Inditex Analysis

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1. Introduction to the firm and its market

Shops around the world
*Last update: 19/02/2008
Source: Inditex Website
BrandQuantity
Zara1,134
Pull and Bear520
Massimo Dutti426
Bershka510
Stradivarius383
Oysho293
Zara Home205
Kiddy's Class/Skhuaban230
TOTAL3,701
Inditex, as stated on its website, is one of the world’s largest fashion distributors: nearly 6 million of items were put on the market in 2006 (Figure 1). With eight sales concepts Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Kiddy's Class they boast nowadays 3,701 stores in 68 countries, distributed as shown in Table 1.

In their own words: “Inditex’s philosophy -creativity and quality design together with a rapid response to market demands- has resulted in fast international expansion and excellent response to their sales concepts.”

In this assigment, I will try to provide some facts to support this strategy and to point out some exposures which could jeopardise Inditex’s future success.

Table 1: Inditex shops distribution
Since the first Zara shop (the most important concept of the group, with 72.3% of total Inditex sales in 2006) was opened in 1975, the company has expanded quiet heavily within the so called “Fast Fashion” clothing sector, especially from 2001 (Figure 1). In May of that year, Inditex made an initial public stock offering, and was by then, the world’s third largest clothing retailer.

No less significant is their strategy of diversification, which differentiates the business model of Inditex from other competitors like H&M. In parallel with its overseas expansion, Inditex has been continuously adding new brands to the original Zara. Some of them of new creation: Pull and Bear, Bershka, Oysho, Kiddy’s Class and Zara Home; other have been through acquisitions: Massimo Dutti and Stradivarius. The objective is to target different customer segments (Appendix 1). The third main point in this introduction is Inditex’s manufacturing strategy. Unlike its main competitors - Gap, H&M or Benetton - Inditex uses less Asian outsourcing (although Asian and Europe Eastern participation have been growing during last years) and maintains more controlled manufacturing sites in Spain, Portugal, Turkey and Morocco.

Finally, only the American company Gap beats the turnover of Inditex in the clothing segment. H&M, the other big competitor, was taken over by Inditex two years ago. Although the Swedish company had a profit 15% higher than Inditex’s in 2007, the Spanish company has increased their net revenue in the last six years by 130% vs the 90% of H&M. Gap, although far from both of them in terms of size, has been losing market share since 2000 (Figure 3). Table 2 shows a comparison of the main financial indicators at the end of 2006 for the three companies.

Figure 2: International Expansion. Source: Inditex 2006 Annual Report.
Figure 3: Turnover growth. Source: Annual Reports of Inditex, Gap and H&M

INDITEXGAPH&M
200606/05200606/05200606/05
Stores3,131+16 %3,112+2 %1,345+13 %
Sales (M €)8,196+22 %12,090-11 %7,580+12 %
EBITDA (M €)1,790+23 %1,296-35 %1,875+16 %
Net Income (M€)1,002+25 %590-37 %1,197+17 %
Value (M €)27,314,3+48 %11,252,4-7 %33,259,4+33 %
PER22,77+19 %21,57+48 %24,63+14 %
Employees69,240+19 %144,293+2 %40,368+17 %
Table 2: Source: Badía, E (2008) “Zara y sus Hermanas”, LID

2. Cost in the short run

2.1 Vulnerability
To provide some idea of the vulnerability of Inditex to external shocks from its market context or from the macroeconomy, I will sketch an approximation of their Short Run Average Total Cost (SRATC) Curve. To achieve that, I will describe the main fixed and variable costs of the company, since I have no access to data which let me produce an exact SRAT curve.

Inditex suffers a high degree of fixed cost coming from its manufacturing process and infrastructures: •3,701 stores in...
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