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MGMT 495Summer 2011:Kelly BossoltMarta KovorotnaSarah Smith

Executive Summary:Financial Analysis: How big is the apparel industry?IPOInditex compared to competitionExternal Analysis:Competition, who and whereGlobal Retailing Trends (QR)Internal Analysis:JITTelecommunicationsBackward IntegrationEach brand, separate entityMGMTVertical Integration

Financial Analysis: The BIG PictureHow big is the world apparel trade market??

http://www.teonline.com/industry-overview.htmlFinancial Analysis: Compared to competitorsCompany:Operating Margin:EBITD:Current Ratio:Inditex (ITX.MC)18.0723.20B1.66H&M (HMb.ST)19.9823.61B2.36Gap (GPS)12.91EBITDA 3.48B2.33http://uk.reuters.com/business/quotes/financialHighlights?symbol=ITX.MChttp://uk.reuters.com/business/quotes/overview?symbol=HMb.SThttp://finance.yahoo.com/q?s=GPS&ql=0

Financial Analysis: InditezEnd of 2001340 million net income on revenues of 3,250 million 1,284 stores515 outside of Spain generated 54% of revenueCapital Expenditure split 80%, 10%, 10%

2002510-560 million of CAPEX: 230-275 was spent on new stores (across all chains)Financial Analysis: InditexMay 2001Launch of IPO (26% of shares sold to public)Stock price increased 50% by 2002Market valuation of 13.4 billion

Financial Analysis: Zara2001Largest and most internationalized of all 6 chains507 stores, 282 of which were in 32 countries outside of Spain1,050 million of companys capital (72% of the total)EBIT at 441 million (85% of total) on sales of 2,477 million (76% of total)

Financial Analysis: Inditex as of 2011Net Sales: 2,960mGross Profit: 1,741mNet Income: 332m78 countries5,154 stores

External Analysis: Fashion IndustryApparel trade 1990sChina export powerhouse, JapanEuropean Union: Turkey, North Africa, sundry Eastern EuropeUnited States: Mexico, Caribbean Basin Multi-Fiber Arrangement (MFA), since 19742002, post-MFA world2005, reduced tariffs (7-9%)

External Analysis: Fashion IndustryLi & Fung, Hong Kongs largest trading companyMultinational supply chain:Jacket: Filling- China, outer fabric-Korea, zipper-Japan, inner lining- Taiwan, elastics and labelHong Kong shipped to US.

Liz Claiborne, 1976Outsourced production1990s, restructure of suppliers

Backwards Integration vs. pure middleman

External Analysis: Fashion Industry1990s, the increasing concentration of apparel retilingRetail chains sales: 85% U.S., 70% Europe, 40% Latin America and East Asia, 10% China and IndiaPromotion of Quick Response (QR)Reduced forecast errors and inventory risksProbing the marketCompression of cycle timesImproved information technologyGlobalized apparel retailing2000, spending on apparel 900 billion Per capita spendingLocal variation in customersget big fast

External Analysis: International CompetitorsThe Gap1969, San Francisco90% international production1987, international expansion: UK, Germany, Japan1990s, Banana Republic, The Gap, and Old NavyFrailer to repositioning

Hennes and Mauritz (H&M)1947, SwedenAll production outsourcedQuick to internalizeLower price than ZaraExpensive advertisingFewer designers

External Analysis: International CompetitorsBenetton1965, ItalyInvestment in controlling subcontractors production activitiesLittle downstream investmentNarrowing product lines1990, hit saturationWorld Co. of JapanComparable cycle timesIntegrated backward into manufacturingDepressed Japanese marketComparable cycle times

External Analysis: Inditex/ZaraRetailers to aristocracyHome to thousands of small apparel workshopsSophisticated local demandSpanish consumer vs. Italian buyerQuality fabric from local suppliers 1980 Vertical integrationSourcing from Far East200 external suppliers

External Analysis: Inditex/ZaraThird party delivery servicesKLM & DHLCustomers know the delivery dayBuy now because you will not see this item laterMarket entry via franchising and joint venturesCyprus, 1996Turkey, 199849:50 split

Internal Analysis: TechnologyJust in Time (JIT) ManufacturingEnabled a Quick ResponseImproved CoordinationFaster market shifts with increased flexibilityReduced forecast errors and inventory risksCompressed cycle timeTelecommunicationsSupply, production, sales locationsTracking systemPreferencesRepeat orders

Internal Analysis: Vertical IntegrationBackwards IntegrationManufacturing of most time-sensitive itemsShip directly from the central distribution center to storesFast cycle timesNew design to finished good in 4-5 weeksModifications in 2 weeksIndustry had 3-6 month cycle timesReduced working capital and enabled continuous manufacturingBulk of products out much later than competitors with more time to prepareInternal Analysis: Separate Business UnitsEach brand was its own separate entityDifferent Strategies, Product Designs, Manufacturing, Distribution, Image, Personnel, etc.Group managementStrategic Vision, coordinated concepts, administrative servicesLearning by doingCreated item daily, only about 1/3 was producedFailure rate was 1%, industry was 10%Internal Analysis: Employee TrainingStore ManagerResponsibilitiesHiring and TrainingSmall business feelSalaryIncentive to earn up to half with performanceTraining15 day trainingCorporate for managers and overseas management

Internal Analysis: Competitive AdvantageValueZara NameWell known, scarcity, attractive ambience, freshVertical IntegratedControl the supplyQuick turnover (no more than 3 days in warehouse)Short supply chain and lead timesOrganizationOrganized to exploit their resourcesSimilar products in all stores

RecommendationsRemain consistentHold up with European expansion: GreeceKeep investing in technologyAdvertise! Increase the awareness

Questions