The economic recovery is continuing to gain traction, and with it, the global apparel industry is gradually feeling the effects of improving conditions. Retailers and brand-owners have skillfully managed their businesses through the turbulence of the recent recession, albeit not without some necessary belt-tightening and the fallout of some significant industry players. On a positive note, as the economy continues to strengthen, apparel shoppers not only are stepping back into stores, but they’re digging deeper into their wallets than they have in several years. Of course, that doesn’t mean the industry is without challenges; quite the opposite. Consistent and dramatic price reductions, undertaken to boost demand and incent buying behavior, have left their mark in the form of lower prices and tighter margins. To cope with both long-standing and new challenges, the apparel industry has stretched the boundaries of its creativity and imagination to find new ways to increase selling opportunities, reduce operating costs, achieve competitive advantage and improve the bottom line. This report focuses on the structure, trends, economic outlook and the challenges facing this huge global industry, and tries to address some issues through better understanding the dynamics that fuel this sector.
A project is the result of hours of painstaking work and this is no exception. There are people who deserve special mention here; without whom this project would not have been possible. First and foremost, I would like to thank my mentors and all my teachers for their advice, support and encouragement. Finally, during a project, there are times when we lose the will to go on, and wish the project were over then and there. My friends helped me endure those times with their unfailing humor and unflinching encouragements. If I owe more to someone than others, they would definitely be my parents, for their constant support and blessings, without whom I would not be where I am today.
01 02 03 04 05
Introduction
Objectives
Research Methodology
Overview of the Industry
Global Apparel Value Chain
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06 07 08 09 10
Structure of the Industry
Forced Labour and Policy Trends
Challenges facing the Industry
Economic Outlook: US and Europe
Growth in Emerging Markets
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11 12 13 14
Remedies for Sustainable Growth
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Case Studies
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Conclusion
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References
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OBJECTIVES
INTRODUCTION
Fashion is a big deal. The global apparel, accessories and
The objectives of this report are:
luxury goods market generated total revenues of $1,334.1 billion in 2008. And the opportunity for the industry to have a positive impact on global society and the environment is just as significant as its economic clout. The fashion industry brings many benefits to everyday lives across the globe.
Fashion goes beyond simple clothing to express identity, create wellbeing, embrace creativity and connect global communities. But like all industries there’s a negative side,
1. 2. 3. 4. 5. 6. 7. 8.
characterized at its worst by factories exploiting workers, generating throwaway fashion, wasting resources and encouraging unsustainable consumption.
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To have an overview of the global apparel industry To study the Global Apparel Value Chain To understand how the apparel industry is structured To understand the trends in the global apparel industry To have an extensive view of the challenges facing the industry To understand the economic outlook for the US and European markets To understand the growth in emerging markets To suggest possible remedies for maintaining sustainable growth in the fashion industry To understand the dynamics of the industry through studying companies, each a representative of their respective target market segment 01
INDUSTRY OVERVIEW
RESEARCH METHODOLOGY
The report primarily focuses on the global apparel industry and 3 apparel companies in particular: each of which represents a different market segment and is a world-leader in their respective segment. Apart from that, to study the trends in this sector, we look at 50 key apparel manufacturers around the world, but these companies do not necessarily, as a whole, represent an average slice of the apparel industry. To understand the numbers in this report, this statistical bias should be considered. Most companies assessed in the current-trends section own multiple brands, and grades attributed to them generally apply to these brands as well.
With regards to the 3 major companies studied, due to limited time constraints, we were unable to gather primary data, and had to rely on market research and company published annual reports and press releases.
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The Global fashion industry is one of the largest sectors worldwide, and is of paramount importance to the growth on an economy. The industry consists of various sub-sectors, such as: Apparel, Jewellery (Precious and semi-precious), Footwear and Cosmetics. Although the Jewellery sector is the largest by value, it is miniscule when compared to the Apparel sector with respect to volume. Hence, we will study the global apparel industry, starting by looking at the world clothing market and its growth over the years. Fig 1: The World Clothing Market (in US$ million) and its growth over the years (in US$ billion), courtesy: IAF, Euromonitor)
APPAREL VALUE CHAIN The apparel value chain is organized around five main segments: 1. raw material supply, including natural and synthetic fibers 2. provision of components, such as the yarns and fabrics manufactured by textile companies 3. production networks made up of garment factories, including their 4. domestic and overseas subcontractors 5. export channels established by trade intermediaries 6. marketing networks at the retail level
Over time, there have been continual shifts in the location of both the most significant apparel exporting countries and regions, as well as their main end markets. Apparel has been the classic “buyerdriven� global value chain. Unlike producer-driven chains, where profits come from scale, volume and technological advances, in the buyer-driven global apparel value chain, profits come from combinations of high-value research, design, sales, marketing, and financial services that allow the retailers, designers and marketers to act as strategic brokers in linking overseas factories and traders with product niches in their main consumer markets. The companies that develop and sell brand-name products have considerable control over how, when, and where manufacturing will take place, and how much profit accrues at each stage, essentially controlling how basic value-adding activities are distributed along the value chain.
Fig 2: The Global Apparel Value Chain
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To understand how this division of work occurs and how initiatives to develop the workforce may affect the role developing countries play in the global value chain, six distinct value-adding activities can be identified: research and new product development (R&D), design, production, logistics (purchasing and distribution), marketing and branding, services What is striking about this schema is that the most important value-adding stages are intangible services that occur before and after the apparel production process, which requires us to expand considerably our ideas about where the greatest gains from workforce development are likely to occur.
• Distribution (Outbound): After apparel is manufactured, it is distributed and sold via a network of wholesalers, agents, logistics firms, and other companies responsible for valueadding activities outside of production. • Marketing and Sales: This function includes all activities and companies associated with pricing, selling, and distributing a product, including activities such as branding or advertising. These companies frequently do not make any physical alternations to the product. Apparel is marketed and sold to consumers (via retail channels), institutions, or to the government. • Services: This includes any type of activity a firm or industry provides to its suppliers, buyers, or employees, typically as a way to distinguish itself from competitors in the market (e.g., offering consulting about international apparel businesses or fashion trends).
• R&D: This value-adding function includes companies that engage in R&D, as well as activities related to improving the physical product or process and market and consumer research. • Design: This stage includes people and companies that offer aesthetic design services for products and components throughout the value chain. Design and style activities are used to attract attention, improve product performance, cut production costs, and give the product a strong competitive advantage in the target market. • Purchasing/Sourcing (Inbound): This stage refers to the inbound processes involved in purchasing and transporting textile products. It includes physically transporting products, as well as managing or providing technology and equipment for supply chain coordination. Logistics can involve domestic or overseas coordination. • Production/Assembly/Cut, Make, Trim (CMT): Apparel manufacturers cut and sew woven or knitted fabric or knit apparel directly from yarn. The cut-and-sew classification includes a diverse range of establishments making full lines of ready-to-wear and custom apparel. Apparel manufacturers can be contractors, performing cutting or sewing operations on materials owned by others, or jobbers and tailors who manufacture custom garments for individual clients. Firms can purchase textiles from another establishment or make the textile components in-house.
Fig 3: Curve of Value-Added stages in the Apparel Chain 04
INDUSTRY STRUCTURE
The apparel industry is the quintessential example of a buyer-driven commodity chain marked by power asymmetries between the suppliers and global buyers of final apparel products (Gereffi & Memedovic, 2003). Global buyers determine what is to be produced, where, by whom, and at what price. In most cases, these lead firms outsource manufacturing to a global network of contract manufacturers in developing countries that offer the most competitive rates. Lead firms include retailers and brand owners and are typically headquartered in the leading markets—Europe, Japan, and the United States. These firms tend to perform the most valuable activities in the apparel value chain—design, branding, and marketing of products— and in most cases, they outsource the manufacturing process to a global network of suppliers. Like all global industries, the apparel value chain relies on international standards to coordinate the activities of suppliers. By the turn of the century, most lead firms had implemented private standards and codes of conduct based on cost, quality, timeliness, and corporate responsibility in terms of labor and environmental standards (Bartley, 2005; Gereffi et al., 2001). Factory performance is measured regularly, and delivery, quality, and price are tracked over time. It is common for firms to be certified by multiple buyer brands, such as Walmart, Ralph Lauren, Target, and The Gap. Table 1 provides examples of these lead firms.
Since these lead firms in the apparel industry adopted global sourcing models in the 1970s, manufacturing has become the domain of developing countries. However, the geographic pattern of this shift has been significantly influenced by a complex array of quotas and preferential trade agreements. The quota system began with the Long-Term Arrangement Regarding International Trade in Cotton Textiles and Substitutes under the auspices of the General Agreement on Tariffs and Trade (GATT) in 1962 and was extended to include other materials under the Multi Fibre Arrangement (MFA) implemented in 1974 (ILO, 2005). The MFA was put in place to protect developed economies from cheap imports from the developing world, and it governed world trade in textiles and apparel for the next 30 years. Several developing countries—and least developed countries, in particular, benefitted from this trade framework, which provided them with quotas for duty-free imports into leading markets and protected the growth of their nascent apparel industries from low-cost competitors such as China. This agreement was phased out between 1995 and 2005, as textile trade was brought under the purview of the World Trade Organization’s Agreement on Textiles and Clothing (ATC).
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Several additional unilateral trade agreements and preference schemes with specific apparel and textile clauses came into effect during this phase-out period to ease its impact on least developed countries. These trade agreements have been fundamental to allow small countries such as Nicaragua and Lesotho to continue to compete in the global apparel industry. These agreements include the CAFTA-DR Tariff Preference Levels (TPL) agreement between the United States and Nicaragua; the African Growth and Opportunity Act (AGOA) in which the United States provides temporary relief to sub-Saharan African producers; and the EU’s Generalized System of Preferences (GSP) scheme “Everything but Arms,” which provides for duty free imports from certain least developed countries to the EU, amongst others. These agreements are set to phase out at different intervals before 2015 unless renewed. Their temporary nature provides short-term advantages for the beneficiaries but also highlights the uncertainty of the future of the apparel industry in these countries, which lack other competitive advantages. This plethora of apparel trade agreements has created disparate growth patterns across developing countries. Bangladesh, Cambodia, China, India, and Vietnam, have experienced steady growth, as have Egypt, Nicaragua, and Pakistan. China, in particular, benefitted from the end of quotas and increased its global market share from 26% in 2005 to 33% in 2008 (WTO, 2010); it now accounts for 76% of total global employment in the sector. Other countries have increased exports to one or more of the three major markets—(1) EU, (2) Japan, and (3) the United States, while experiencing declines in others. For example, Indonesia increased its market share in the United States and Japan, but saw a decrease in the EU-15; conversely, Sri Lanka has increased market share in the EU-15 and lost in the United States. Lesotho has seen a small increase in market share in the EU-15 (since 2005) and a decreasing market share in the United States (since 2004).4 Several countries including Canada, EU-12, Hong Kong, Malaysia, Mexico, Morocco, South Korea, Taiwan, Thailand, and Tunisia have seen a continued drop off in their market share since the early 1990s.
Table 2: Top Apparel Exporting Countries by Year (1995-2008). Values in US$ billion. (a) Includes significant shipments through processing zones. (b) Some years include estimates. (c) EU values include intra-EU trade; values only represent EU-15 in 1995. (d) Domestic exports only. (--) Indicates country not in the top 15 in given year Source: WTO, 2010.
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FORCED LABOUR & POLICY TRENDS Two decades ago it was standard practice for an apparel company to publicly deny any responsibility to workers in its supply chain. After years of worker and consumer activism, the debate has shifted and a number of companies have now developed extensive corporate social responsibility (CSR) programs. A handful of companies are using these systems to facilitate positive changes for workers. With statistical data, we present an overview of apparel companies’ current range of responses to arguably the most egregious ongoing abuse of workers: modern slavery. This report provides detailed information on fifty apparel companies’ CSR practices: it assesses each management system in four categories: Policies, Traceability & Transparency, Monitoring & Training, and Worker Rights. Each indicator correlates with a piece of a system that should, if appropriately used, enable improvement in working conditions and the elimination of modern slavery. We hold that child and forced labor are far less likely in supply chains that are highly visible to companies and where workers have a voice to negotiate working conditions and speak out against grievances.
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There is no direct way to measure the existence of child or forced labor in a supply chain. However, we do know that where workers are treated fairly-- where they have a voice about their conditions and receive adequate pay-- modern slavery is by nature far less likely to exist. Beyond this, wages are a critical measure of the decency of a supply chain because they are of chief concern to workers. Interestingly, our data finds that while a handful of the CSR management systems we assess correlate with a known improvement in wages, most do not: only a small number of brands report guarantees of higher-than-minimum wages at the factory level.
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We focus our attention on all aspects of the Apparel Supply Chain, and try to gauge the problem of forced & child labour in each of these areas. Due to decades of international exposure, child and forced labor is less prevalent in export apparel factories today than it was twenty years ago. Nonetheless, people can be found in modern-day slavery even in some key global
apparel
production
hubs.
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countries are known to use child and/or forced labor at the cut-make-trim level, including China and India -- both top-ten global exporters. Fig 4: Apparel Supply Chain
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Child & Forced Labour in Cut-Make-Trim Manufacturing
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Child & Forced Labour in Textiles Production
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Child & Forced Labour in Cotton Production
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CHALLENGES FACING THE INDUSTRY Cost: In most manufacturing countries, costs (minimum wage, inflation, utility costs, currency exchange) continue to rise faster than efficiency gains. Company costs have risen considerably over the years and right now there is more garment manufacturing supply than demand, which increases competition. Some customers have continued to chase lower cost manufacturing countries. But they will soon hit a wall because the number of "new" countries you can move to and still have stable delivery is now very limited, and paying your workers properly and having a facility that is truly safe to work in actually costs money. Doing the right thing: The Bangladesh fires are a wake-up call to the industry that working with manufacturers to improve working conditions, while at the same time squeezing margins out of them, does not mix. It costs money to set up good and safe working conditions for our workers. Providing good food, internet cafes, building sufficient fire escapes, recycling water to reduce water discharge, providing an air-conditioned workplace, paying workers without fail for the actual number of hours worked... all this costs money. On the other hand, it is not acceptable to allow the industry to continue to operate at the expense of workers.
Weak Economy: We are still facing a weak and uncertain economy, although 2014 overall should be better than 2013. Even so, nobody would claim the economy is very healthy. Wage Pressure: While not a new challenge, this year we will continue to see big wage pressure in supply countries. Countries which are competitive in apparel supply - like China, Vietnam, Indonesia, Bangladesh, Burma and Cambodia - will all have doubledigit labour cost inflation. This puts extra pressure on manufacturers because apparel is not increasing in price in the countries that we sell to. Companies have been facing flat manufacturing prices in the last 10 years, but most manufacturers have been able to survive or flourish by improving factory efficiency. It's just that now companies need to be so much better in order to just stay even. Trade-Agreements: Companies are also looking at how best to capitalise on trade preferences like duty-free arrangements, which are important in our cost equation. The European Union (EU) is making changes to its Generalized System of Preferences (GSP) system for developing countries, from the beginning of 2014. So companies are looking at which countries have, or will have, duty-free in the future, and how to increase capacities in those countries. There might also be concessions on processes in those duty-free countries, and we have to build the supply chain to be able to capitalise on these.
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From a supply chain perspective, the challenges are: 1: Managing a more inflationary environment: There are not a lot of lower price countries to move to. To manage inflationary trends, the entire supply chain will need to work much closer, end to end, to eliminate waste and improve overall efficiencies. The opportunity to pick up and quickly move to another country or vendor for a lot lower price is a thing of the past. 2: Changing the mentality from "short term gratification" to a longer-term thinking and planning: Over the past decades companies looked at the short term approach: where can we move today to get the product and/or price we want? As we move into the future companies will need to be much more strategic in choosing processes, equipment and relationships. Creating efficient supply chains takes a lot more work than moving from one vendor to another for price, or a specific product. 3: Shortage of detailed skill sets: The apparel industry needs more hard skill knowledge. Companies need people that know the processes and equipment at ground zero. To create the supply chains of the future companies will require people that can go to a factory and sit down with the management teams and operators at the machine and "show" them how to do it right. All too often the as brands/retailers just throw out expectations without fully understanding what is possible or not, the baseball bat approach.
Mike Flanagan, CEO of apparel industry consultancy Clothesource, feels that the major challenges are: 1: The spectacular uncertainty about sourcing. 2: The imminent pricking of the emerging markets bubble. There is no significant market for most major retailers in the stable ones (99% of the Saudi Arabia market is still not a lot). A few franchises in Slovakia or Guatemala are better than nothing but they make no serious contribution if a retailer is losing share in its core market. And I can't find a single example of a major Western apparel retailer or brand actually making money in a BRIC economy. 3: The real possibility sales in Western markets won't grow. Increasing GDP just isn't translating into people working.
Josh Green, founder and CEO of Panjiva, a New York based firm that provides information for retailers and importers seeking new sources of production: In the midst of a tough macro environment, apparel companies will face a series of key choices in the year(s) ahead. Some companies will react like deer in headlights – and refuse to make choices. The strongest companies will have the courage to choose the path that's right for them - and will thrive. Choice #1: Invest or Harvest: Most companies prize growth above all. The problem is that the macroeconomic conditions will make it tough for most companies to grow. In the years ahead, companies with something truly special to bring to market can succeed by investing in growth, as always. But many companies would do well to focus on profitability, rather than growth, in a tough macro environment. Unfortunately, lots of companies will invest in growth, because it's what they are used to doing, despite the fact that they don't have anything particularly special to bring to the market. These companies will suffer.
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Choice #2: Offline or Online: With the exception of online start-ups, most companies in the apparel industry face an uncomfortable reality. Their knowledge, their skills, their relationships - all are oriented toward working through brick-and-mortar distribution channels. But all the growth is happening online. Companies will have to choose between doubling down on offline, taking a leap of faith online, or finding that elusive balance between the two.
The Top Challenges in Apparel Retail are:
Choice #3: Global or Local: In the sourcing world, we've been talking for years about the need for a truly global sourcing strategy, one that takes advantage of a world of opportunities, wherever they are. Meanwhile, there's also lots of talk about local sourcing strategies - designed to minimise lead times and chase full price revenue. Which is right for a company? The answer will depend on the overall corporate strategy, and of course the answer may be a combination of the two. Clearly, though, getting to the right answer is crucial for any company that's in the business of delivering product to customers.
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ECONOMIC & FASHION OUTLOOK: US and Europe Current Market Situation: • Clothing market under heavy pressure and not growing • Consumers are scared and not spending • Total market value in retail sales in Western Europe is stable: € 266 billion • Strong competition with prices and margins under pressure • Changing consumer behaviour (fast fashion versus slow fashion) • Changing distribution landscape (internet sales, mobile phones, apps) • Economy of scale (less retail outlets) • Changing globalisation landscape • Strong pressure from ngo’s to improve social conditions in low wage countries • Growing importance of health and safety regulations related to clothing • Sustainability is becoming a key marketing tool
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US apparel caught in a pricing tug-of-war: Whilst increasing input costs put upwards pressure on prices, other factors, such as the intense competition and bargain-hunting shoppers, pulled prices down. Apparel marketers continued to struggle to find middle ground. Across apparel categories, value growth outpaced volume growth in 2012, with the difference most pronounced in footwear. Overall, clothing accessories saw the best performance in both volume and value terms. Clothing accessories can quickly and comparatively cheaply update an outfit or wardrobe. Men’s clothing and the plus-size market become important in apparel: Apparel manufacturers and retailers are making increased investment in men’s apparel. Several factors, including: popular culture in the US emphasising a return to higher fashion; pent up demand from the recession; more men returning to work; a surge in personal luxury items; and more of a focus on dressing well (similar to Europeans), drove growth in men’s apparel, especially clothing. As plus-size consumers, both men and women, showed frustration at not finding their size whilst shopping, apparel marketers realised the vast potential in the plus-size market, which also extends into children’s wear. The changing apparel landscape ushers in more partnerships: With rapidly escalating production costs, tremendous growth in e-commerce, invasion of the US apparel retail space by UK firms such as Topshop and Boden, and recessionary after-effects, the landscape in apparel in the US is changing. These changes also introduced new challenges, and apparel marketers increasingly turned to mutually beneficial partnerships to achieve or better manage their goals. Goals vary from expansion of distribution to gaining e-commerce expertise to tapping into new customer segments. Apparel marketers continue to fine-tune their internet retail strategies: Even though consumers are becoming increasingly comfortable with online shopping, selling apparel via the internet still poses some challenges, since shoppers cannot feel or try on the garments. Given the tremendous potential of e-commerce, apparel marketers are making increased investments in internet retailing, with a two-pronged strategy. Improving the overall online shopping experience, from browsing to buying, is aimed at reducing consumers’ hesitation and improving shopper satisfaction. Meanwhile, specific strategies such as ship-from-store, integrated check-outs and partnerships with third-party solution providers help marketers to succeed in online retailing. Sportswear is expected to see the highest value growth in apparel: Overall, average unit prices of clothing are expected to decline sharply over the forecast period in constant terms, whilst footwear prices are anticipated to remain static. Overall, volume growth is expected to outpace constant value growth in apparel. Sportswear is predicted to show the highest constant value growth, given the continued momentum of health and wellness trends in the US. Consumers may not be willing to pay more for apparel; therefore, manufacturers and retailers will look to increased collaborations and operational efficiencies in order to improve or maintain their margins.
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GROWTH IN EMERGING MARKETS: South Africa, UAE, Russia, Singapore, India, Brazil
Fashion events are a key indicator to the growth of the fashion industry in a country. Using data on growth of fashion industries based on countries which host fashion events, we can identify 6 countries which display unique growth patterns and drivers. We will now focus on each of these countries
separately
and see
the
dynamics of the industry in these regions.
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SUSTAINABLE GROWTH
The fashion industry can play a vital role in delivering sustainable development. Not only does it create jobs and contribute to the economy, it also has a huge influence over society and the economy through its marketing, regular customer transactions and complex, globalised supply chains. The global apparel, accessories and luxury goods market generated total revenues of $1,334.1 billion in 2008.2 In 2005, the industry employed approximately 26 million people and contributed to 7% of world exports. But back in 2007, Forum for the Future’s report Fashioning Sustainability4 highlighted the fact that the fashion industry is locked into a cycle of unsustainability – using more and more of the earth’s resources and in some cases exploiting cheap labour supplies in return for ever-decreasing profit margins. Fierce competition and lack of supply chain transparency have both contributed to driving down both costs and social and environmental standards.
On the plus side, the industry has already demonstrated an impressive capacity to adapt and create space for change. Following the first wave of ‘ethical consumerism’ in the late 1980s, for instance, retailers adopted codes of conduct to end relationships with suppliers who exploit workers, and set out to improve labour standards. And the good news is that the industry is not inherently unsustainable. People will always need clothes and want to express themselves through what they wear. If we can harness the industry’s collective energy, adaptability and capacity for innovation, it can play an important role in creating a sustainable, fair and low-carbon world. Indeed, through its powerful marketing and trend setting, it could play a wider role in making sustainability desirable. This is a huge opportunity.
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Remedies for Sustainable Growth 35
Remedies for Sustainable Growth 36
Remedies for Sustainable Growth 37
Remedies for Sustainable Growth 38
Case Study: Zara (Inditex) Target Market:
Mid-Segment Ready-to-wear
Inditex (Industria de Diseño Textil) of Spain, the owner of Zara and five other apparel retailing chains, continued a trajectory of rapid, profitable growth by posting net income of € 340 million on revenues of € 3,250 million in its fiscal year 2001 (ending January 31, 2002). Inditex had had a heavily oversubscribed Initial Public Offering in May 2001. Over the next 12 months, its stock price increased by nearly 50%—despite bearish stock market conditions—to push its market valuation to € 13.4 billion. The high stock price made Inditex’s founder, Amancio Ortega, who had begun to work in the apparel trade as an errand boy half a century earlier, Spain’s richest man. However, it also implied a significant growth challenge. Based on one set of calculations, for example, 76% of the equity value implicit in Inditex’s stock price was based on expectations of future growth—higher than an estimated 69% for Wal-Mart or, for that matter, other high-performing retailers. This case-study focuses on Inditex, particularly the business system and international expansion of the Zara chain that dominated its results.
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Zara’s Business System Zara was the largest and most internationalized of Inditex’s chains. At the end of 2001, it operated 507 stores in countries around the world, including Spain (40% of the total number for Inditex), with 488,400 square meters of selling area (74% of the total) and employing € 1.05 billion of the company’s capital (72% of the total), of which the store network accounted for about 80%. During fiscal year 2001, it had posted EBIT of € 441 million (85% of the total) on sales of € 2,477 million (76% of the total). While Zara’s share of the group’s total sales was expected to drop by two or three percentage points each year, it would continue to be the principal driver of the group’s growth for some time to come, and to play the lead role in increasing the share of Inditex’s sales accounted for by international operations. Zara completed its rollout in the Spanish market by 1990, and began to move overseas around that time. It also began to make major investments in manufacturing logistics and IT, including establishment of a justin-time manufacturing system, a 130,000-squaremeter warehouse close to corporate headquarters in Arteixo, outside La Coruña, and an advanced telecommunications system to connect headquarters and supply, production, and sales locations. Development of logistical, retail, financial, merchandising, and other information systems continued through the 1990s, much of it taking place internally. For example, while there were many logistical packages on the market, Zara’s unusual requirements mandated internal development.
The business system that had resulted was particularly distinctive in that Zara manufactured its most fashionsensitive products internally. Products were shipped directly from the central distribution center to welllocated, attractive stores twice a week, eliminating the need for warehouses and keeping inventories low. Vertical integration helped reduce the “bullwhip effect”—the tendency for fluctuations in final demand to get amplified as they were transmitted back up the supply chain. Even more importantly, Zara was able to originate a design and have finished goods in stores within four to five weeks in the case of entirely new designs, and two weeks for modifications (or restocking) of existing products. In contrast, the traditional industry model might involve cycles of up to six months for design and three months for manufacturing. The short cycle time reduced working capital intensity and facilitated continuous manufacture of new merchandise, even during the biannual sales periods, letting Zara commit to the bulk of its product line for a season much later than its key competitors (see Exhibit 13). Thus, Zara undertook 35% of product design and purchases of raw material, 40%–50% of the purchases of finished products from external suppliers, and 85% of the in-house production after the season had started, compared with only 0%–20% in the case of traditional retailers. But while quick response was critical to Zara’s superior performance, the connection between the two was not automatic.
Sourcing & Manufacturing Zara sourced fabric, other inputs, and finished products from external suppliers with the help of purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters. While Europe had historically dominated Zara’s sourcing patterns, the recent establishment of three companies in Hong Kong for purposes of purchasing as well as trend-spotting suggested that sourcing from the Far East, particularly China, might expand substantially. About one-half of the fabric purchased was “gray” (undyed) to facilitate in-season updating with maximum flexibility. Much of this volume was funneled through Comditel, a 100%owned subsidiary of Inditex, that dealt with more than 200 external suppliers of fabric and other raw materials. Comditel managed the dyeing, patterning, and finishing of gray fabric for all of Inditex’s chains, not just Zara, and supplied finished fabric to external as well as in-house manufacturers. This process, reminiscent of Benetton’s, meant that it took only one week to finish fabric. Further down the value chain, about 40% of finished garments were manufactured internally, and of the remainder, approximately twothirds of the items were sourced from Europe and North Africa and one-third from Asia. The most fashionable items tended to be the riskiest and therefore were the ones that were produced in small lots internally or under contract by suppliers who were located close by, and reordered if they sold well. More basic items that were more price-sensitive than timesensitive were particularly likely to be outsourced to Asia, since production in Europe was typically 15%– 20% more expensive for Zara. About 20 suppliers accounted for 70% of all external purchases.
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International Expansion
Growth Options
At the end of 2001, Zara was by far the most internationalized as well as the largest of Inditex’s chains. Zara operated 282 stores in 32 countries outside Spain (55% of the international total for Inditex) and had posted international sales of € 1.5 billion (86% of Inditex’s international sales) during the year. Of its international stores, 186 were located in Europe, 35 in North America, 29 in South America, 27 in the Middle East, and 5 in Japan. Overall, international operations accounted for 56% of Zara’s stores and 61% of its sales in 2001, and had been steadily increasing its shares of those totals. The profitability of Zara’s operations was not disaggregated geographically but, according to top management, was roughly the same in (the rest of) Europe and the Americas as in Spain. Approximately 80% of the new Zara stores slated to be opened in 2002 were expected to be outside Spain, and Inditex even cited the weight of Zara in the group’s total selling area as the principal reason Inditex’s sales were increasingly international. But over a longer time frame, Zara faced several important issues regarding its international expansion.
Inditex’s plans for 2002 called for the addition of 55 to 65 Zara stores, 80% of them outside Spain. But the geographic focus of Zara’s store additions over a longer timeframe remained to be determined. Since Zara had accounted for two-thirds of the total selling area added by Inditex across all its chains in 2001, decisions about Zara’s expansion would have important grouplevel implications. The growth options for Zara within its home market of Spain seemed somewhat limited. Zara still had only a 4% share there, but Inditex’s total share amounted to 6%. And the experience of H&M—which had undergone like-for-like sales declines after its share in its home market, Sweden, hit 10%—hinted that there might be relatively tight constraints on such an approach. Italy was the largest single apparel market in Europe, partly because Italians spent more than € 1,000 per capita on apparel (versus less than € 600 per capita for Spaniards). Italian consumers visited apparel stores relatively frequently and were considered relatively fashion-forward. Apparel retailing in Italy was dominated by independent stores, which accounted for 61% of the market there (vs. 45% in Spain and 15%–30% in France, Germany, and the United Kingdom). Relatedly, concentration levels were lower in Italy than in any of the four other major European markets. Of course, expansion within Europe was only one of several regional options. Zara could conceivably also deepen its commitment to a second region by investing significantly in distribution and even production there. North America and Asia seemed to be the two other obvious regional possibilities. South America was much smaller and subject to profitability pressures that were thought likely to persist; the Middle East was more profitable on average, but even smaller. However, the larger regions presented their own challenges.
The U.S. market, the key to North America, was subject to retailing overcapacity, was less fashion-forward than Europe, demanded larger sizes on average, and exhibited considerable internal variation. Benetton had had to retreat after a disastrous attempt to expand in the United States in the 1980s. And in early 2002, H&M had slowed down its ambitious expansion effort there because of higher-than-expected operating costs and weak demand—despite the fact that its prices there were pegged at levels comparable to those that it posted in its large markets in North Europe. Asia appeared to be even more competitive and difficult to penetrate than North America.
Outlook While the issues surrounding Zara’s future geographic focus were important, top management had to consider some questions that reached even farther. One immediate set concerned the non-Zara chains that had recently proliferated, but at least some of which were of subcritical scale. Could Inditex cope with the complexity of managing multiple chains without compromising the excellence of individual chains, especially since its geographic scope was also relatively broad? Looking farther out, should it start up or acquire additional chains? The questions were sharpened by Inditex’s revenue growth rate requirements, which top management pegged at 20%+ per annum. While like-forlike sales growth had averaged 9% per year recently, it might fall to 7% or even 5%, so a 15% annual increase in selling space seemed to be a minimal requirement. And, of course, margins had to be preserved as well— potentially a challenge given some of the threats to the sustainability of Inditex’s competitive advantages.
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Growth of Inditex over the years 2008-2012
Results comparison between 1st Half of 2013 and 1st Half of 2012 43
Case Study: Nike Target Market: Sports-wear
As the world’s leading athletic footwear, apparel and equipment company, NIKE, Inc. is dedicated to inspiring every athlete to reach peak performance. Nike co-founder Bill Bowerman sawendless possibilities for human potential embodied through sport. His philosophy still guidesour mission today: “To bring inspiration and innovation to every athlete in the world.” (And if you have a body, you are an athlete.)
Nike's strategy revolves around:
Innovation to serve the athlete
Innovation to grow the company
Innovation to inspire the world
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Products
International Markets
Competition
NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. It places considerable emphasis on high quality construction and innovation in products designed for men, women and children. Running, training, basketball, soccer, sportinspired casual shoes, and kids’ shoes are currently our top-selling footwear categories and expect them to continue to lead in product sales in the near future. Nike also markets footwear designed for aquatic activities, baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses.
In fiscal 2009, non-U.S. sales (including non-U.S. sales of its other businesses) accounted for 58% of total revenues, compared to 57% in fiscal 2008 and 53% in fiscal 2007. NIKE sells its products to retail accounts, through NIKE-owned retail stores, and through a mix of independent distributors and licensees around the world. NIKE estimates that it sells to more than 28,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. It operates 14 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, some Latin American countries, and Europe, NIKE has a futures ordering program for retailers similar to the United States futures program described above. NIKE’s three largest customers outside of the U.S. accounted for approximately 11% of total non-U.S. sales.
The athletic footwear, apparel and equipment industry is keenly competitive in the United States and on a worldwide basis. NIKE compete internationally with a significant number of athletic and leisure shoe companies, athletic and leisure apparel companies, sports equipment companies, and large companies having diversified lines of athletic and leisure shoes, apparel and equipment, including Adidas, Puma, and others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel, and athletic equipment, constitute significant risk factors in its operations. NIKE is the largest seller of athletic footwear and athletic apparel in the world. Performance and reliability of shoes, apparel, and equipment, new product development, price, product identity through marketing and promotion, and customer support and service are important aspects of competition in the athletic footwear, apparel and equipment industry. To help market its products, NIKE contract with prominent and influential athletes, coaches, teams, colleges and sports leagues to endorse its brands and use its products, and NIKE actively sponsor sporting events and clinics. NIKE believes that it is competitive in all of these areas.
Manufacturing United States Market In fiscal 2009, sales in the United States including U.S. sales of Nike’s other businesses accounted for approximately 42% of total revenues, compared to 43% in fiscal 2008 and 47% in fiscal 2007. For fiscal 2009, Nike’s other businesses were primarily comprised of Cole Haan, Converse, Hurley, NIKE Golf and Umbro (which was acquired on March 3, 2008). For fiscal 2008 and 2007, Nike’s other businesses were primarily comprised of Cole Haan, Converse, Exeter (whose primary business was the Starter brand business which was sold on December 17, 2007), Hurley, NIKE Bauer Hockey (which was sold on April 17, 2008), NIKE Golf and Umbro.
Virtually all of its footwear is produced outside of the United States. In fiscal 2009, contract suppliers in China, Vietnam, Indonesia and Thailand manufactured 36%, 36%, 22% and 6% of total NIKE brand footwear, respectively. NIKE also has manufacturing agreements with independent factories in Argentina, Brazil, India, and Mexico to manufacture footwear for sale primarily within those countries. Its largest single footwear factory accounted for approximately 5% of total fiscal 2009 footwear production. Almost all of NIKE brand apparel is manufactured outside of the United States by independent contract manufacturers located in 34 countries. Most of this apparel production occurred in China, Thailand, Indonesia, Malaysia, Vietnam, Turkey, Sri Lanka, Cambodia, Taiwan, El Salvador, Mexico, India and Israel. Its largest single apparel factory accounted for approximately 5% of total fiscal 2009 apparel production.
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Risk Factors The various business risks that NIKE currently faces are:
NIKE, Inc. CONSOLIDATED STATEMENTS OF INCOME For the period ended August 31, 2013
1. Its products face stiff competition 2. Challenges regarding anticipation of customer preferences 3. Challenges regarding technical innovation 4. Challenges in obtaining regular high-quality endorsements 5. Failure of its contractors in following code of conduct, local laws and standards 6. Global capital and credit market conditions 7. Business highly affected by seasonality and trends, resulting in fluctuating income 8. “Future” orders may not necessarily translate into future revenue 9. Its “Future Order” program does not prevent shortages / excesses of inventory 10. Financial health of its retailers 11. Increase and concentration of credit risk through consolidation of retailers, resulting in probable impairing of its ability to sell products 12. Challenges regarding adequate protection of its intellectual property rights and patents 13. Company is subject to periodic litigations 14. Its international operations involve inherent risks 15. Changes in tax laws, and currency rate fluctuations 16. Dependence on overseas sourcing, manufacturing, distributing & financing 17. Significant dependence on IT infrastructure and key personnel
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Case Study: Christian Dior Target Market: High-end/Couture
On February 12, 1947, a new couturier named Christian Dior presented his first show. In the elegant gray-and white salon on the Avenue Montaigne, a model sauntered out wearing a calfgrazing skirt made with 20 yards of black wool. A cream shantung jacket—like most of Dior’s designs, it came with a name, Bar—had a tightly nipped waist that flared into a regal peplum. In a postwar world still under strict rationing, the ensemble was not just excessive, it was downright shocking. But to a legion of women used to boxy suits with drab, short skirts, Dior’s ultra-feminine styles were a blissful reminder of better days—and the promise of a return to luxury. “You waved your wand and suddenly I was young and hopeful again,” one ardent fan wrote Monsieur Dior, “I love you.” “Magic . . . was what everyone now wanted from Paris,” the Vogue editor Bettina Ballard wrote after seeing the show. “Never has there been a moment more climactically right for a Napoleon, an Alexander the Great, a Caesar of the couture. Paris fashion was waiting to be seized and shaken and given direction. There has never been an easier or a more complete conquest than that of Christian Dior in 1947.”
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Company Overview
Business Risk Factors
Christian Dior S.A., commonly known as Dior, is a French luxury goods company controlled and chaired by businessman Bernard Arnault who also heads LVMH Moët Hennessy • Louis Vuitton – the world's largest luxury group. Dior itself holds 42.36% shares of and 59.01% voting rights within LVMH. Founded in 1946 by the eponymous designer Christian Dior, today the company designs and retails ready-to-wear, leather goods, fashion accessories, footwear, jewelry, timepieces, fragrance, makeup, and skincare products while also maintaining its tradition as a creator of recognized haute-couture (under the Christian Dior Couture division). While the Christian Dior label remains largely for women's offerings, the company also operates the Dior Homme division for men and the baby Dior label for children’s wear. Products are sold throughout its portfolio of retail stores worldwide, as well as through its online store via dior.com. Competitors to the House of Dior include, among many, the fashion houses of Chanel, Burberry, Yves Saint Laurent, Gucci and Prada.
The following are the strategic and operational risks faced by the Company: 1. Group’s Image and Reputation 2. Counterfeit and parallel retail networks 3. Contractual constraints 4. Anticipating changes in customer expectations 5. International exposure 6. Consumer safety 7. Seasonality 8. Supply sources & strategic competencies 9. Information systems 10. Industrial, environmental & climate risks
Financial Risk Factors The following are the financial risks faced by the Company: 1. 2. 3. 4. 5. 6. 7. 8.
Credit Risk Counterparty risk Foreign Exchange risk Interest rate risk Equity market risk Commodity market risk Liquidity risk Organization of foreign exchange, interest rate and equity market risk management
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From this report, the following inferences can be drawn: 1. The economic meltdown of 2008 has left deep scars both in the economy as well as in the minds of consumers. They are spending less, leading to a slow recovery. 2. Investments made for expansion by companies are not translating into expected revenue. 3. Regardless of the financial crisis however, the apparel industry is still huge and is starting to see growth and profits once again. 4. To cut costs and face competition, companies are increasingly compromising on best practices, often leading to adverse environmental impact and forced labour in third-world countries. 5. The current practices of apparel companies can not be sustained in future. Couture in this economy is infeasible and losses from it cannot be ignored. 6. To maintain sustainable growth in this sector, various measures can be taken, and some initiatives have already been made by various forums and apparel associations. 7. Due to the increasing complexity of international trade, accurate information can often mean success or demise for a company. This is where Information Technology comes into play, and more and more companies are now heavily relying on ERP systems, RFID technology, forecasting technology, etc. to gain precise knowledge about sales and their customers, in order to reduce their time-to-market and inventory excesses & shortages. 50
[1]
Wikipedia
[11]
ILRF (International Labor Rights Forum) & Free2Work
[2]
Christian Dior S. A. – Annual Report
[12]
Report on Sustainable Future by Levi Strauss & Co.
[3]
Nike, Inc. – Annual Report
[13]
Whitepaper of Checkpoint Systems, Inc. on use of RFID in the
[4]
Grupo Inditex – Annual Report
[5]
Report on Zara – Harvard University
[14]
Just-Style.com
[6]
WikiWealth
[15]
Vogue Fashion Magazine
[7]
Report of Center on Globalization, Governance &
[16]
NeoLane
Competitiveness
[17]
MBASkool.com
[8]
Report of IAF (International Apparel Federation)
[18]
Mobile Marketer
[9]
Euromonitor
[19]
Thesis Report by Audrey Darmon of KTH Electrical
[10]
Grail Research
Industry
Engineering Institute [20]
Corporate sites of Dior, Zara and Nike
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