MGMT 495 Summer 2011: Kelly Bossolt Marta Kovorotna Sarah Smith

1. MGMT 495 Summer 2011: Kelly Bossolt Marta Kovorotna Sarah Smith

2. Executive Summary: • Financial Analysis: • How big is the apparel industry? • IPO • Inditex compared to competition • External Analysis: • Competition, who and where • Global Retailing • Trends (QR) • Internal Analysis: • JIT • Telecommunications • Backward Integration • Each brand, separate entity • MGMT • Vertical Integration

3. Financial Analysis: The BIG Picture http://www.teonline.com/industry-overview.html How big is the world apparel trade market??

4. Financial Analysis: Compared to competitors http://uk.reuters.com/business/quotes/financialHighlights?symbol=ITX.MC http://uk.reuters.com/business/quotes/overview?symbol=HMb.ST http://finance.yahoo.com/q?s=GPS&ql=0

5. Financial Analysis: Inditez • End of 2001 • €340 million net income on revenues of €3,250 million • 1,284 stores • 515 outside of Spain generated 54% of revenue • Capital Expenditure split 80%, 10%, 10% • 2002 • €510-560 million of CAPEX: 230-275 was spent on new stores (across all chains)

6. Financial Analysis: Inditex • May 2001 • Launch of IPO (26% of shares sold to public) • Stock price increased 50% by 2002 • Market valuation of €13.4 billion

7. Financial Analysis: Zara • 2001 • Largest and most internationalized of all 6 chains • 507 stores, 282 of which were in 32 countries outside of Spain • €1,050 million of company’s capital (72% of the total) • EBIT at €441 million (85% of total) on sales of €2,477 million (76% of total)

8. Financial Analysis: Inditex as of 2011 Net Sales: €2,960m Gross Profit: € 1,741m Net Income: €332m 78 countries 5,154 stores

9. External Analysis: Fashion Industry • Apparel trade 1990s • China – export powerhouse, Japan • European Union: Turkey, North Africa, sundry Eastern Europe • United States: Mexico, Caribbean Basin • Multi-Fiber Arrangement (MFA), since 1974 • 2002, post-MFA world • 2005, reduced tariffs (7-9%)

10. External Analysis: Fashion Industry • Li & Fung, Hong Kong’s largest trading company • Multinational supply chain: • Jacket: Filling- China, outer fabric-Korea, zipper-Japan, inner lining- Taiwan, elastics and label–Hong Kong – shipped to US. • Liz Claiborne, 1976 • Outsourced production • 1990s, restructure of suppliers • Backwards Integration vs. pure middleman

11. External Analysis: Fashion Industry • 1990s, the increasing concentration of apparel retiling • Retail chain’s sales: 85% U.S., 70% Europe, 40% Latin America and East Asia, 10% China and India • Promotion of Quick Response (QR) • Reduced forecast errors and inventory risks • Probing the market • Compression of cycle times • Improved information technology • Globalized apparel retailing • 2000, spending on apparel €900 billion • Per capita spending • Local variation in customers • “get big fast”

12. External Analysis: International Competitors • The Gap • 1969, San Francisco • 90% international production • 1987, international expansion: UK, Germany, Japan • 1990s, Banana Republic, The Gap, and Old Navy • Frailer to repositioning • Hennes and Mauritz (H&M) • 1947, Sweden • All production outsourced • Quick to internalize • Lower price than Zara • Expensive advertising • Fewer designers

13. External Analysis: International Competitors • Benetton • 1965, Italy • Investment in controlling subcontractors’ production activities • Little downstream investment • Narrowing product lines • 1990, hit saturation • World Co. of Japan • Comparable cycle times • Integrated backward into manufacturing • Depressed Japanese market • Comparable cycle times

14. External Analysis: Inditex/Zara • Retailers to aristocracy • Home to thousands of small apparel workshops • Sophisticated local demand • Spanish consumer vs. Italian buyer • Quality fabric from local suppliers • 1980 Vertical integration • Sourcing from Far East • 200 external suppliers

15. External Analysis: Inditex/Zara • Third party delivery services • KLM & DHL • Customers know the delivery day • “Buy now because you will not see this item later” • Market entry via franchising and joint ventures • Cyprus, 1996 • Turkey, 1998 • 49:50 split

16. Internal Analysis: Technology • Just in Time (JIT) Manufacturing • Enabled a Quick Response • Improved Coordination • Faster market shifts with increased flexibility • Reduced forecast errors and inventory risks • Compressed cycle time • Telecommunications • Supply, production, sales locations • Tracking system • Preferences • Repeat orders

17. Internal Analysis: Vertical Integration • Backwards Integration • Manufacturing of most time-sensitive items • Ship directly from the central distribution center to stores • Fast cycle times • New design to finished good in 4-5 weeks • Modifications in 2 weeks • Industry had 3-6 month cycle times • Reduced working capital and enabled continuous manufacturing • Bulk of products out much later than competitors with more time to prepare

18. Internal Analysis: Separate Business Units • Each brand was its own separate entity • Different Strategies, Product Designs, Manufacturing, Distribution, Image, Personnel, etc. • Group management • Strategic Vision, coordinated concepts, administrative services • Learning by doing • Created item daily, only about 1/3 was produced • Failure rate was 1%, industry was 10%

19. Internal Analysis: Employee Training • Store Manager • Responsibilities • Hiring and Training • Small business feel • Salary • Incentive to earn up to half with performance • Training • 15 day training • Corporate for managers and overseas management

20. Internal Analysis: Competitive Advantage • Value • Zara Name • Well known, scarcity, attractive ambience, fresh • Vertical Integrated • Control the supply • Quick turnover (no more than 3 days in warehouse) • Short supply chain and lead times • Organization • Organized to exploit their resources • Similar products in all stores

21. Recommendations Remain consistent Hold upwith European expansion: Greece Keep investing in technology Advertise! Increase the awareness

22. Questions