Zara UK’s operating profit fell by over a third in the year to the end of January 2014 because of increased costs, while its sales increased by just £15m.
Zara UK’s operating profit fell by 34.3% in the year to the end of January 2014 because of costs increasing by £32.9m while its sales rose by just £15m, up 3.4% on last year.
The investment in two flagships in London, plus its store in Manchester, and 10 smaller refits, as well as the added cost of new warehousing facilities to service Greater London stores is blamed for this decline.
This investment in stores is in line with Inditex’s strategy for Zara globally of establishing large flagships as well as refreshing its smaller stores, so this was necessary to maintain global policy, but Zara’s stores are such an integral part of its proposition keeping them fresh is essential.
In essence Zara is a mass-market fashion retailer, but it over-delivers on expectations with quality, well-priced fashion in a premium store environment, which is one of its main attractions.
It has always had these high-quality store environments but its new flagships could easily be housing luxury brands, therefore it is not surprising that the costs are high.
Low UK margin
However, what the accounts also reveal is that the UK business is operating on a much lower operating margin than the overall Zara group.
“With just 66 stores the UK business does not have the benefit of scale of some of its competitors”
Maureen Hinton, Conlumino
Its margin fell from 11.7% in 2013 to 7.4% in 2014, while the overall Zara business delivers an operating margin in the low 20s. To be fair the Zara group has seen its operating margin shrink too with higher operating costs and increased investments in the store estate.
With just 66 stores the UK business does not have the benefit of scale of some of its competitors in the market. Frequent deliveries to a disparate store estate will have a relatively higher cost base. Now it has greater store density in the London area one can see the need for warehousing – especially as online takes off.
However, Zara also suffers from the vagaries of fashion. Despite its focus on absorbing and reacting to customer response to new products and adjusting accordingly, a season where less commercial trends dominate can have a significant impact on sales and margins.
Its recent spring/summer ranges with lemon yellows, acid shades and pastels did not seem to resonate well with the UK shopper and Zara appeared to have far more on discount than others in the summer Sales.
It has also introduced a new ‘special prices’ range that features fashion basics at much lower price points than the core range. This looks like there has been some resistance to pricing in the UK where it does face very strong competition. But the strategy also carries the danger of cannibalising sales of the core range.
Zara has established itself as a go-to destination for fashion in the UK, albeit mainly in the Southeast. It appeals to a wide age range and is head and shoulders above many mass-market operators but like many other foreign entrants to the UK it has discovered this is not an easy market.
It has been cautious with expansion so far and will no doubt continue in this vein with new store openings and developing its online business.
- Maureen Hinton is group research director at Conlumino
Zara profits fall by a third as it invests in stores and supply chain
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Comment: UK proving to be a challenging market for Zara