to expand rapidly across the United States, Gap started to sell its private label products in its stores. Gap is a famous fashion retailer with a distinct marketing campaign consisting of mainly primetime television adverts which target the fashion conscious 15 to 35 age old women and men. The company operates over 4000 stores all over the world. Gap was well known for extensive collections of T-shirts and jeans which is simple but stylish. however, since 2001 the pace of development became slow due to lack of a clear fashion positioning and failing to meet consumer’s fast fashion demand. More than 90% of its products are outsourced ,which made supply chain is too long and have a slow response to fashion. Also, Gap ‘s core customer base has aged. Gap needs a reposition for its brand and design, but the chain has struggled to attract a younger generation to its stores. the company do not have effective approach to deal with it. Gap is suffering plummet sale and its competitors such as Zara and H&M profited from Gap’s downfall. In 2008, Inditex’s fashion chain Zara has overtaken Gap to becoe the world’s largest clothing retailer.
Financial Performance and comparison
Exhibit 3 Financial data of Inditex
Operating profit margin and return on capital employed ¼ˆROCE¼‰ are two indicators used to evaluate profitability of the firm. According to the figures, there is a stable increasing trend over last five years
Exhibit 4 Total revenue
Exhibit 5 Net profit margin
comparison of net profit margins between Inditex and its main competitors over the same period is another indicator to show how effective a company is at cost control and profitability. Net profit margins is result that Net profit divided by net revenues. The net profit margin is a good measure to compare companies in the same industry due to similar business environment all companies confronted. The higher the net profit margin is, the more profitable the company is. To put it in another way, the more effective the company is at converting sales into profit . According to exhibit 4, we can see that H&M have strong capacity to consistently convert around 22% of its total revenue into profit, Inditex’s net profit margin is similar. Compared with Inditex and H&M,GAP has lowest net profit margin.
Exhibit 6 Return on capital employed
Exhibit 6, above, demonstrates return on capital employed (ROCE) shows how much profit a company can earn from the investments the shareholders have made in their company. It basically be used to show how much a company is gaining for its capital. In figure 6, GAP underperforms in this measure, not just due to low profit levels, but also because of huge amount of capital in order to generate profit. However, GAP’s return on capital employed ratio is increasing gradually. on the other hand, Inditex requires higher capital per unit of profit than H&M. there is a decline on its ROCE ratio since 2007. H&M vastly outperforms all other firms. Inditex invests more than H&M in fixed assets dues to its vertical integration. Inditex has million eoros in property, plant and equipment, while H&M only has 661 million euro. This is the main reason that H&M has much more higher ROCE ratio than Inditex.
Inditex’s Business Strategies
4.1 Design-Fashion follower, industry leader
The process of Inditex’s product development ran through anytime in order to adapt to new fashion trends . Designers and managers attend high-fashion fairs and exhibitions to obtain fashion information and then convert the latest fashion trends of the season into their designs. Other source of design inspiration comes from TV, Internet, film content or trend spotters. product development teams focus on venues such as university campus and clubs around the world to capture fashion trends and customer preferences.Zara’s product development teams have frequent conversation by useing their IT system. Inditex gave significant autonomy to each store manager in deciding the quantity of product its need for a store and which product to display in their stores and which product to be on sale. The manager’s responsibility is to make these decision based on market research and sales trends back to their company. Moreover, the young, fashionable store staffs helps to report the sales analysis, the product life cycles, and the store trends to the designers.
There are specialized teams in headquarters to analyze feedbacks and information from each store, then design and produce their products. These sales analysis allows the designers to develop the right products to meet consumer Demand.
Design team came up with approximately 12,000 new styles design per year. Such an design concept depends on the regular creation of new design. For example, Zara’s designer team came up with approximately 40,000 new designs per year, from which only slightly more than one-third of them for production. Zara often follower the fashion trend of the high-fashion houses and offers similar products at much lower prices by using less expensive fabric. It also tried to offer more colors and more size to meet the need of consumers . After a prototype of new design was selected, a computer-aided design system is used to refine colors and textures.
Limited number of new items were produced and presented in certain stores and large volumes of product are produced only if customer’s reaction is positive. As a consequence, failure rates on new products is only 1% which is more less than average rate 10% of other fashion retailers.
Inditex has been able to obtain excellent financial record due to its vertical integration and fast fashion business strategies which provide Inditex with a competitive advantage over traditional fashion retailers in the industry. Generally speaking, apparel retailers always try to keep slower costs by outsourcing production to developing countries where the lowest labor could reduce its manufacture cost. On the other hand, Inditex’s subsidiary retailing chain adopted a successful diverse method of doing business by working through the whole value chain. highly capital intensive and vertical integration is a distinctive feature of Inditex’s business model.
From the upstream value chain, a subsidiary of Inditex company, Comdietel, funnels fabric and other input supplied by external suppliers. More than half of the fabric was undyed which provide maximum flexibility to produce in-season clothes. Comdietel is able to dye and processing gray fabric into certain pattern within only one week to meet the requirement of downstream value chain.
Inditex has 20 fully owned manufacture factories across the Europe. These factories use capital intensive production process and provide cut garment and semi-manufactured products to approximately 500 in-house workshops. the relevant cutting machines and other systems produce semi-manufactured items and cut garments which will be transited directly into workshops. The progress looks rigmarole, but it is quite efficient because Bar codes track the cut pieces through the every production steps. Workshops are located in labor-intensive areas across Europe such as Spain and northern Portugal. These workshop manufacture clothes in small scale to specialized by product type. The sewn clothes were sent back from these workshops to various product line under different brands.
The center will inspect, iron and fold before send finished garment to distribution center.
The secret of Inditex’s success is that vertical integration leads to short turnaround times and great flexibility. by doing in-house production, inditex has obtained high level of variety, amount and frenquency of new style of clothes. inditex adopts a market orientation by reducing lead-times and increasing flexibility. Zara is able to upgrade products in its stores within 10 to 15 days from design to stores. vertical integration decreased Inditex’s stock to a minimum level and reduced fashion risk. In the mean while, providing small amount of products in a great variety of styles rendered Inditex shorter lead times and high level flexibility. As a consequence of offering fewer amount of product more often, Indite obtains larger percentages of the full price due to in-season sell and thus achieve higher net margins on sales. This strategy also create a climate of
By focusing on shorter response times to fashion trends and keep up with fashion. Inditex made efforts to make sure that its stores are able to offer latest fashion items that consumers desired at the time. Inditex can move from coming up a design to having clothes in its stores within 2 weeks. Short lead times is Inditex one of the most important competitive advantages over its competitors. When Inditex’s retail stores provide consumer with latest fashion items and gain huge amount of sales, its competitors still struggling to catch up. In comparison, H&M’s lead times is more than 20 days. Traditional retailer use 4-6 months .
A more systematic approach to inventory distribution is another feature of Inditex. Each retail chain has its own centralized distribution system. Distribution center is located in Arteixo and small satellite centers is across the world. In order to keep its stores refreshed with new merchandise every two weeks, the warehouses of Inditex is a place to transfer merchandise rather than store them. Under Indetex’s distribution system, most of merchandise stayed at the distribution centers only few hours. Products are inspected and shipped immediately in distribution center which is regard as a place where products are moved rather than stored.Store managers can check lists of items available to be shipped to their stores. Based on their store inventories, they can request quantities and type of products. However, Inditex’s international expansion required constant adjustment on distribution. Zara schedules the shipment by time zone to make sure distribute effectively. Inditex uses this method to gain a competitive advantage by minimizing the lead times.
Inditex’s marketing strategy is very effective because its marketing policy is zerao advertising. Inditex invest in selecting locations for its subsidiary retail chains and the presentation of those stores. For example, products in Zara are relative inexpensive, but shopping in Zara shores did not feel cheap. Zara stores are centrally located with spacious and nice decaration. The clothes were presented very tide and upscale. There is a big difference between Zara stores and the store of some upper scale stores.
Inditex constantly changes its products. Therefore, customers are never sure what is going to be on Zara’s shelves the following week. Zara designs apparel to meet consumer demand, attempting to pull customers in by producing small amount to create a fear that if customers do not buy immediately, the product will out of stock. There is no any other company that can produce high fashion clothes faster than Zara, which position itself as high fashion at cheap prices. Although Zara has been accused of copying the design of other upscale fashion retailers, the prime difference is the price which make high fashion is affordable for average customers.
The pricing strategy chosen can effect revenue. The price of a product is very vital for a company to get back all its effort. The other three of element of marketing mix are costs. Thus, no matter how good the garment is. How efficient the supply chain and how creative the promotion, unless the price covers cost, the company will make profits. Clothes might suffer from prices that are too low among competition. Pricing is very important since it often send quality cues to customers ¼ˆJobber, 2007¼‰Inditex does not competes on price because they know their customers are more sensitive to fashion instead of price. Inditex’s subsidiary brands follow a maket-based pricing strategy. Inditex sets price in line with its marketing strategy with reference to other marketing decisions such as position, strategic objective, promotion and value to customers. therefore, Inditex set price differently on different brands. Zara’s prices are very reasonable. It’s objective is to set price as cheap as possible to allow people to have fast fashion clothes. Inditex will adjust its price for certain product to keep low inventories if the company overestimated the demand.
No advertising promotion strategy is another effective approach for inditex to cut cost. Other fashion retailers spend 3.5% of their revenue on advertising, while inditex only spends 0.3% on promotion. But that does not means Inditex make less efforts on promotion. Zara does not engaged in large advertsing campaigns on television and magazines. It just adopt different approach to promote its products. It spend its money onlocation. The company believes that its shop windows presentation are all the advertising it needs and its sores only opened in the most fashionable district.
Business model Analysis
According to Inditex’s financial ratios and business models, we can conclude that
Inditex’s higher income and oprating profit margin result from its business model of vertical integration which keeps costs and operating expenses much lower than Gap and H&M. In-house production allows inditex have little transaction costs. In light of the transaction cost theory, Madhok said that manage business activities inside the company is direct way to diminish the transaction costs. The costs of managing upstream or downstream of business activities within an institution will be much lower than through the market. In the meanwhile, vertical integration gives a firm more control and flexibilities to operate directly. Forward integration can provide product differentiation advantages that are difficult to imitate as well as superior design intelligence. Potential advantage from integration is the degree of vale added at the stage. vertical integration provide ability for a firm to predict the changes in needs quickly and speed up learning process with regard to new trends. It also provides control to identify mistakes more quickly and correct it rapidly. Inditex is a typical example of vertical integration. The group has authority to operate directly through designing, manufacturing and distribution. Due to vertical integration, the group gains a better position in the purchasing of raw materials, controlling the manufacturing process and obtaining better lead time to market. Decreased Cost does not only derive from lower transaction cost but also comes from waste reducing. This happens by designing and cutting its fabric in-house and it acquires fabrics in grey to keep costs low. Zara dyeing and printing fabric until close to manufacture to acquire more flexibilities in order to meet various design requirements, thereby minimize raw material waste and rendered Zara great flexibility in adapting their product lines based on latest market trends and consumer preference and responding quickly to changes in consumer demand.
On the other hand, some economist and management scholars have different opinion with regard to negative aspect of vertical integration. Harrigan’s (1983) pointed out vertical integration can limit flexibility and reduce information about both in-put market and product markers as the comoant becomes more insulated, companies are advised not to vertically integrate, especially if a company has bargaining power. For instance, H&M and Gap have low level of vertical integration. Market transactions take place and then supplier and distributors are main solution. For apparel industry, labor cost is one of significant issues. Low cost labor countries such as china, Pakistan and Bangladesh are outsourcing destination. It is important to note that outsourcing into lower cost labor countries is not only sustainable strategy, because fast fashion requires shorter lead times. Inditex chooses to produce closer, not cheaper. They believes that even if the company will save some labor cost by outsourcing production into the Third World, the group still end up costing more in the end, because it destroys Inditex’s competitive advantages: flexibility and lead times. By producing closer, Inditex could quickly reduce and increase the amount of products according to response by each store. It also avoids the inventory backlogs and clearance sales which were a regular drain on the profit of rivals, particularly in seasons of imminent recession’ (Newsweek, 2001). However, As Inditex expands internationally rapidly, producing nearby becomes less efficient . by 2010, Inditex is one of the most internationalized and largest fashion retail chain. Inditex operates more than 2800 stores in 74 countries worldwide and % of sales came from international sales.( )
Rest of Europe
Asia and rest of the world
Inditex faced several crucial issues regarding its international expansion.
To sum up, Balancing strategy of vertical integration and outsourcing might be more efficient way to optimize a company’s performance. The simultaneous pursuit both vertical integration and outsourcing seems contradictory. In fact, when a company adopts balanced strategy, the uncertainty will be reduced and a company’s product portfolio will be improved, thereby leads to a firm’s competitive advantage and great performance. The extent of balance should be based on company’s resource. a firm neither focuses too much on vertical integration nor on strategic outsourcing result from its resource and capacities.
the pressures of globalization and international expansion lead to Inditex transform it activities. it does not using a single best way of doing business any more. Zara illustrated that Inditex starts adopt diversity of successful approaches to decisions about outsourcing and vertical manufacturing. The percentage of Zara’s global sourcing increased to 60%. 34% of production was carried out on Asia. Inditex still keep about 40% of finished garments were produced in house. The most fashionable products require more flexibility. In contrast, more basic products that are more price-sensitive than time-sensitive are outsourced to labor intensive developing countries, because production in Asia is 15%-20% cheaper than Europe.
Vertical integration leads to cost efficiency
Divese brands offerings enable to cover various market segments
Strong supply chain
Retail chains under Inditex developing unblanced
Vertical integration leads to cost efficiency
Vertical integration is not a superior form of strategy in any industry. However, fast fashion industry is a competitive business where product life is short and differentiation is vital to build its brand image. Competition among apparel retailers on price and quality has intensified as low cost global outsourcing has been a trend over the past two decades. At present, competition has shifted on quick response and led-time. Therefore, vertical integrated fashion retailer gained advantage in implementing a set of process innovation to shorten the production cycle. Less vertical integrated company is lack of flexibility.
Divese brands offerings enable to cover various market segments
Strong supply chain
Although Inditex has a successful operation model, it also have some weaknesses that can affects its sustainable growth in future. Eight of retail chains under Inditex experienced unblanced developed. Zara generous more than % of Inditex’s total revenues, 7 other brands account for much smaller percentage. Inditex is putting all their eggs into one basket. Although Zara has become well-known brand worldwide, seven other brands still have very limited development internationally.
Inditex’s international expansion plan of Zara made the company well-known worldwide. One the other hand, its standardized production line and strategy might result in the failure of Zara. For instance, Zara was not able to penetrate American fashion market. This is basically due to the differences between European style and American tastes. Difference in the economic, cultural, social and political conditions in each of the country should be taken into accounted. Hence, inditex’s product lines should be customized on a country or region basis to be able to effectively meet to the local customer’s preference and taste without incurring additional costs. For example, some product lines will not meet demand in the Middle East due to cultural norms..
Transaction Cost analysis
Higher labour cost
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