Outsourcing Versus Vertical Integration in the Fast Fashion Apparel Industry: A Case Study of Inditex, H&M, and Gap Presented by Emily Zhang- Economics Mentor: Dr. Gang Sun, Textile and Clothing Department

Special thanks to the MURALS Program and Dr. Hope Medina

Presentation outline Definition Company introduction Financial data analysis Conclusion Further study direction

Definition

The Apparel Industry Value Chain Source: Appelbaum and Gereffi (1994) Retail Stores, Outlets, Catalog, E-commerce Raw Material Networks Natural and Synthetic Fibers Components Networks Natural and Synthetic Fabrics Production Networks Clothing Manufacturing Brand Name Companies Inditex, H&M, Gap Distribution Retail   Logistics Value is being added at each stage of activities: for instance, fabrics have a broader use than fibers, and branded clothing has more demand than the ones without brand. A value chain is a chain of activities for a firm operating in a specific industry. Each additional activity along the chain adds more value to the final products.

Definition Continued Fast Fashion: A contemporary term used by fashion retailers to acknowledge that designs move from catwalk to store in the fastest time to capture current trends in the market. Vertical integration: A strategy of production management control, to gain ownership of companies or activities along the business’ value chain. Backward integration: A fashion retailer establishes ownership of a clothing factory. Forward integration: A clothing manufacture establishes ownership of a fashion store.

Company introduction

Company introduction inditex CEO: Pablo Isla Founder: Amancio Orgega Founded in 1963 No.5 richest man worldwide

Company INTRODUCTION H&M CEO: Karl-Johan Persson Founder: Erling Persson His son: Stephan Persson is the No.7 richest man worldwide Founded in 1947 H&M, COS(timeless and distinctive trends), Monki(creativity&expression), Weekeday, and CheapMonday

Company introduction gap CEO: Glenn Murphy Founder: Donald Fisher and Doris Fisher Founded in 1969

Company introduction Comparison Inditex has short lead time because first, it produces trendy products locally: manufactures in its own factories, then have them sewed in its small-work-shop suppliers. The products are then finished with ironing and hanging in its headquarter factory. The next process is to distribute the products to its 6 distribution centers where products are separated and packaged according to each store’s orders. Gap has reported consecutively for 5 years that its inaccurate prediction of market trend has resulted excessive inventory and mark downs that hurt its revenues. Apparently, fast fashion trend is different than that of designer or luxury brand(average survival year?). Fast fashion targets at young group of consumers who look for varieties, creation, and inspiration in their clothing, therefore, pooling the talent of a group of designers is far more efficient than relying on one principle designer. Zara’s designers are divided into groups so that each store have their designated designers who can constantly communicate back to region and store managers to make their design reflect the taste of the consumers. It closely follows the principle of supply and demand. It creates the types of products consumer want, instead of making a design and anticipating consumers would accept it. Company No. of Designer No. of Supplier No. of Distribution Center Product Lead Time Inditex (Founded, 1963, Spain) ≈300 ≈1,237 6 2 weeks H&M (Founded 1947,Sweden) ≈150 ≈700 19 Few weeks to 26 weeks Gap 1969, San Francisco) head designer ≈1,000 12 26 weeks or more

Company introduction Comparison Inditex has a more diversified market strategy with more brands targeting at different countries and customer groups

Company introduction Comparison Inditex, store growth rate: 105% Gap, store growth rate:6% H&M, store growth rate:109%

Financial data analysis

H&M

H&M, average:13.60% Inditex/Zara, average: 11.61% Gap, average: 5.75%

Conlusion Vertical integration is not necessarily a profible strategyfor Gap, because H&M and Gap both outsources nearly 100% of their production to factories in Asia and Europe, however, H&M is two times profitable than GAP and is expanding rapidly. What is wrong?

Design AND VARIETY& Pricing stretegy $60 $80 $25 Gap’s clothing line is considered “dull,” yet pricy.

Further direction In-depth study on the factors that drive H&M profitable and efficient when it outsources 100% of its production Questions? Thank you!