The case of Marks & Spencer and Zara

In this survey it will be discussed to what extent external factors such as macroeconomic conditions and market power affect company profitability as opposed to the internal factors of managerial ability and efficiency. To this end, the case of apparel manufacturing and retail in Western Europe and particularly the fashionable middle class segment will be used. First, the macroeconomic conditions as formed in the European apparel industry from 1995 to 2004 will be examined.

Then, the performance of two major European apparel industry members active in the fashion/quality market segment Inditex SA and Marks & Spencer Plc will be assessed under the light of these conditions.Due to availability of quality data and relative importance to the clothing industry, the countries included in the survey are: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Slovakia, Spain, Sweden, United Kingdom.Apparel manufacturing and retail Industry CharacteristicsThe clothing sector is a labour-intensive, low wage industry. The high-quality fashion market is characterized by high risk and high margins, relatively well-paid workers and designers and a high degree of flexibility. The lower quality and the non fashion driven markets are more commoditized and have lower risk and profit margins. The core value chain members from top to bottom are retailers, apparel producers and textiles wholesalers and manufacturers (Appendix graph 1).

This survey will focus mostly on retail and apparel production.The E.U. is the largest world market for clothing and textiles, especially in the high quality fashion market, valuing 35.6% of the global market. Approximately 170,000 textile and clothing firms have annual revenues of more than �200 billion and employ 2.

6 million people. In France, Italy, Spain and especially the E.U.'s newest members in Central and Eastern Europe, the sector is a critical part of the economy. Textile and clothing account for about 4% of total manufacturing production and 7% of employment in manufacturing. The retail part of the clothing industry is responsible for 10% of the entire retail sales in the E.

U.The market's core characteristics are those of monopolistic competition:* Fragmented market, with thousands of small and large firms, none of which possess more than 10% share in a particular country market.* Byers are a very large number of consumers in the case of directly selling through outlets and a large number of shops in the case of wholesaling.* There are very few barriers to entry.* The product is differentiated in the eyes of consumers (different lines, fashion), resulting to the creation of many small virtual monopolies that compete with each other in the long term. In the short term lack of homogeneity results in most products being substitutes for each other.

However, they are all competing for the limited disposal income allocated to apparel.In Monopolistic competition the equilibrium in the short term will be similar to that of a monopoly, since each player is the unique provider of the particular brand. However, in the long run new entrants make the market more competitive and force to price reduction and differentiation.The companies that manufacture in Asia and enjoy lower costs are willing to provide more output for any price levels.

Their Average Cost is lower and they equal their Marginal Revenue to their Marginal Cost at a lower price (see Graph 1). Therefore, they supply more output at a lower price. Because in the long term monopolistic competition behaves more like competitive market than a monopoly, the effect supply curve would be a shift downwards from S to S1, resulting to a lower price equilibrium.Consumption in units volume will rise but to the benefit of the low cost producers, since the traditional domestic companies cannot compete effectively at the new lower prices and keep losing market share. Elasticity will be higher as we move towards more commoditized or lower quality products that target the lower income segments.

However, not even high quality fast fashion expensive garments producers remain unaffected and all eventually lose profit, unless they innovate and differentiate enough to distinguish their product and add value that cannot be countered by the low cost imports.Graph 3.2: Shift of Supply because of lower costs.Space for success despite bad omensExperience from the most successful companies has shown that there is adequate space for management to overcome the difficulties that these macroeconomic conditions pose.

Success in the case of Inditex SA sources from taking advantage of fast fashion trends that the importers cannot catch up with because of distance, while in the same time sell massively in very competitive prices. And failure in the case of Marks & Spencer Plc. sourced exactly from losing this contact with fashion and treating its product as a commodity, thus vulnerable to price changes.In the competitive European apparel industry, where large players see their sales diminishing and the many small face bankruptcy, few companies like Inditex have managed to create sustainable growing operations and expand rapidly and profitable. In the last four years Inditex has shown the greatest growth in its history, especially outside Spain, which has reached to the point of saturation, something that is very rare in the clothing market.

Since 2000 Inditex has more than doubled its shops and sales while profitability has grown even more. Inditex is a group of companies activating in the clothing industry, integrating business units in almost all apparel value chain from textile dying to retail shops. Its core market is Europe, where 83% of its turnover is realized and especially Spain, which is the company's Headquarters.;The Inditex business model consists of a few simple concepts that cover the whole business from supply chain and logistics to designs and retailing.Fast FashionZara's design team works at the capacity of producing 1000 new designs every month. The new designs are produced in smaller than anticipated demand capacity so that a feeling of scarcity and change is created to the customer.

Instead of forecasting the next year's trends and designing clothes months ago, Zara's designers react to the fashion trends in flash speed and supported by excellent operations Inditex is able to achieve a lead time of 20 days from design to shelf.Supply Chain and Vertical IntegrationLike the vast majority of European manufacturers Inditex uses the international system of subcontracting often referred to as Outward Processing Trade. However, it is doing so in a much lesser degree. Inditex is perhaps the only operation of that size that has such a degree of vertical integration from textiles purchases and dying to retail, being quite innovative in that way.

Only the sewing process is outsourced, with the fast fashion or else 'pronto moda' articles sent to many small workshops in Portugal or Spain and the products with longer life cycle being processed at distant but low cost production sites all over the world in Turkey, Egypt, Morocco, China, Taiwan etc. Total vertical integration enables Inditex to achieve high levels of flexibility, dependability and speed to a small sacrifice in costs. Still though, the Inditex operation is very cost efficient allowing for economies of scale and claiming the added value from virtually all the value chain stages.High Street StrategyRetailing is done only through spacious and luxurious High Street shops always located at the best markets of the largest cities.

Having the best shops in every market, and sometimes even more than one at the same street, servers not only the obvious purpose of attracting high traffic, but also performs the role of advertising for the brands, which are not advertised at all in any other way. Inditex's shops are the primary source of information to production regarding new designs and consumer suggestions are taken very seriously as hints for the next best seller design. The shops have their inventories renewed twice a week often moving non sellers between cities or countries. The goal is to have as many designs as possible in barely adequate quantities to maximize space utilization and offer customers the incentive to come again soon.In the same time that Inditex was making its impressive expansion from Spain throughout Europe and was seeing its profits piling up, the major UK retailer and clothing manufacturer was at the worst moment of its history.

By 1999 Marks ; Spencer already had an established position as an international mixed retailer with clothing accounting for about half its GBP 8.22 Billion turnover. Its shops spanned the globe with the focusing mostly in UK and Europe and already operated 294 stores in the UK and 322 in the rest of the world.M;S had followed the traditional Outward Processing Trade system for decades now and had developed a seemingly robust production model that offered excellent quality clothing over very good price. M;S organized its production under Spring/Summer and Fall/Winter collections.

A 'buying team' comprising of stylists, product developers, merchandisers and technologists would design, purchase materials and assured quality for the next year's collection in advance. The production was sourced to a wide network of suppliers many of who were located in the UK to enable close control by the buying team and others in low cost labour countries abroad. The path to the stores passed through sophisticated central warehouses which held big amounts of inventory to guarantee seven weeks of sales. Unfortunately for M&S, good quality is not enough for the modern world of fashion and low prices advantage became less competitive after the market started to become flooded with imports that offered sufficient quality for half the M&S price. Eventually M&S just 'went out of fashion' and management was too late to realize that, only in fall/winter 1998 when the whole collection based on black and grey proved to be irrelevant to the market demands. At the time that was realized, there was little to be done since the lead times the traditional M&S model offered were close to one year.

M&S started to lose the fashion game and held its market share from collapsing only by the aged population and less fashionable but price sensitive products. M&S collection were no longer relevant and was considered outdated by many of its previous customers. Sales in Germany, Spain, France and other European major markets began shrinking and the Canadian operations were closed in 1999.In an attempt to moderate the losses for the group coming mainly from its international operations, M&S decided to shut down operations mainly in continental Europe in 2001.

The decision to shut down large department stores in major European cities and lay off suddenly thousands of employees placed M&S in confrontation with European governments. As a result M&S was obligated to pay large fines and compensations to workers, while its image lost significantly. The apparel market in Europe has been suffering the last ten years by a negative macroeconomic environment that is gradually worsening from the effect of misused quotas restrictions to free trade. The market is becoming more concentrated and the more commoditized producers are losing share to private labels manufactured abroad and independent importers, while the large fashion retail chains are forced to adapt their business model or shrink. However, in these bad times innovative business models introduced by efficient companies and competent management can lead to success stories such as that of Inditex SA and the ZARA brand.On the other hand, complacency, inefficient management, bureaucracy and persistence to outdated practices can lead to profit loss and shrinking in the case of Marks & Spencer.

M&S management failed to see the way fashion industry was moving into fast and inexpensive products often referred as 'cheap chic', while Inditex built its successful enterprise exactly on those changes its competitors failed to realize. Although, the macroeconomic conditions assisted in the failures of M&S, it was the company's internal environment that had the choice to adapt to those conditions or conserve and suffer from them. Sooner or later the previous successful strategy becomes obsolete in a rapidly changing environment and it is the management's role to make decisions according to these changes.