MADRID/STOCKHOLM/BERLIN The families behind Zara-owner Inditex (ITX.MC) and H&M (HMb.ST) will need to fend off fast-moving competitors if they are to replicate online the winning formulae that made them the world's top two fashion retailers.
Each has borrowed ideas from the other, but their business models are quite distinct, which could put Inditex in a stronger position to tackle digital-only upstarts like Germany's Zalando (ZALG.DE) or Britain's Asos (ASOS.L).
H&M has moved into Inditex's "fast fashion" space by offering a bigger turnover of styles, a strategy summed up by a slogan in an H&M store in Berlin: “New stuff comes into the store every day. Why don’t you too?”
Inditex, for its part, has launched a budget chain to try to compete with the lower prices of H&M and other fast-growing discounters like Primark (ABF.L) and Forever21.
But by and large, each has stuck to its original approach, giving them unique advantages and disadvantages online.
Zara's slick distribution network is a big bonus though some analysts feel its cutting edge fashions may make managing stock more tricky. H&M took to the Internet earlier but its low prices and decentralized distribution network are barriers to growth.
"The higher the typical selling price of the product, the better for online growth and margins, because a higher selling price can help the retailer to bear the cost of subsidized delivery," said Societe Generale analyst Anne Critchlow.
Primark, where average prices are at least a third lower than H&M, opted out of ecommerce after a brief trial with ASOS in 2013, saying it is hard to justify selling a three pound ($4) T-shirt online when it cost the same to ship it.
In H&M's biggest market Germany, the Swedish chain charges 4.90 euros for delivery in 3-5 days, compared with 3.95 euros at Zara, which offers free delivery for orders over 50 euros.
Neither can trump Zalando, which lures shoppers by offering free delivery within 2 days and free returns within 100 days.
"People keep pushing free delivery, same-day delivery, incredible levels of customer service, but someone has to pay for that," said Bryan Roberts of consultants Kantar Retail.
"And if shoppers aren't going to pay for it, it's going to have to be shareholders."
KEEPING UP WITH TRENDS
Inditex's founder Amancio Ortega, the world's fourth richest man, has for years used live feedback from staff observing customers in shops to help plan new designs and initiatives, perhaps explaining why Zara only went online in 2010, 12 years after H&M's ecommerce launch in Scandinavia.
But Inditex now makes online sales in 27 of its 80 markets - compared with just 13 of 55 markets for H&M, although that accounts for about three-quarters of both their sales bases and that will rise to about 87 percent for H&M by the end of 2015.
The Inditex ecommerce roll-out has been helped by the supply chain and centralized logistics it developed to deliver new lines to stores twice a week from huge warehouses in Spain.
Inditex and H&M declined to make their ecommerce executives available for this article and neither reports their share of global online sales of clothes and footwear, which are set to more than double to about $313 billion by 2018, or about 13 percent of the total market, according to data firm Euromonitor.
H&M, which operates from local warehouses in each of its markets, has had to invest in IT for each new online country, forcing it to delay its U.S. launch several times. It plans to roll out ecommerce to another nine markets this year.
The Swedish firm's inventory changes less often than Inditex's and its less cutting edge approach to fashion may encourage customers to buy without trying on first, said Neil Saunders, managing director of research company Conlumino.
Set against that is the logistical hurdle of H&M sourcing most its clothes in Asia whereas more of Zara's are made in Europe.
While neither firm gives figures, SocGen's Critchlow expects ecommerce to reach nearly 8 percent of sales at Inditex by 2020 and estimates that H&M could already be making 5-10 percent of its sales online - helping drive 14 percent revenue growth last year as Web sales went live in France, Italy, Spain and China.
Online-only players are growing even faster, innovating with state-of-the art warehouses and features like a new Zalando app that finds garments similar to those photographed by a user.
Zalando, launched in 2008, already ships 1,500 brands to customers in 15 countries and is the most visited fashion site in developed markets like Europe and North America, according to Morgan Stanley research, well ahead of ASOS, H&M and Inditex. It aims for 20-25 percent sales growth this year.
Inditex last year hired 31-year-old Maria Fanjul, who ran successful start-up advisory firm StepOne and ticketing website Entradas.com, to look for logistical and IT synergies between the websites of Inditex’s nine brands.
Inditex says it will roll out online sales to more countries, but predicts it will not have to invest so much in future following big outlays on logistics in the last few years. It has also slowed the pace of store openings, focusing more on flagship sites in prestige locations.
H&M spends 3-4 percent of sales on advertising compared with the 0.5 percent analysts estimate for Inditex, which relies on its stores to promote its high street fashion and sends "lookbook" emails of the latest styles to online customers.
"Growth will come from people buying on the web in small towns in the middle of nowhere where it doesn't make any sense to open a Zara," said Joe Haslam, who studied Inditex as part of his role as Associate Professor at IE Business School in Madrid.
This should mean capital expenditure falls as a percentage of sales, while cash flow and returns on invested capital will improve, predicts Bernstein analyst Jamie Merriman, who rates Inditex "market perform" and H&M "underperform".
H&M, which last year appointed Skype founder Niklas Zennstrom to the board to help with its online expansion, is predicting another year of rising capital expenditure as it spends on IT, new concepts and growing its store network.
H&M has taken steps to improve the online experience, posting more and better photos on its sites and tweaking the search function, but is grappling with the need to migrate its early ecommerce markets to a new web platform.
And it has yet to allow shoppers to pick up online orders in store, a service Zara already provides and which Roberts of Kantar Retail says is essential to beat online-only players as it keeps costs low and gets customers into shops to buy more.
"The end-game will be click-and-collect," he said.
(Writing by Emma Thomasson; editing by Philippa Fletcher)