Zara and H&M are often spoken of in the same breath—as the fast-fashion invaders that are stealing market share away from mass-market rivals in a number of countries. Yet, despite the similarities, we see some key distinctions between H&M and Zara’s parent company Inditex.
Zara and H&M are often spoken of in the same breath, as the fast-fashion invaders that are stealing market share away from mass-market rivals in a number of regions. Yet, we think there are some key distinctions between H&M and Zara’s parent company Inditex, and in this report, we bring together some key metrics to put these two firms head to head.
We focus on three themes in this report:
Fast fashion is produced with short lead times in response to fashion trends, catwalk styles and consumer demand. It demands manufacturing in or close to the market—proximity markets—in which the product will be sold, to eliminate lengthy shipping times.
Proximity markets: For products manufactured in proximity markets, Inditex is typically reported to have lead times of around five weeks—although its corporate website claims it can get a product from design to sale in as little as three weeks, and the company is understood to be able to replenish stocks of existing designs in two weeks. H&M can get fast-fashion products to market in around two to six weeks, according to Morgan Stanley research cited in Business Insider.
Asia-sourced markets: It takes between three and six months for H&M’s Asian-sourced products to reach store shelves, according to the same Morgan Stanley research. The lead times at Inditex for Asian-manufactured garments are roughly similar.
We begin with a comparison of some top-line figures. By revenues, Inditex is 14% larger than H&M. For the current fiscal year, analyst consensus is for euro-denominated revenue growth of 10.4% at Inditex and 4.5% at H&M.
One of the most meaningful differences between Inditex and H&M—and it is one that may come as a surprise to some readers—is that H&M is not predominantly a fast-fashion retailer.
According to a number of news websites, including WSJ.com, just 20% of H&M’s product offering is fast fashion—in other words, only 20% of its clothes are designed in-season in response to current trends. The remaining 80% of products are ordered months in advance. When we tried to verify this with the company, H&M neither confirmed nor denied this widely reported 20%/80% split. Inditex, in contrast, designs around 60% of its products in-season, according to research by Fung Business Intelligence.
Indeed, a visit to any H&M store will dispel the notion that it is mainly a fast-fashion retailer: its shops are filled with rack upon rack of basics and staples, from plain shirts and t-shirts to chinos and hooded tops.
A split of the factory locations used by the two firms gives a strong indication of how much is manufactured in-season and how much in advance: fast fashion must be produced in or close to the market in which it is sold (predominantly, Europe for Inditex and H&M), due to the long shipping times for orders from the more traditional Asian sourcing markets.
While a majority of factories used by Inditex are located in or close to Europe, just under one-third of those used by H&M are in such “proximity” locations.
Further distinctions include the following:
We provide a more detailed breakdown of the factory locations of the two companies below.
Inditex is growing much faster than H&M. In the companies’ most recent respective fiscal years, Inditex grew euro-denominated sales at almost double the pace that H&M did. And the growth gap has widened in the first half of the current fiscal year:
Total growth at both retailers has been supported by new store openings. To look at underlying growth, we chart the year-over-year change in average sales per store. This metric underscores the divergence in top-line performance between these two retailers. H&M saw sales per store return to negative territory in the year ended November 2016, where it remained in the first half of the current fiscal year.
Even while H&M has seen sluggish sales growth, it has continued to grow its orders with suppliers very strongly. As a result, H&M is growing its inventory at a much faster pace than it is growing its sales. This glut of stock will likely pressure H&M’s gross margin downward in the near term. In its nine-month report for fiscal 2017, H&M noted that “aggressive markdowns were made” over summer 2017, due to an excess of stock.
Below, we chart the percentage-point difference between the year-over-year increase in inventories and the year-over-year increase in revenues: the higher the number, the more inventory the retailer is accumulating. We provide the supporting data in the tables directly below the chart.
Both Inditex and H&M are multi-banner groups, although H&M was traditionally a mono-brand retailer and launched its additional banners only in the 2000s. H&M launched Weekday in 2002, Cheap Monday in 2004, Monki in 2006, Cos in 2007, & Other Stories in 2013 and Arket in 2017. H&M does not split out revenues by banner.
Zara continues to be the dominant banner at Inditex: it accounted for two-thirds of Inditex’s revenues in the year ended January 2017. Apart from Zara, the company splits out figures for Bershka only, as we chart below. Inditex’s other banners are Massimo Dutti, Oysho, Pull&Bear, Stradivarius, Uterque and Zara Home.
The regional sales split is one area of relative commonality between the two companies. In total, Europe accounted for 64% of Inditex’s revenues and 65% of H&M’s revenues in the latest fiscal year.