The release of the second-quarter results of the two largest global fashion retailers, Inditex and H&M has sparked discussion that the Spanish company is on the verge of overtaking H&M, as the most valuable listed fashion retailer.

H&M, the world’s number two in terms of sales, saw its gross margin for the quarter fall to 61.7% from 65% a year earlier. This margin dip was attributed to rising raw material costs and higher wages in Asia.

On the face of it, H&M’s strategy to keep prices low seemed prudent given that the Swedish retailer’s operations are concentrated in Europe and consumer spending on discretionary items is sluggish. However, the retailer was unprepared for the shift in European shopper spending, which has meant that many consumers have moved away from buying clothing in volumes at low prices to spending more but less frequently on higher quality items. In this type of climate, H&M’s pricing strategy couldn’t work as its key youth target market just simply weren’t buying product in the same way as in the past.

By contrast, Inditex has been far less exposed to the issues that have negatively affected H&M. Firstly, Inditex relies less on cotton and secondly it restricts sourcing to markets close to home such as Morocco, Portugal as well as Spain. This has reduced its exposure to higher wage costs in Asia while boosting its ability to turn out fast fashion with a high turnaround of just 14 days.

Inditex is also less reliant on Europe for the bulk of sales having rapidly opened stores in China and is the first European fashion giant to implement a strategy for the Southern Hemisphere. This year Inditex has opened stores in Australia, and plans to open in South Africa and Peru.

On the subject of branding and product, Inditex has been less affected by rising youth unemployment in Europe by offering a total of eight brands aimed at a number of different population segments with flagship brand Zara offering high fashion designs combined with sharp tailoring to the mass market.

Meanwhile, H&M may up its stock value through its collaboration with Versace with a high-profile range. However, it is worth noting that Inditex has never collaborated with any designer or high-profile celebrity. From this, we can conclude that Inditex’s success is down to intelligent retailing, which by itself cuts out the need for publicity or reliance on producing at the lowest cost in Asia.

Isabel Cavill, senior retail analyst, Planet Retail

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