Zara's Company Situation Analysis - Essay Example

?Company Situation Analysis Introduction Company Situation Analysis Section provides an overview of Zara’s financial and overall business performance. For this purpose, analysis of key financial ratios and SWOT analysis were conducted, respectively. Financial Analysis Calculation of the historical data of operation revenues of Inditex (see Appendix, Table 1) has shown 24% overall sales growth within the two- year period from 2010 to 2012. Benetton, the Gap, and H&M have shown 0%, 2%, and 8% sales increase, respectively. Comparing to its direct competitors, Inditex has illustrated very high level of sales demonstrating not just viability and feasibility of its business strategy but also effectiveness of its flexibility and capability to adapt to market trends. Based on the rising revenues and margin data, it is possible to conclude that Inditex is at the growth phase of the life cycle, while Benetton, the GAP, and H&M are at maturity and stability phase, as their revenues and margins are declining. Financial Ratio Analysis - Inditex Profitability Gross profit margin of the company is fairly high – 59%, which implies that the company has effective outsourcing manufacturing strategy and has good relationships with suppliers. Both factors have positive impact on cost reduction. Operating profit margin is 18%, which means that the company makes 0,18 cents for every Euro of sales (before taxes). Net profit margin is 14% and it means that the company has good control over its costs. ROA ratio which is 19% means that the company is effectively using its investment, converting it into profit. ROE Liquidity Current ratio of the company is 2,0 suggests that the company has a good ability to pay back its short-term liabilities with the short-term assets it has. This means that Inditex is capable to continue its business expansion strategy and to avoid insolvency during the slower growth phases. The quick ratio of 1,5 means that Inditex position has enough liquid assets to cover its current liabilities. Thus, the company can implement its strategy of fast fashion being capable to pay quickly for its orders and to kepp short inventory turnover. Leverage Debt-to-Equity ratio (0.42) indicates that the company’s debt used to finance its operations is not so high and is a positive sign of strong financial position of the Inditex. This indicates that the company is financially strong enough to grow its business due to its profits rather than debts. Long-term debt-to-equity ratio is relatively low and indicates on the company’s financial stability. Activity Inventory turnover at 4,50 indicates that the company has efficient supply chain and can continue taking its course of fast fashion retailer. Days of inventory ratio is equal to average 81.0 days. This indicator seems to be fairly high for the company focusing on fast fashion strategy. Average collection period is 13,4 days, which is quite low and therefore optimal for Inditex to continue its aggressive business development strategy. Financial Analysis has shown that Zara’s overall financial position is very strong and enabling for implementing its strategy of future sales and stores’ growth. SWOT Analysis Strengths The company’s strategy is based on aggressive multichannel global business expansion which is implemented due to its flexible business model based on having the right fashions at the right time at affordable prices. Financial state of the company rated as “healthy” allows the company to have enough capital for future growth and investments. Global expansion of Zara’s stores and its responsive marketing strategy increase global brand awareness. All these result in strong sales and revenue growth. Effective supply chain management allows the company to be competitive on the market balancing the quality of its goods and affordable prices for mass market consumers. Excellent human resource management is another strategic strength of the company which enables the company to grow its sales and gain positive reputation. Design of new stores in accordance with the highest standards of external certification agencies increases loyalty of current Zara’s customers and is more attractive for its potential customers. Outsourcing manufacturing strategy combined with diversification suppliers’ strategy allows the company to reduce the costs of manufacturing and also avoid risk of dependence on key suppliers. Weaknesses One of the major weaknesses derived from the financial analysis relates to the relative high days of inventory ratio which is 81days. For Zara, pursuing fast fashion retailer strategy days of inventory should be reduced. Opportunities Social media is a great opportunity for Zara and its effective marketing promotion and greater interaction with its customers. Growing online sales open new horizons for the company and allow keeping minimum costs for advertisement but increasing sales dramatically. This opportunity if used successfully would result in higher profit margin and revenues. R&D investment is another opportunity for Zara to be more competitive among its rivals by designing unique, innovative or new apparels. Growing retail apparel market in Asian region offers great sales opportunities for Zara due to the high density population of this area. The forecast of significant growth of retail fashion industry also provides Zara with sales growth opportunity and increased market share in apparel industry. Effective public policies that encourage investment also offer opportunities for developing countries to leap frog into emerging high growth sectors of the world economy and thus to open for Zara/Inditex new sourcing and distribution options. Threats One of the key threats in fashion industry relates to the company’s failure to forecast apparel trends successfully. Another threat is going parallel with the opportunity provided by online presence, as failure to implement effective e-commerce strategy might damage or even destroy the company’s brand within hours. Dependence on external factors, such as changes in a country or region’s regulatory or government status can adversely affect revenues and profits, as well as dependence on economic conditions. Dependence on vendors also imposes a threat of increased costs in manufacturing and therefore, Zara faces a risk of lower sales. Risk associated with the quality of suppliers as a result of outsourcing manufacturing strategy can also have negative impact on the overall company’s brand and the number of sustainability aware consumers is growing steadily. Appendix Table 1. The past sales growth rate comparison between Inditex, Benetton, Gap, and H&M (2009-2012). Net Operating Revenues 2011/2012 2010/2011 2009/2010 % growth rate (2009-2011/2012) Inditex 13792612 12526595 11083514 24% BENETTON (Euro) 2 032 341 2 053 059 2 049 259 0 The GAP (US Dollar) 2012: 14549 14664 14197 2% H&M (Swedish Kroner) 109999 108483 101393 8% Table 2. Financial Ratios – Inditex Table 3. SWOT Analysis SWOT Analysis – Summary Table Strengths Strategy based on aggressive multichannel global business expansion A flexible business model based on having the right fashions at the right time at affordable prices (Balanced pricing strategy with the quality) Strong global brand awareness; Strong revenue growth; Effective supply chain management; Responsive marketing strategy; Excellent human resource management; Design of new stores in accordance with the highest standards of external certification agencies Outsourcing manufacturing strategy + diversification of suppliers Weaknesses High days of inventory ratio Opportunities Social media as an opportunity for effective marketing promotion and greater interaction with customers R&D investment as an opportunity for being more competitive by designing unique, innovative or new apparels Growing online sales worldwide Growing retail apparel market in Asian region Threats Failure to forecast apparel trends successfully Failure to implement effective e-commerce strategy Changes in a country or region’s regulatory or government status can adversely affect revenues and profits Dependence on economic conditions (rising costs – pressure on prices and profit margins) Dependence on vendors imposes a threat of increased costs in manufacturing and therefore, lower sales International operations may be subject to differing employment conditions, transportation availability, regulatory/operating requirements, and force major events Risk associated with the quality of suppliers as a results of outsourcing manufacturing strategy Ongoing intense competition from local, national and global apparel companies References: Matherly L., and Richards C. (2013). ZARA: Chic and Fast Fashion. Journal of Strategic Management Education. 9 (2). Read More