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)
Raw Material
Networks
Natural and
Synthetic Fibers
Components
Networks
Production
Natural and
Synthetic Fabrics
Clothing
Manufacturing
Networks
Brand Name
Companies
Distribution
Inditex,
H&M, Gap
Logistics
Retail
Retail Stores,
Outlets, Catalog,
E-commerce
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
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
(Founded
1969, San
Francisco)
head
designer
≈1,000
12
26 weeks or
more
COMPANY INTRODUCTION
COMPARISON
Country Presence & No. of Brands
90
80
8
60
50
40
Countries
No. of Brands
5
70
9
8
7
5
77
30
5
4
44
20
6
3
39
2
10
1
0
0
Inditex
H&M
Gap
Inditex has a more diversified market strategy with more brands
targeting at different countries and customer groups
COMPANY INTRODUCTION
COMPARISON
6000
No. of Stores by Each Brand
5500
5527
Inditex, store growth rate: 105%
5000
5044
4500
4607
4264
4000
Gap, store growth rate:6%
3691
3500
3131
3000 3053
2500 2693
3131
3167
3149
3246
3231
3095
2500
H&M, store growth rate:109%
2206
2000
1988
1738
1500
1193
1000
2005
1345
2006
1522
2007
2008
2009
2010
2011
FINANCIAL DATA ANALYSIS
20 000 000 000
18 000 000 000
Figure 1: Net Sales & Net Income
(in dollars, 2001-2011)
Inditex
Net Sales
H&M
16 000 000 000
Gap
14 000 000 000
12 000 000 000
10 000 000 000
8 000 000 000
6 000 000 000
4 000 000 000
2 000 000 000
0
Net Income
H&M
Inditex
Gap
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 2: Average Gross Profit Margin
(2001-2011)
Gap
59,50%
Inditex
55,90%
60,00%
H&M
50,00%
37,30%
40,00%
30,00%
20,00%
10,00%
0,00%
Gap
Inditex
H&M
Figure 3: Operating Profit Margin
2001-2011
0,25
23,50%
GAP Inditex H&M
H&M
Inditex
0,2
19,00%
18,50%
0,15
13,40%
GAP
0,1
9,90%
7,00%
0,05
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20%
Figure 3: Net Profit Margin
(2001-2011)
18%
H&M, average:13.60%
16%
14%
12%
10%
Inditex/Zara, average: 11.61%
8%
6%
4%
2%
0%
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
$25
$80
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!