Fast fashion companies Zara and H&M are among the brightest stars in Europe's retail landscape. But despite the obvious rivalry between them, the fashion firms are using different strategies to ring up sales. Ivan Castano reports.

Last year, Spain-based Inditex, owner of the ubiquitous Zara chain in Europe, delivered revenues of EUR6.74bn (US$8.66bn), eclipsing the EUR6.2bn clocked by Swedish
archrival Hennes & Mauritz.

The Artexio, Spain-based retailer also expanded faster than H&M, of Stockholm, rolling out 443 stores compared to 125 stores for its Scandinavian competitor.

But despite its booming performance, H&M says it doesn't need to smarten up to the Spaniards.

"We have been working alongside Inditex and Zara for a long time and this is nothing dramatic for us," H&M investor relations director Neils Vinge points out. "We do our thing and they do their thing and we don't plan to do anything specific to compete with them."

Moreover, "success is not a matter of size but of delivering fashion and quality at the best price," Vinge adds.

Industry observers agree, noting that H&M and Zara use different strategies to ring up sales in the $735bn specialised-retail market, now dominated by Gap of the US.

Unlike Inditex, H&M targets a more budget consumer and has a wider age appeal, experts say.

Moreover, while both chains are expanding strongly across Europe, H&M is targeting the US as its other key international market, while Zara is concentrating on Asia-Pacific, notably Japan.

Finally, there's plenty of market room for both companies to coexist, observers reckon.

"Better operating margins"
According to H&M's Vinge, H&M is more efficient at profit-making than Inditex. The chain reported net profit of EUR993m in 2005 compared with EUR803m for Inditex.

"Our EBIT (operating) margins are better than Inditex's," added Vinge.

Moreover, asked whether H&M plans to hasten its stocking times, which observers give Zara "bravos" for, Vinge says that the company is doing well with its current schedules, which range from two weeks to six months depending on the item. That compares with
an average of two weeks for Zara.

"We source about 60% of our wears from Asia and get all the high-fashion items to stores as fast as our fastest rivals," Vinge comments. With basic garments, we don't need such a quick turnaround time."

Vinge adds that H&M is very cost conscious and careful about its operations and that it will stick to its current strategy in the future.

"We our going to focus on improving ourselves and beating our own targets," he says.

Inditex has outlined an ambitious growth strategy which calls for it to double its store count to 5,000 stores in five years, up from 2,700 now. In turn, H&M says it will grow its store numbers by 10-15% in coming years from nearly 1,200 shops currently.

That strategy is likely to grow sales slower than Inditex, which analysts expect to raise turnover by 20% a year compared to 12% for H&M.

But they are also upbeat about H&M's outlook, mainly because of the company's efficient management and strong profitability ratios.

"H&M doesn't need to increase its expansion. They are getting double-digit earnings growth and have huge cash flow generation - they are doing well enough on their own merit," says a London-based retail analyst.

The two companies are similar, yet different, beasts he notes.

Diverging strategies
While they both target the fast-fashion ready-to-wear market, H&M sells to a younger consumer, has more basics and lower price points.

"They have a very different expansion policy than Inditex, which is more about dominating the globe by having stores in every large city," says the analyst, adding that H&M prefers to penetrate fewer markets more deeply.

H&M is also expanding from Northern to Southern Europe, while Inditex is doing the opposite and can raise prices as a result, boosting its revenues, adds the analyst.

Caroline Taylor, an analyst at market researcher Mintel, agrees that H&M can do well with its current strategy. She points out that H&M's sourcing, while slower than Inditex in some areas, is more geographically diversified, giving the Swedish concern greater flexibility to adapt to shifting consumer trends in different markets.

"My feeling is that because Inditex's operations are so concentrated in La Coruna, their future expansion might be more difficult than it predicts," says Taylor.

However, Inditex's diverse brand portfolio, which includes other expansionist chains such as Massimo Dutti, Bershka and Stradivarious, sets it apart from H&M.

"Inditex has a larger chain portfolio, increasing their demographic appeal. Plus, they are still in fewer markets than H&M so this gives them more places to go to," Taylor adds.

US market seen key for H&M
Analysts also see enormous growth potential for H&M in the US where some predict it could roll out 600 stores in the medium term, up from roughly 100 now. So far Inditex has pursued a measly expansion in the US, where it has opened just 19 Zara stores.

"H&M has been there for six years and they are likely to step up their expansion soon," says the anonymous analyst, who works for a big investment bank. "We expect a lot of their future growth to come from the US where we see a potential for 600 stores.

Adds Taylor: "H&M has expanded sensibly in the US and they are making gains in New York and Boston. If things go well, the potential for growth is massive.

Taylor adds that H&M's market target is different from that of Gap, which leads the US market, a factor that will help the retailer to consolidate its presence.

Paul Barrett, a retail manager at market researcher Euromonitor, adds that the world's specialty-retail market is still big enough for H&M and Inditex to strike gold in.

"I think there is a place in the sun for both H&M and Zara," Barrett says. "They can coexist because when you take them together there is still a lot of expansion room for both companies. They don't have to grow by shooting each other down."