Case study: Inditex S.A.

Module name: International Management Decision

Making

Module leader: Dr. Noah Karley

Module Code: 001098
Student ID Number: 1331052
LAIBS, Anglia Ruskin University Cambridge
January 2014


Word Count:
1. Introduction
The financial and operational success or failure of a company is
dependent on the decisions taken by its managers. In the highly complex
context of the global business arena, leading managers are taking into
consideration various rapidly changing economic factors. In order to
understand the multiplex business environment, leading personnel should
easily identify the nature of competition on the domestic and international
market, companys objectives, production costs and market structure.
Additionally the global managers should show a deep understanding of
competition through game theory. Collecting and analyzing data not only
about the present / future customer, but also about the competition and the
transitions on the market is a milestone for the successful managers and their
companies. The following assignment will aim to collect, provide and analyze
data from secondary sources as textbooks, business articles, economical
analysis and forecasts for a case study based on the company Inditex. The
provided analysis will include the domestic and international business
environment of the company and will try to clarify the local and the global
nature of managerial decision making by the firm.
1.1. Background
Opening its first store in A Coruna (northwest Spain), with more then
6000 stores in 86 markets all over the world and 120,034 employees as of
31th. January 2013, Inditex is one of the biggest apparel companies in the
world (Inditex Dossier, 2013). In addition to its main brand Zara, the
company is also represented by Bershka, Pull and Bear, Oysho, Massimo
Dutti, Zara Home Uterque and Stradivarius. The firm also engaged in the
activities of more then 100 companies in the textile and fashion design,
manufacturing and distribution businesses (Inditex, 2013). The vertical
forwards and backwards integration of the company, included by the
geographical proximity of design and production facilities is minimizing the
operational time to 14 days from design to store delivery and 24 48 hours
from the production, again to the stores (Inditex Dossier, 2013). This fact is
enabling the so called fast fashion - giving a strategic advantage to the
company in comparison with its competitors on the domestic Spanish market
and internationally.
1.2. Nature of industry
Due to the great size and the various diversification strategies of
Inditex and its identified competitors under which: El Corte Ingles, C&A,
Mango Group, H&M, Grupo Cortefiel, it is obligatory to identify the nature of
the industry. These companies are engaged in business activities including
construction, telecommunication and advertising (beyond their own products).
The analyzed industry is the apparel retail industry, consisting the sale of
menswear, womenswear and childrenswear. All other up or downstream
activities of the examined companies will be included only if it affects their
performance of the core business of the firms. These consist design,
production, distribution and marketing of the apparels.
2. Domestic Market

Inditex is a Spanish clothing retailer with extensive international interest.
According to the company, the Spanish market is responsible for 21% of the
sales in 2012, a shrinking number in comparison with year 2000 34%
(Inditex, 2013). A reason for that could be the extensive expansion of the
company on the international market and / or the financial situation on the
domestic market. According to the following table, the Spanish apparel retail
industry is facing negative growth through the last five years (2008 2012).

Source: (Marketline, 2013a).
Starting form 18.3 billion euro in the basis year and reaching a 14.7 billion
euro in 2012, the apparel retail industry value is showing a negative
compound annual growth rate (CAGR) for the period of 5.4%. According to
the National Statistics Institute of Spain, the total unemployment rate for the
third quarter of 2013 is 25.98% and the youth unemployment - 56.1% (INE,
2013). As the main brand of Inditex, Zara is aiming to attract people between
20 and 30 year olds, the high youth unemployment is worsening even more
the market situation. The same could apply for the competitors of the
company and is by all means strengthening the rivalry among the retail
specialists.
2.1. Nature of Competition
The shrinking market, described in the previous section is suggesting
high rivalry on the domestic market. A forecast made by Marketline (2013a) is
predicting maintenance of weak apparel retail sales on the domestic market,
as visible below.

Source: Marketline (2013a).
According to this prognosis with CAGR for 2012 2017 of minus 0.6%, the
rivalry is expected to increase, as the market is tightening during the whole
nine years period (2008 2017). Another reason for high rivalry is as Porter
(1980) suggests is high fixed costs. Due to a well - established vertical
forwards integration the competitors are represented in their own stores.
Based on Mintel (2013a) Inditex is represented on the local market by 1930
stores, Grupo Cortefiel by 898 stores, Mango Group by 326, H&M by 146 and
C&A 109 (Data for the fiscal year 2012). The high number of own operated
stores is suggesting high capitalization need and high fixed cost. The high
rivalry and the weak economic situation could be a reason for further
consolidation of the apparel retail market in Spain.
2.2. Market shares

The present deviation of the market between the apparel specialists is visual
on the following table. Leader on the Spanish market is Inditex with 13.4% of
the market, and a growth in comparison with year 2011 of 0.7 percent points.
The closest market share competition is coming from El Corte Ingles with
10.6%, however the company is concentrated in retailing of external for the
firm brands in contrast with Inditex, which is selling their own designed
apparels.

Table 2. Market shares of leading clothing retailers in Spain, source: Mintel, 2013.
In this matter the direct competitors are Grupo Cortefiel, H&M, C&A and
Mango. The market shares of the above mentioned companies is much lower
then Inditex and is in moving between 2.5 and 1.2 percent of the market. All
five companies (excluding El Corte Ingles) have risen their market shares in
comparison with year 2010, a fact that could again suggest a future higher
segmentation of the market.
The concentration ratio between the companies with the highest market
shares (excluding El Corte Ingles) is giving a leading position to Inditex Group
with a difference of more then 10% in comparison with the second one -
Grupo Cortefiel. Further showing only slight difference between Grupo
Cortefiel, H&M and C&A, suggesting a present and future exacerbated rivalry
between all three companies.
2.3. Market structure

The market structure of an industry is as the following visual
suggesting dependent on the number of firms, the freedom of entry and the
nature of the product.

Features of the four market structures, source: Karley, 2013
Based on the concentration ratio shown in table 2, the biggest (in terms of
market shares) companies are building 28.6% of the apparel retail industry in
Spain. This means, that more then 70% of the market is presently managed
by small and middle enterprises and is putting the industry in the section of
monopolistic competition by the factor number of firms. Even though the
number of firms is very big, the price and power pressure, which could be
used shouldnt be neglected. And indeed, this is the main reason not to
classify the market structure as perfect competition.
The capitalistic organization of the apparel retail market in Spain is
suggesting no legal restrictions on the freedom of entry. Firstly, limitations of
this feature could be the high capitalization of the biggest firms already on the
market. We could take as an example Inditex with 101.6 billion dollars market
capitalization (CNNMoney, 2013a) and H&M with 74.2 billion dollars
(CNNMoney, 2013b). Secondly, the already build infrastructure including high
number of stores and logistics as already mentioned could hamper the
success of the new entrants or scare away possible investors. This implies,
that the second feature freedom of entry is mixed between monopolistic
competition and oligopoly.
Due to the various brand concepts of the apparel producers and
retailers it could be concluded, that the last factor, which is deciding the
market structure the product differentiation is highly differentiated. Not only
the brand difference, but also the design distinction is differentiating the
products, which are offered on the market.
According to the presented arguments it could be concluded, that the
market structure of the Spanish apparel retail industry is presently in
monopolistic competition. This suggestion will imply relative elastic downward
slopping demand curve as visualized below. In order to point out the
difference between a perfect competition and the monopolistic market on the
graph both demand curves could be seen. The demand curve which a
perfectly competitive firm is facing is completely straight, which should imply
that the firms are price takers due to the their high number and totally
substitutable products. The monopolistic demand curve is still relatively
elastic, but downward sloping due to the relatively high number of competitors
and the slight difference in their outputs.

Source: Prenhall, 2013.
2.2. Market competitiveness
3. Price- / Non- price strategies
As shown in the previous section, the apparel retail industry is highly
competitive. This could also suggest high price and non price competition.
3.1. Price strategies
According to Lucas et al. (1994) pricing is part of an overall integrated firm
strategy, which is defined by variables as product quality, store location,
advertisement and customer service. In addition, prices are the first tool,
which the customers use to evaluate the quality of a product, brand or a
retailer. Based on Standard and Poors (2004) retailers and brands are using
a price tier strategy in order to reach consumers beyond their price tier. A
good example for that could be seen in the different design concepts, which
are imbedded in the various Inditex brands. These are Zara as a core brand
for 20 30 year olds (middle price); Bershka avant garde casual fashion
for 15 25 year olds (lower middle price); Pull&Bear young casual
fashion 15 30 year olds (sits between Bershka and Zara); Stradivarius
young fashion, casual and creative (lower middle price); Massimo Dutti
smart casual and formal wear aimed at independent older customers, 30+
(high price category); Oysho underwear and lingerie (middle price), Uterque
more sophisticated and elegant, 30+ (middle price); Zara Home home
counterpart of Zara (middle price) (Inditex, 2013). This implies, that Inditex is
using price discrimination towards its customers by dividing them into different
groups and extracting the highest possible price for its products. This various
diversification of the companys fashion concepts is one of the key reasons for
the leading position on the apparel retail industry in Spain by Inditex.

3.2. Non price strategies
Principally price alone cannot build or sustain the companys marketing
strategy and should be included by a non - price strategy. According to
Seiders and Voss (2004) apparels are part of products group which are time
sensitive and have limited and various live span. The following visual is
corresponding to the vertical forwards and backwards integration of Inditex.

Source: Runfola Guercini, 2013.
Due to the geographical proximity of the external and own manufacturing
facilities, the design headquarters, and the own operated stores Inditex is
enabling time schedules of 14 days from design to the window display and
restocking in 24 48 hours (Inditex Dossier, 2013). This is highly interrelated
with the core business of the company and is empowering Inditex to rapidly
change its models in pace with the changes in the consumer tastes and
trends.
The promptly changing of the models, which are displayed, is another
non price strategy that the company is using. The core principle is that there
are two days in the week, with new deliveries and possibly new models, called
Z-days (Inditex, 2013). The restocking of older models is usually also an
undisclosed for the companys outsider information. These two facts are
gathering multiple customers on those Z days and is forcing them to buy the
new merchandise, due to the unknown possibility of restocking. Marketline
(2013a) is suggesting that this is one of the main reasons for Zara to sell more
than 80 % of its collection at the original prices.
According to Ghemawat & Nueno (2006), Zara is spending only 0.3%
of its revenues on advertising, which is in comparison with other retail
specialist (3 4%) is significantly lower. Instead the company is choosing well
the locations of its stores in central areas with high distribution of income and
is relying on bigger window areas (Inditex, 2013).
Additionally since 2012 the company is extensively rebranding its main
brand Zara, by increasing the quality of the input materials (from cotton and
viscose to cashmere and wool) and by giving a more luxurious vision on all
the new stores of the brand (Inditex Dossier, 2013). This is accompanied by a
rise in the original prices of the goods and could be part of the firms strategy
to distinguish itself by its competitors in the middle price level. A successful
differentiation could put the brand in a unique selling point and by that
increase the profit margins and attract attention from the higher price level
customers (Levitt, 1986).

3.3. Demand estimation
The following figure is visualizing a well - established theory about the law of
demand. The law is stating, that the lower the price of a commodity, the larger
the quantity that will be demanded, other things being equal.

Figure??? Based on the law of demand
According to Karley (2013) not only the price, but also the following
determinants are important in order to estimate demand: price, tastes, number
/ price of substitutes, number / price of complementary, distribution of income
and expectations. As already stated previously the company is using its
different fashion concepts to increase the demand, which is determined by
price and taste. Additionally various non price strategies, which are applied
to use the other determinants as expectations and distribution of income. For
example store location, special days of delivery and rise of product quality.
The stated above is suggesting a strong understanding of its
customers and the theoretical demand estimation. In order to quantify and
measure the taste of the consumer and to manage its supply chain, the
company is relying on its personnel and well embedded technology. As of
31th of January 2013, the company is employing 120,314 people under
which: 300 designers and around 90,000 shop assistants (Inditex Dossier,
2013). In order to keep the fast pace of information between trading areas,
design department and production cites, the company is using its custom
developed software. The hardware is a PDA device (Personal Digital
Assistant) called Casiopea, which is informing the chain center about store
stock availability and is automatically managing the supply chain (Bada,
2009). Shop assistants and managers are giving information about the colors,
sizes and designs, which are highly demanded and could also give
suggestions about future restocking. Processing this information and internally
analyzing it, is giving quantifiable prognosis about the demand and the
preferences of the companys customers. This is enabling more successful
quantitative and qualitative management of the supply chain.
3. Financial Performance of Inditex and its main
competitors
In order to quantify the differences and similarities between Inditex and its
main competitors, the following paragraph will aim to closely discuss the
financial performance and the share price movements on the capital markets.
In conclusion there will be discussed possible reasons for the deviations in
financial matter between the companies.
4.1. Financial Performance
The financial performance of a company is a key factor for its
shareholders and future investors and is also from substantial importance for
the sustainable future of the company. The identified main competitors of
Inditex on the Spanish market in terms of sales are Grupo Cortefiel, H&M,
C&A and Mango Group. Among the analyzed companies only Inditex and
H&M are disclosing their financial performances in their annual reports. The
publicly available information of the other firms is insufficient in order to
conduct a financial comparison. This is the main reason to use other sources
as the Mintel reports of the Spanish apparel retail industry for the years 2008
2013. The following figure is showing the sales for the last three years of the
selected main competitors of Inditex H&M and C&A.

Based on Mintel, 2013.
We could conclude that the Spanish market is for the three companies either
maturing, or slowly declining in terms of sales.
The mentioned above is in conjunction with the following table. In terms of
sales, the group Inditex is experiencing around 50% rising of its sales from
2008/9 to 2012/13. In contrast the Spanish branch is maturing and is having
the same levels in 2012/13 as in 2008/9.

Source: Mintel, 2013.
H&Ms groups and Spanish performance is also pointing out, the maturity of
the Spanish market and the less dependence of the company on the Spanish
customer.

Based on Mintel, 2013.
The financial performance of C&A as part of the German based Cofra Holding
AG is estimating its sales for both the Spanish and Portuguese market.
Based on Mintel, 2013.
Showing slower group growth rates in comparison with Inditex and H&M, but
same diminishing sales on the Spanish market.
4.2. Share Movements
Among the three examined companies only Inditex and H&M are listed on the
stock exchange. According to the following figure Inditex Group has gained
value of its shares of more than 340% for a five years period. As of 7
th
of
January the companys shares are being traded at 32.18 dollar per share,
which is leading to a market capitalization of 100.3 billion US dollars.

Share Price of Inditex S.A. in US dollars for the years 2009 2013. Source: CNNMoney,
2013a.

The Swedish clothing specialist H&M is also experiencing share price growth
between the years 2009 2013. A five - year change of 129.31% raised the
share price of the firm to 8.92 US dollars as of 3
rd
of January 2014. This is
leading to market capitalization of 73.8 billion US dollars.
Share price of H&M t in US dollars for the years 2009 -2013. Source: CNNMoney, 2013b.
4.3. Conclusion on financial performance
The three analyzed apparel retailers are showing healthy financial
performance, as the shown data suggests. In comparison with the other
competitors, Inditex is showing a rapid growth trough the examined five year
period. Possible reason for that is Inditexs aggressive global expansion
strategy by enlarging their outlet number with more than 2000 for the same
period and by the fast pace implementation of online stores (Inditex, 2013).
The leading position of Inditex on the Spanish market in terms of sales and
market share is reasoned by the fact, that this is the domestic market of the
company. Understanding better the taste of the local consumer is an
advantage, that the company is still experiencing. The economies of scale
and the geographical proximity of production cites (more than 50% of Inditexs
products is made in Spain) and outlets are another reason for its leading
position on the Spanish market (Inditex, 2013). Still the Spanish consumer is
playing a less important role for the sales generation of all three companies
due to the maturity of the market and the recession, which the Spanish
economy is still experiencing (Marketline, 2013a).
5. Globalization / Internationalization
The saturation of the domestic market is one of the reasons for Inditex to
search for a global expansion of its activities (Martinez,
1997(INTERNATIONALIZATION)). Opening its first store abroad in Portugal
in 1988, as of year 2013 the company is operating more than 6000 stores in
86 countries (Inditex, 2013). The following table is summarizing the factors,
which lead to the global expansion of Inditex.

Based on McGoldrick (1995) and Lopez & Fan (2009).
5.1. Entry strategies
Inditex is applying three different strategies to penetrate foreign markets: own
subsidiary, joint venture, franchising. Based on Inditex (2013), Europe is
accounting for 66% of the in store sales of the company. On the European
market, the firm is using its main brand Zara initially on the basis of joint
venture to gain experience for the consumer and to organize its supply chain.
For example the 50/50 joint venture with the German retailer Otto Group and
the Italian property firm Grupo Percassi (Lopez & Fan, 2009). After gathering
enough information about the foreign European market it acquires the whole
enterprise as in 2006, where the company bought off all its stakes in Zara
Russia, Zara Itally and 78% of its German joint venture, the rest 22% in 2010
(Mintel, 2013). Joint ventures are also imbedded in the companys
internationalization strategy on the Asian market in order to minimize high
initial investment risk and due to the geographical and cultural distance.
Searching for a strong local partner on the foreign market could also ease and
enhance the customers awareness of the company. In 2009 Inditex is landing
on the Indian market by signing a contract with Tata Group (Inditex, 2013).
The third entry strategy franchise is rarely used and is applied in small
markets with high risk, usually culturally distant and with small market size
forecasts as Malaysia, Andora, Kuwait and Saudi Arabia (Flavian & Polo,
2000).
5.2. Global competitors
Despite the fact, that the global apparel retail industry is highly fragmented
and is presented by enormous number of potential competitors, the main
rivals of Inditex on the global market are GAP Inc. and H&M. The criteria,
which affected the choice of the two companies are market capitalization and
number of stores. The leading position of Inditex in terms of market
capitalization is based on its around 100 billion US dollars worth market
shares. Although the H&M and GAP Inc. are having, for the industry high level
of capitalization, their performance is significantly lower than this of Inditex.

Based on Inditex, 2013; H&M, 2013; GAP, 2013.
The other key factor for the identification of the companys global
competitors number of outlets- is summarized on the following table.
Strategic reason for the success of Inditex is their vertical forwards integration
and is as visual part of the strategy of H&M and GAP Inc. Inditex with more
than 6000 is an indisputable leader in terms of store number. The present
performance of the company is almost double then its rivals, which enables
economies of scale and higher platform for consumer awareness.

Based on: Inditex, 2013; H&M, 2013; GAP, 2013.
Data about the exact global market shares of the three companies could not
be found. But Marketline (2013b) in their report Global Apparel Industry is
agreeing, that Inditex, H&M and GAP Inc. are the biggest apparel retailers
and represent highest percentages of the approximate global revenues.
Another insight from the report is that the globalization and liberalization of the
market is increasing the competition between the companies not only on their
local markets, but also on the emerging markets (Marketline, 2013b). Good
example for a booming market is the Asian market, which represents a
chance for the rivals to enhance their growth. The efforts of the companies to
attract the Asian consumer are notable through the opening of new stores
(H&M 134, Inditex 396) and the developing of online commerce by Inditex
and GAP Inc. (Inditex, 2013; GAP, 2013; H&M, 2013).
6. Conclusion

The conducted analysis has shown that Inditex is holding a leading position
both on the domestic and international market. Key reason for this is the well
embedded in the supply chain management - vertical backwards and forwards
integration. Another reason for the global success of the company are the
price and non price strategies of the firm, which include various fashion
concepts, unique selling position of the main brand Zara and the store
location only in highly populated areas with high income distribution. The high
capitalization of the apparel retailer, included by an internationalization
strategy mix is helping the rapid global expansion of the company and
enhancing the already existing economies of scale. All the above mentioned
is suggesting a sustainable future growth of Inditex.






















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