ZARA: FAST FASHION

CASE SOLUTIONS- GROUP MEMEBERS- Achal Goel (199278088), Piyush Raj

(199278001), Rishab Gupta (199278006), Rohit Dawra Gul (199278027)

Answer: 1

S.No Company Name Gross Profit Margin Net Income (PAT) R0E

1 GAP (15,559-10,904)*100/15559= 29.91 -9 0.00265

2 H&M 51.65 410 0.248485

3 BENETTON 43.32 148 0.056814

4 INDITEX 51.90 340 0.228802

If we compare the financial health of the different global apparel chain competing with each other,
we can use the help of Exhibit 6 given to us in the case which clearly leads us to certain finding about
the firms. To compare the financials of the firms we have used mainly 3 parameters of judgement i.e.
Gross Profit Margin, Net Income (Profit After Tax), ROE (Return On Equity)

 Gross Profit Margin = (Revenue-Cost of Goods) *100/ Revenue

 Net Income (PAT) = PBT-Taxes
 ROE (Return on Investment) = Net Income/ Equity----Book Value

It is clearly evident that the Inditex group’s- ZARA records the maximum Gross Profit Margin out of all
the competing global apparel chains playing in the similar space. GAP in spite of having the highest
revenue has the lowest Gross profit margins. Although H&M has been doing reasonably well as it has
a profit margin close to 50% while maintaining steady Net Income levels as well. Benetton also has a
decent Gross Profit Margin of 43.32.

Talking about the ROE- Return on Equity, we can clearly see that H&M has the highest returns as it
provides a ROE of 0.2485 which is very healthy in comparison to its counterparts. However, Inditex
also manages an impressive ROE value of 0.2288 which is again much higher than brands like GAP and
Benetton.

Some other Key Observations:

In spite of having one of the lowest operating revenue Zara manages to clock high profits
unlike other players
They employ a large no of employees (around 26,0000 owing to their vast spread operations
overseas in about 39 countries which contribute significantly to their profits
 Inditex-ZARA records the maximum growth in terms of market value over a year which speaks
highly about the success and power of the brand thus suggesting huge potential in the future
years to come
Inditex has more of Property, Plant and Equipment than the current assets which is a direct
reflection of the fact that they own most of the production networks and don’t outsource
them owing to investment in fixed assets

Answer 2:

 Zara always planned its production in small batches, with vertically integrated manufacturing
plants thus avoiding huge variations in the demand and production. This helped in bringing
down the Bullwhip effect which is otherwise quite common in the apparel industry thus giving
Zara a competitive advantage over its competitors.
 Zara produced around 11,000 different articles owing to variations in colour, fabric, sizes and
various other factors which was huge in comparison to the ones produced by other players
existing in the market as they manufactured around 2000-4000 articles only. This was a
somewhat much more complex job but definitely gave ZARA an advantage to launch fresh
and new products in the market.
 Zara believed in the vertical integration model thus owing the ownership of most of the
manufacturing facilities and relying minimally on the outsourcing option which helped out the
company in bringing down the lead times and launching the products-latest fashion and
trends in the market much earlier than their competitors.
 Zara operated from a centralized distributed system which comprised of a huge facility located
in Arteixo and small sub centres in other areas of importance. This directly meant low
inventory costs. Most of the other global apparel chains maintained multiple warehouses in
different parts of the globe to meet the demand on time.
 Zara placed high emphasis on backward vertical integration to position itself as a quick fashion
follower rather than trying to achieve manufacturing efficiencies by focusing on upstream
operations. They limited their production levels and maintained lower inventory levels even
if it meant keeping the demand unsatisfied. This prevented them from generating
unnecessary wastes and huge inventory costs.
 Zara spends only 0.3% of its revenue on media advertising which is very low in comparison to
that spent by its competitors in the market. Zara creates a buzz in the market by spending on
their store’s outlook which helps in giving their customers a unique and fresh appeal. They
also create a sense of scarcity as none of the articles last in the store for than 2 weeks or so
there is always a sense with the customers that if they like something then buy it now else
you’ll loose it.
 Their expansion strategy is one of the best out there in this segment which is very clearly
evident from their growth rate and the portion of their revenues that they end up spending
in expanding their overseas operation opening more and more high end stores to explore the
unexplored customer markets around the world.