1) With which of the international competitors listed in the case is it most interesting to compare Inditex´s financial results? Why? What do comparisons indicate about Inditex´s relative operating economics?
Financial results of Inditex Group and its competitors GAP, BENETTON, and H&M (Table 1) have to be evaluated under a common bases, in other words, identifying variables that are common for the four companies due to at the end the business strategy of each one are different. For example, the format of each of the stores varies per company, and so the market where they are located . Figure 1, shows the product market positioning map of Inditex stores and its competitors.
Source: Exhibit 5. HBS case Zara: Fast Fashion
As it is stated in the HBS Case ZARA: Fast Fashion, the main characteristic that differentiates Inditex from the rest of the group is that the vertical scope of Zara is wider that the other three competitors, a result of that Zara owns much of its production and most of its stores . Characteristics of each of the four companies that analysts consider comparables are identified in Table2.
Table 2. Key Issues of Inditex Closets Competitors.
ConceptInditexGAPH & MBenetton
ProductionOwn most of productionOutsourcingOutsourcingOutsourcing StoresMost ownedMost ownedMost OwnedFranchise
Area of focus on salesEurope 77%USA 87%Europe 96%Europe 78% Lead timesShort 5-6 weeksToo long (Months)Significantly longer than Zara Stores typeMultiformatSingle format, OutletsSingle formatSingle format + Outlets Source: Case data
Based on the considerations presented above and the data provided by the case (Table 1) we calculated a series of financial indicators for the companies in order to compare them and select which could be comparable to Inditex. There were some important indicators that could help us to evaluate the efficiency of the business model of each company, especially the supply chain performance, but data as inventory levels were not available. Table 3 shows results of some indicators that help in the objective of finding similarities among the companies.
For the purpose of this analysis we selected the indicators ROA, ROE (considering book and market value of equity), Debt/Equity, gross, operating, and net margin, and average sales per store and per square meter, as the ratios to compare among the four companies because they minimize the distortion that could result from the different business model each company operates. Indicators as ROE at market value, average sales per square meter and gross margin show the efficiency of the business in a basic ground due they compare each business with itself and provides information about how effective is the model selected. These indicators might minimize the effect of business decisions like owning or leasing stores, direct retail operations or franchise, vertical integration or outsourcing, wholesale or retail activities, among others. The effect of decisions like the detailed are reflected on the size of current assets and liabilities, long term liabilities and split of the equity (information not provided). We complemented the comparison with ROA, Debt/Equity ratio, operating and net margin to see the effect of the financing and the administrative and selling expenses in the result of the companies.
Comparing the financial data and the indicators calculation despite of differences in the approach of the companies as shown in table 2- Inditex and H&M are comparable in terms of the financial results, with similarities in performance indicators like average sales per square meter (Euro 4,924 Inditex vs Euro 4,610 H&M), close ROE at market value (about 2.5% each one), and similar gross margin (52% approx.) Both companies have most of its stores located in Europe (86% Inditex, 96% H&M) but H&M are more dependent on the sales on home continent (96% vs 77%). But there are...