- 2018-09-27
ZARA confronts market competition with discount and promotion strategies
A batch of new products are put on the shelves every week, attracting customers to visit and allowing customers to put on new ZARA every weekend to maximize the "fastness".
As a result, in October and September, Amancio Ortega, the founder of ZARA, surpassed Bill Gates to become the richest man in the new world on the Forbes Global Rich List.
But this weekend, I am afraid that Ortega, who has retired, will be unforgettable. On February 23, 2018, ZARA's parent company-Inditex plunged 7.06% to the lowest point in the past three years. It also set the group's largest single-day decline since June, and its market value evaporated 5.9 billion euros (approximately US$7.2 billion). Tejia's net worth has shrunk by US$4.3 billion.
Previously, the internationally renowned investment bank JP Morgan Chase lowered the target price of Inditex, because ZARA's frequent discounts and promotions put the company's gross profit under "enormous pressure".
According to Forbes’ real-time rich list data, Inditex’s stock price plummeted, causing Ortega’s wealth to shrink by US$4.3 billion to US$68.7 billion in a single day. It is currently ranked seventh in the world, and it also gave up the throne of the richest fashion man to LVMH Bernard Arnault, the chief executive officer (CEO) of France and the richest man in France. JPMorgan Chase analyst Chiara Battistini said that Inditex's sales are expected to grow by 10% in the fourth quarter of 2017, which means that Inditex's sales have slowed significantly during the holidays and the beginning of the new year in 2018. Inditex previously stated that from November 1st to December 11th, 2017 (the early part of the fourth quarter), the company's sales increased by 13%.
Although Inditex is priced in euros, about half of the company's sales are from countries and regions outside the euro area, which also means that the exchange rate fluctuations of the euro against other currencies will also have varying degrees of impact on the company's earnings.
In addition, the currencies of many Asian and Latin American countries are pegged to the US dollar, which means that the rise of the euro and the weakening of the US dollar will also have an adverse effect on Inditex. Since the beginning of 2018, the euro has risen by 2.5% against the dollar, and the key price once exceeded 1.25 in the middle of the month.
Earlier, after Inditex's competitor H&M announced its sales decline in the fourth quarter of 2017 and said it would close more stores, investors were particularly sensitive to the increase or decrease in sales in the mass apparel industry. But it should be noted that, unlike Inditex, H&M attributed its decline in performance to the decline in physical store traffic.
Although Inditex's stock price has recorded double-digit sales growth in the past three quarters and far outperforms H&M, Inditex's stock price has fallen 11% since the beginning of 2018.
Inditex's global supply chain model has always been the target of imitation in the mass apparel industry, and its e-commerce strategy has always been regarded as a leader in the industry. However, competitor H&M revealed at the Capital Market Day event held on Valentine's Day in the West that 12.5% of online revenue is actually much higher than Inditex’s e-commerce revenue. The market estimates that Inditex's online revenue ratio is only 7% to 8%.
During the third quarter, Inditex opened a net 99 stores, far fewer than the 131 expected by Deutsche Bank. In recent years, Inditex has clearly focused on expanding the global online market. The development of physical channels no longer wins by volume, but focuses on large stores, thereby reducing the speed and scale of offline expansion.
Although it has begun to reduce store openings and move to online development three years ago, analysts almost all believe that Inditex’s price reduction strategy to stimulate sales will exert pressure on profitability, and same store sales (referring to the same store that has been open for at least one year) The increase in sales during the same period will not be able to offset the increase in costs associated with the development of e-commerce. They believe that due to the high logistics and express costs associated with online sales, the business is actually not as profitable as physical retail.
Inditex Chairman and Chief Executive Officer (CEO) Pablo Isla has previously emphasized to analysts that they maintain a basically stable pricing policy in all markets. Although they have been adjusting prices, they have no strategy to reduce prices for the lowest-end products. However, Societe Generale's survey of ZARA's pricing in 10 markets showed that the minimum price ratio of the brand was further reduced in 2017, but it also increased the price of high-end products to broaden the consumer group.
Box: Inditex Zara is one of the world's four largest fashion retail groups
Inditex is the abbreviation of INdustrias de DIseño TEXtil, SA. It is one of the world's four major fashion retail groups from Spain (the other three are United States casual fashion giants-GAP, Sweden (Sweden) fashion giants- H&M, the Netherlands (The Netherlands) cheap clothing chain giant-C&A). In recent years, with the popularity and global expansion of its ZARA, it has gradually surpassed H&M, GAP and other fashion retail giants to become the world's largest fashion group company.
Inditex owns eight clothing brands: ZARA, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Uterque, and ZARA HOME. ZARA is the most successful among them and is considered one of the most research-worthy brands in Europe.
Inditex currently has 7,405 stores worldwide, with sales of 23.3 billion euros (approximately 28.6 billion U.S. dollars) in 2017. Ortega has now resigned as chairman of Inditex.