Fashion Chain Zara Reclaims the Glory of Spain

“In my empire, the sun never sets.” Emperor Carlos V left this phrase as a legacy of the power of the Spanish crown. Five centuries later, Amancio Ortega, president of Inditex Group, has recovered the lost empire, at least where the fashion industry is concerned. The Inditex Group’s Zara chain, founded in 1975 in Arteixo, a small town in the north of Spain, hopes to become the world leader in retail clothing.  With more than 1,600 shops in 40 countries, Zara appears to have found the formula for success: Give the public what it wants, at the lowest possible price, in the shortest time possible.

 

The success of Zara cannot be explained without talking about its founder, Amancio Ortega. This former employee of a shirt maker laid the foundations of his empire in a small family workshop in Arteixo, in [Spain’s province of] Galicia. In the opinion of José María Nueno, a professor at IESE Business School, “a great part of the success of Zara is based on the instinct of its founder, who is capable of anticipating trends and creating style. His entire strategy is focused on satisfying every last need of the customer.”

 

Nearly 30 years ago, when he opened the first Zara shop, Ortega already saw clearly that the secret of winning was rooted in giving the customer what he wanted before he asked for it. His maxim has always been flexibility, and knowing how to adapt to changes, even anticipate them. He has achieved a record number of new openings – one new store every day and a half – by providing fashions that are low-priced and always new.

 

Moreover, this formula works both during boom times and in periods of crisis. At a time of clear economic downturn, when many families are cutting spending faced with what might happen, the Inditex Group’s profits grew by 29% during the past fiscal year, totaling 438.1 million euros. Sales reached 3.97 billion euros, a 22% increase.

 

But this same strength turned against Inditex, at least when it came to its share price. In the two days following Inditex’s earnings report (corrected in the Spanish version) on March 22, its shares fell 20%, to 18.4 euros. This collapse was due to the fact that analysts had predicted [profit] growth of 34%, and the company only achieved 29%.

 

International investors, who also dumped some shares, were caught up in the sales results, and justified their decision by saying that Inditex’s business model was not as strong as before, according to Nueno. “That assertion makes no sense. You don’t have to be a fortune teller, and say that the model is in crisis. On the contrary, it is very strong, as demonstrated by the good results that it brought about in the current economic situation.”

 

In Nueno’s opinion, “Expectations were excessive. You don’t achieve growth of 30% every year.” Moreover, he believes that the fall in the share price means that it has moved closer to its real value; it does not reflect a beating in the market. “The company’s own managers were the first to recognize that the share price was excessive,” Nueno state. “The shares are now correctly valued. In fact, now is a good time to buy because the shares are going to reflect improvements in the business.”

 

Nueno is confident that Inditex will continue to maintain its upward path, with new openings and an aggressive international expansion. “The group has a presence in 50 countries but in most of them it counts on just three shops. However, there is enough demand to support 12 outlets of the chain in all those markets. They are barely expanding [the number of shops] in the countries where they already operate, but they are enjoying strong [sales] growth figures.”

 

The speed of expansion reflects the company’s unique approach to the fashion business. “The big advantage of Inditex, and specifically of Zara, is its skill at responding [to the marketplace],” says Nueno. “The company revolutionized the textile sector when it had the idea of bringing out a number of different collections each season, instead of the usual two collections each year. However, for this system to be profitable, you need the largest possible volume, which means that your shops always have to be located in strategic places that count on getting new merchandise each week. This permits them to have a constant traffic of customers.

 

“They achieve this in a simple way,” Nueno adds, “thanks to a structure based in one great logistical center in Arteixo, from which they distribute directly to each shop. That way, they don’t need central offices in the new countries where they locate. Their only problem is to get the best location for opening a shop.”

 

The average Zara customer pays 17 visits a year to Zara shop windows and shelves, compared with four times a year for the competition. “The public knows that, what it doesn’t buy today, may not be there [on the shelves] tomorrow. It’s a great inducement for consumption, and an authentic marketing success,” Nueno says.

 

Selling without Advertising

One of the greatest achievements of the company is probably that it has managed to become famous without having to resort to advertising,” says Nueno. “Zara does not advertise. All of its marketing is found in its shops. So it always chooses the best premises, strategically located on the most active shopping streets. Everything is thought out, including the smallest details. The shop decorations, the window dressing, the staff … Nothing is left to chance.”

 

Nueno notes, however, that on specific occasions the group has relied on some advertising. “For the launch in Italy, it did some publicity, although at the time it didn’t appear that they would need any.” Nueno believes that the main reason the group doesn’t devote money to this approach is that “its model is based on change, because they know that people like change, especially in ordinary brands. If we take even a brief look again at the brands that have filled our closets over the past 10 years, we will see that they have changed. Consumers, especially women, are only loyal to luxury brands, but not to ordinary ones. So what sense does it make to invest in the brand? It’s better to invest in the business.”

 

From the outset, Zara has projected an aura of mystery. The company was growing quietly until the 1980s, when it began its international expansion. In 1988, it opened its first shop, in Porto, Portugal. A year later, it took the leap into New York. Then, came France, Mexico, Greece, Belgium and Sweden.

 

But it was at the end of the 1990s that Zara flung itself fully into foreign markets. Italy was its first conquest. On April 10, 2002, Zara opened its first shop in Milan, the capital of fashion. A three-story, former movie theater on the busiest street in the city was the location chosen for taking the first steps in that country.  “Italy and Germany (which the company entered in 1999) are the acid test for Zara, along with expansion into the United States, since those are three markets where strong competitors are operating,” says Nueno.

 

“The advantage of the group is its skill for adaptation. Before getting into a market, they analyze the taste of people, as well as trends, and they adapt the basics of their style to each country,” Nueno adds.  This approach has allowed Zara to triumph even in the Far East, where it has adapted its offerings to a different culture, one in which long skirts and luxurious garments capture all of the public’s attention.

 

The success of this strategy is rooted in the confidence the company places in its sales people in each region, and the people who manage the shops. They maintain direct contact with Amancio Ortega, and bear the responsibility on their shoulders for figuring out what to carry during the next season. For example, to run the new location in Milan, Zara had its pick of more than 600 candidates. In the end, it managed to steal away the woman who managed the Louis Vuitton store.

 

Expanding its Brands

Inditex is the third-ranking distributor of fashion in the world. GAP, the American chain and H&M, the Swedish chain, are the only companies that can compete with Zara for the world crown of fashion.  Each of these three companies has its own business model, reflecting its strengths and weaknesses, according to a report by BBVA Bolsa.  “GAP has a multifaceted approach supported by the image of its brand. Its business model centers on its own design and sales, outsourcing all production. It has expanded with strength in the United States, but only has a minor presence in Europe. Moreover, its positioning is less tied to fashion than Inditex’s, and its prices are less aggressive.”

 

As for H&M, analysts at BBVA consider that “its positioning regarding style and pricing is similar to Inditex, offering high quality fashion at a low price. The quality is inferior to that of Inditex, and its business model is similar to that of GAP, since the design and sales are in-house but the production is outsourced. This limits how fast GAP can access the market, which is an advantage for Inditex.” Focused on Europe, H&M is starting its expansion in the United States.

 

“Zara counts on its very flexible structure, which is superior to that of its competitors, and can adapt to any market. In principle, it can count on having what it takes to continue expanding with success overseas,” notes Nueno. In fact, the goal of the company is to “double its size over the next four years,” as José María Castellanos, managing director of Inditex, has pointed out.

 

To achieve that goal, the group will continue to open stores in foreign countries under the Zara brand. However, above all, it will try to expand the rest of its brands: Massimo Dutti, Pull & Bear, Bershka, Oysho, Stradivarius and Kiddy’s Class. “The chain wants to take advantage of the pulling power of its leading brand, as well as the foreign distribution network it already has in place, to multiply the foreign presence of the rest of its subsidiaries,” says Nueno.

 

In Great Britain and France, for example, the chain just opened its first  Massimo Dutti stores. In addition, in England it has opened six Zara locations, including one with more than 3,000 square meters of space, on exclusive Oxford Street.  During the final quarter of the past fiscal year, the company took the leap into the Swiss market, under the brands of Zara, Massimo Dutti and Oysho. This year, the group is finishing up plans for Bershka’s entry into the Netherlands and France, the start of Pull & Bear operations in Germany, and the launch of a new chain, Zarahome, dedicated to the home.

 

Despite all these achievements, the company does have an Achilles Heel – the United States. “The group has a presence in that country but, for the moment, the U.S. does not figure as one of its priority objectives. Simply put, that’s because the U.S. is the cemetery of global distribution,” according to Nueno, who cites various factors to justify that conclusion. “First, because of the different profiles of consumers along the length and breadth of the entire country. On the [East] coast, the athletic [style] wins out. In the center, there is a lot of public obesity. And in the West, the Asian and Hispanic populations stand out. Moreover, in the United States it is very hard to grow without advertising because there are thousands of kilometers and thousands of mental light years between one city and another. Finally, Inditex still has great growth potential in Europe – which leaves them the United States for when they have no other markets to grow in.”

 

Criticism and Acclaim

From Tokyo to New York – passing through Buenos Aires, Caracas, Andorra, Paris or Milan – the empire of Amancio Ortega leaves no one feeling indifferent. A solid financial structure goes along with the commercial success. The company has managed to reduce its financial debt from 7% to 3%, and place 91 million euros of debt without having to abandon ownership in its shop units, according to Inditex’s quarterly earnings announcement. Its system is to finance investments with its own customers, and it collects from them in an average period of 10.7 days. That is the best such ratio among Spanish distributors. Moreover, Inditex takes the longest among companies in its sector to pay off its suppliers, an average term of 94 days, second only to Carrefour of France, according to industry analysts.

 

But Inditex has not been free from criticism. Designers accuse it of copying their designs, making them faster but with lower quality, and then selling them at a low price. The company has never denied that it is inspired by other firms, and by the people that it sees on the streets – and even at street markets or bazaars.  Using so many sources of information allows it to be avant-garde.  Tokyo is its favorite city for getting inspiration, and for forecasting new trends.

 

Nevertheless, Inditex counts on its own teams of designers, who compare all that information with the requests they get from their shop managers and the advice they get from their sales people. In addition, unlike most textile groups, which manufacture most of their products in the third world, Inditex produces 80% of its merchandise in Europe. Only the most elaborately prepared garments are manufactured in workshops in Peru, Morocco, Cambodia or Thailand.

 

To avoid being buffeted by scandals, such as the one suffered by the multinational Nike – accused of exploiting children in factories abroad – Inditex put together a code of ethics before going public in 2001, (announced in its annual report), Inditex investigated all its foreign workshops to make sure that they were not employing children. It also checked to make sure that the workshops were paying workers in accordance with local agreements and complying with labor hygiene standards, according to company’s sources. In those efforts, the Spanish group is working in collaboration with various NGOs [non-governmental organizations], and has already broken its business ties with five workshops in Tangiers.

 

The heart of Inditex continues to be in Arteixo, where the company has 14 factories connected by tunnels to a giant distribution center that, in a matter of hours, fills up with clothing. Twice each week, this lung distributes its oxygen to the shops, in such a way that local shops never have to wait more than 72 hours to receive any new order.

 

This empire has allowed Amancio Ortega to become one of the richest men in the world (he is number 21 on Forbes Magazine’s list of richest individuals). Business schools also have turned toward Galicia to study the secret of Zara. Pankaj Ghemawat, a Harvard professor who shot a video for his university on the company, came to the conclusion that “[Ortega’s] model for responding is extremely fast, much faster than what other companies have been able to achieve. Inditex has realized that it is more useful to pay attention to the customer, see what items the customer buys, and fill the shops with that style.”

 

The growth of the company is so fast, it now sketches out strategies years in advance. But will it be able to maintain the same rhythm in 10 years? “Its challenge is in foreign markets and in the growth of its subsidiaries,” says Nueno. At least for the moment, it doesn’t appear as if anything can slow it down.

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