Loading...

Successful Business Models in the Fashion Retail Industry. Strategic Audit of H&M compared to ZARA

by Nadine Pahl (Author) Wiebke Mohring (Author)

Research Paper (undergraduate) 2008 30 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

List of Abbreviations

List of Figures

1 Overview
1.1 Introduction
1.2 H&M and ZARA: Background and Development
1.3 The Clothing Retail Industry

2 H&M vs. ZARA
2.1 Size and Bargain Power
2.2 Sourcing and Manufacturing
2.3 Supply Chain / Distribution
2.4 Retailing
2.5 Expansion Strategy

3 Conclusion
3.1 Positioning of H&M and ZARA Within the Market
3.2 Answering the ‘100 EUR Question’

Appendix 1 Integral Total Management (ITM) Checklist

Bibliography

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Figures

Figure 1: First Hennes Store (Sweden, 1947)

Figure 2: The Clothing Retail Industry – Market size in 2000

Figure 3: Average labor costs and productivity in apparel ($/hour, 1998)

Figure 4: Financial development of H&M and ZARA between 2001 and 2007

Figure 5: Financial performance of H&M and ZARA in 2007 with comparison to 2006

Figure 6: Supply chain of H&M and ZARA

Figure 7: Store display of H&M in Vancouver.

Figure 8: Store display of ZARA in Milan

Figure 9: Positioning of H&M and ZARA within the market

Figure 10: SWOT Analysis of ZARA

Figure 11: SWOT Analysis of H&M

1 Overview

1.1 Introduction

In the increasingly competitive and changing fashion retail market the two European fashion retailers Hennes & Mauritz (H&M) and ZARA have explored the market possibilities in different ways: Both companies have chosen unique and very opposite business models and growth strategies which had enabled them to expand quickly and successfully beyond its own borders.

Whereas H&M focuses on outsourcing production, ZARA relies on controlling every step of the value chain. Whereas H&M follows an aggressive marketing and PR strategy, ZARA does virtually no advertising. But both companies known for their “fast fashion” dress fashionable people around the globe and compete for the title of the largest clothing retailer in Europe in a league of their own.

Thus, two main questions arise: What makes both companies so successful and what are the fundamental differences and similarities in their business models?

The following assignments starts with presenting the background and development of both companies and giving a short overview about the clothing retail industry. Chapter two explores the business models of H&M and ZARA in terms of the whole value chain. Based chapter two, the assignment ends with summarizing both business strategies to provide a reasonable answer to the key question:

If you would have 100 euro to invest, in which company would you invest in: H&M or ZARA?

Abbildung in dieser Leseprobe nicht enthalten

1.2 H&M and ZARA: Background and Development

From the humble beginnings in the small Swedish town of Viisteras, Hennes & Mauritz (H&M) has grown into an international fashion retailer: In 1947 the Swedish Erling Persson opened his first store called “Hennes” (Swedish “for her”) in Viisteras. Consequently the product range was limited to women’s clothes by then1:

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: First Hennes Store (Sweden, 1947) Source: www.hm.com, 11.06.2008.

The chain expanded during the 1950ies and spread to the neighbouring countries of Denmark and Norway in the 1960ies. With the acquisition of the Stockholm-based Mauritz Widfross in 1968 H&M was complete.2 The company expanded into men’s and kids wear. H&M went public in 1974 and continued its geographic expansion beyond Scandinavia, starting 1976 in Great Britain.3

When Stephan Persson, the founder’s son, took over the position of the managerial director in 1988, he worked towards quality improvement and reduction of operating costs.4 In addition, H&M started to spend more on advertising and design and accelerated its expansion in Europe. Indicators for the fast development in the new millennium were the opening of the first store in the USA in 2000 and H&M’s $ 5.8 billion turnover in 2002.5

H&M’s business concept is to give the customer unbeatable value by offering fashion and quality at the best price.6 The target group is very broad, including women, men, teenagers and children with the main age group of 15 to 30 years7. H&M’s product range includes everything from modern basics to high fashion reflecting the very latest international trends.8

By the end of 2007 it was operating around 1,500 stores in 28 countries around the globe. However, Europe stays the business focus9.

H&M was the largest clothing retailer in Europe until 2005. But then the faster expanding Spanish group Industria de Diseño Textil (Inditex) took over and made H&M lose market share.10

ZARA is the most successful of the six apparel chains of the Inditex Group.11 Similar to H&M, from the humble beginnings in the small Spanish town of La Coruna, ZARA has grown into an international fashion retailer:

In contrast to Persson, who started as a retailer, ZARA’s founder Amancio Ortega Gaona began as a clothing manufacturer for lingerie and nightwear in 1963.12 He came to the retail business by accident, because one of his business costumers dropped him and he was forced to open a shop and to sell the manufactured items on his own.13 In 1975 Ortega opened the first ZARA store near his own factory in La Coruna in northern Spain.14 ZARA expanded to the main Spanish cities during the following years. During the 1980ies Ortega integrated ZARA in a new holding company, Industria de Diseno Textil (Inditex), led ZARA beyond the Spanish borders to Portugal and invested heavily in IT.15

In the following decade ZARA expanded even faster, opening a new store every week and entering global metropoles like Paris and New York as well as new countries in Europe, the Americas and the near east.16 In 2007, ZARA was present in 68 countries, operating a network of 1,361 stores.17

According to Inditex “ZARA is in step with society, dressing the ideas, trends and tastes that society itself has developed.”18 Our fashion philosophy is to provide creativity and quality design together with a rapid response to market demands.“ ZARA’s mission from the beginning until now, is to sell “medium quality fashion at affordable prices”,19 very similar to H&M, but ZARA focuses slightly more on design and rapid response to the market. The target group overlaps those of the Swedish competitor as well: ZARA offers fashion for women, men, teenagers and children with a main age group of 15 to 45 years.20

Inditex is one of the worlds largest fashion distributors, with ZARA making up more than two thirds of the group’s turnover.21 As mentioned above ZARA has become Europe’s leading fashion retail chain.

It is striking, that both chains are of European origin and still focus on the European market, despite their global presence. Because both aim at the same target group by offering the latest fashion trends for reasonable prices, H&M and ZARA are strong competitors.

Both companies are very successful in the fashion retail industry by building up a strong brand. H&M has the advantage of its longer presence in the market and a stronger brand image, whereas ZARA has grown faster with a larger market presence today. In addition ZARA has the support of the larger Inditex group in the background.

1.3 The Clothing Retail Industry

In 2000, about 900 billion euro worldwide have been spent on clothing and apparel. The main markets are (Western) Europe with 34%, the United States with 29% and Asia with 23% of the total market sales:22

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: The Clothing Retail Industry – Market size in 2000 Source: See also Ghemawat et al. (2006), p. 4.

The clothing industry is a very broad industry selling products ranging from pants and shirts to accessories. It is affected by fast and globalized trends in design, models, colours and styles, and also by rapidly changing personal consumer preferences.23

The supplier power is relative low, because of the high number of possible suppliers due to the fact, that the apparel industry is able to transfer production in low wage countries fast and easy (fig. 3). As the clothing industry is very labour intensive, wage differences between different countries are an important factor for the location of production:

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Average labor costs and productivity in apparel ($/hour, 1998) Source: Ghemawat (2006), p. 21.

In the segment of ZARA and H&M the quality of the product does not have to be outstanding, so suppliers or production plants are mainly aligned by costs and ability to respond fast to fashion trends. This is the reason why the clothing retail industry is characterised by an increasing and ongoing trend for outsourcing of manufacturing to developing countries.24

In contrast, the buyers hold much power. They are price-sensitive; they can change their retailers easy because the products are interchangeable, no matter what the retail chains try to establish a unique image.

Competitive rivalry is strong in the clothing retail industry based the great number of suppliers and the high need for cost reduction. Concerning the entry barriers for the apparel industry – they are not high. But as global retail chains, like H&M and ZARA, use economies of scale, sophisticated information systems and a global network, such position is difficult to reach for a new competitor. A potential thread are strong grocers entering the apparel market, rising Asian imports and maybe in some market segments online shops.25

There is a continuous threat for substitution, fast fashion retail chains compete with apparel discounters like Kik in Germany, with mail-order companies like Otto or with smaller national and local retail chains.

As already mentioned, H&M and ZARA are focussing on a strong presence in Europe. The EU clothing industry itself has grown by 6.3% since 2001 to reach EUR 292 billion in 2006.26 Germany, Italy, the UK, France, Spain and the Netherlands form the top six European clothing markets. But whereas the western market are mainly saturated, the markets in Eastern Europe grow really fast with Estonia, Lithuania, the Czech Republic and Slovakia as fastest growing markets over the last five years:

[...]


1 See Verma (2007), p. 10.

2 Ibid.

3 Ibid.

4 Ibid.

5 See Verma (2007), p. 10.

6 Ibid., p. 1.

7 Ibid., p. 2.

8 Ibid., p. 1.

9 See www.hm.com, 16.06.2008.

10 See Verma (2007), p. 8.

11 See Göransson et al. (2007), p. 41.

12 See Mcafee et al. (2007), p. 3.

13 See Ferdows et al. (2004), p. 1.

14 See Mcafee et al. (2007), p. 3.

15 See Verma (2007), p. 9.

16 Ibid.

17 See Göransson (2007), p. 34.

18 www.inditex.com, 10.06.2008.

19 Ibid.

20 See Ghemawat (2006),p. 28.

21 See Verma (2007), p. 1.

22 See Ghemawa et al. (2006), p. 4.

23 See Maguire (2003), s.p.

24 See Ghemawat et al. (2006), p. 2.

25 See Germer (2007), s.p.

26 See www.hm.com, 10.06.2008.

Details

Pages
30
Year
2008
ISBN (eBook)
9783640298044
ISBN (Book)
9783640303304
File size
864 KB
Language
English
Catalog Number
v124623
Institution / College
University of Applied Sciences Berlin
Grade
1,3
Tags
Successful Business Models Fashion Retail Industry Strategic Management

Authors

Share

Previous

Title: Successful Business Models in the Fashion Retail Industry. Strategic Audit of H&M compared to ZARA