Inditex, the world’s largest clothing retailer with more than 5,000 shops in 77 countries and a market capitalization of €36 billion, provided more proof of its power in early March by taking control of a historic location on New York’s Fifth Avenue.

Despite the economic crisis, the Spanish fashion firm whose eight brands include Zara, Stradivarius, Bershka, and Pull & Bear, purchased a 3,600-square-meter (38,750-square-foot) location in the heart of New York for US$324 million. Inditex will pay more than $8,300 per square foot to accommodate the next shop of its flagship Zara brand at 666 Fifth Ave. The emblematic building lies in one of the city’s most active shopping areas, near Rockefeller Center, the Museum of Modern Art, and Saint Patrick’s Cathedral. The deal is one of the most expensive in the history of New York commercial real estate.

Over the same period, Inditex, which has enjoyed a fourfold increase in sales and profits over the last decade, has attracted attention for very different reasons. Its Stradivarius brand, which targets young people, was accused of piracy by Delia Rodriguez in her blog Trending Topics. In an entry titled “Inditex and its blouses decorated with faces,” Rodriguez accused Inditex of having brought out a collection of blouses with drawings printed from photographs of two stylish bloggers — 19-year-old Michele Krüsi and Louise Ebel, alias Miss Pandora — without their permission.

The blog noted that this was not the first time that Inditex — headed by Amancio Ortega, the world’s seventh-richest man, according to Forbes — has been involved in such an incident. In May 2010, Zara was accused of piracy when it brought out a blouse with a drawing of well-known French blogger Betty Autier, author of The blog mentioned similar incidents in companies within Inditex.

The company responded by saying the garments had been purchased by an outside supplier and, as a result, any piracy was not the responsibility of Inditex. Still, Inditex apologized and said it would no longer sell the blouses.

Garments have been withdrawn for other reasons. In 2006, customers in the United Arab Emirates protested when some Bershka blouses carried the image of a mosque. In 2007, Inditex brought out a handbag that carried the image of a swastika, which is common in some cultures but, for obvious reasons, is widely offensive.

In both cases, Inditex apologized and attributed the mistakes to its suppliers. But questions were raised: Is it acceptable for a company with the scope of Inditex to make such mistakes? How will they affect the company’s image? Should Inditex rethink its relationships with its suppliers?

Pressure on Designers

Some industry observers say Inditex has been inspired by the collections of other designers and/or by trends in discotheques and on the Web. Esteban García-Canal, professor of business management at the University of Oviedo in Spain, notes that “imitating designs and styles is an accepted practice in the fashion industry, except when it refers to the use of registered brands and logos, of course.” He says there is nothing new about companies introducing designs inspired by people on the street. “A very typical case involved Malcolm McLaren and the punk style.” During the 1970s, McLaren converted the Sex Pistols music brand into an emblem of the punk movement, and created a style based on punk from his shop on King’s Road in London.

In this context, García-Canal says, “The Inditex group, in its environment, and Zara in particular have based their competitive advantage on the concept of ‘fast fashion.’ That is to say, on their ability to capture dominant styles through various sources, and then offer them to the market quickly and at low cost.” The company began in 1975 by selling quilted boots in Arteixo, a town in Galicia in Spain’s northwest, only to become a model for the apparel sector by offering the latest high-quality fashions quickly and at a good price. It manages to bring to its shops two new collections per week, as well as to design, produce, distribute and sell its collections in four weeks, while competitors take several months.

To do that, Inditex uses some 300 designers who have to create some 35,000 designs a year for a clientele of various tastes in 400 locations in Europe, the Americas, Asia and Africa. According to Gerard Costa, professor of marketing at ESADE, who has analyzed the blogging crisis, these people “are under brutal pressure to create. If you look at the pirated images, you can observe that they have copied the photo by using onionskin paper and have incorporated some elements, such as a drink can, with the intention of improving the image.” Costa says that in the company, “The premium is on the ability to respond rapidly, since they have to bring out five new products each week. So from the viewpoint of human resources, the pressure is horrific.”

Inditex’s business model has not seemed to consider this aspect of the company important. Costa says one of Inditex’s “weak points is its high rate of personnel turnover. That is because the company is highly centralized, and there are very few possibilities for young employees to get promoted; the average employee is 26 years old. They came with the illusion that they were working in a leading company in the fashion industry, but they do nothave the feeling of being on the same team with senior management.”

“From its origins, Inditex has been a company focused on details,” Costa says. “It is vertically integrated and it will always be about the details. So its strength is not in its alignment with its suppliers.” Instead, the company blames its external suppliers for its mistakes. At times like this, he adds, “in Inditex’s managerial board, they will be talking about their culture of details, such as, for example, the serious mistakes that have been able to occur in their shops, which surely suffer the most from any possible loss of control over the chain from the top.”

In Zara, everything revolves around the shops. That’s where the data about customers’ tastes come from. It’s where decisions are made about which products to offer or withdraw. Even advertising originates in the shops, Costa notes. Zara chooses its locations well, and customers know that stock is rotated constantly, so visiting a shop ensures they don’t miss out.

To bring these garments to their destination, Inditex relies on its eight logisticscenters in Spain and 11 factories. The group has decided to maintain a geographically centralized business. Unlike most companies in the sector, which typically subcontract in Asia, Inditex produces more than half of its garments close to home. In addition to its factories in Spain, it has others in Portugal and Morocco. In those plants it manufactures the most sophisticated garments, leaving the manufacture of simpler products such as blouses and jeans to Asia.

Speedy Responses

Experts say the company has been equally rapid in its response to the piracy scandals, revealing that it is agile when it comes to providing designs to its shops. Costa notes that its behavior has followed a standard pattern: apologize, blame the supply chain, withdraw the garments, and consider the issue resolved. In his view, responding appropriately has been a crucial reason why the Web treats Inditex benevolently. Credit also must be given to its community managers, who “have been very careful about sounding the alarm about what is being said about the company on the Internet.”

Costa disagrees with those who say the design scandals reflect an intentional word-of-mouth campaign — or “buzz marketing” — directed against Inditex since it began doing business online at the end of 2009. Costa cites the well-known phrase: “I don’t care what you say about me, so long as you say something about me.” He warns, however, that “at this point, we are entering treacherous terrain because talking about you on the Internet is very risky. This medium can be turned into a sound box.”

García-Canal adds that the speed with which a company withdraws its products from the market minimizes negative impact. He believes that those errors are part of the Inditex business model and could be repeated in the future. “In reality, the Zara method for introducing new products remains a process of trial and error, although I believe that there should be some steps for avoiding mistakes such as the handbag with the swastika on it.”

García-Canal says the company should create a code of unacceptable practices, but it should not consider it necessary to change its design guidelines since they form part of the company’s DNA. “We can’t expect Inditex to sign up famous designers, which in any case would also create problems, as happened in the case of John Galliano.” The British fashion designer was recently fired by the Christian Dior fashion house for his anti-Semitic declarations.

The Challenges of Globalization

Experts minimize the possible impact of the piracy scandals, but point to other weaknesses that result from the company’s ever-greater geographical reach and its expanded channels.

García-Canal says that nowadays, “The main challenge for Inditex is to maintain its ability to differentiate prices; that is, to charge different prices in each country,” as it does today. An article in The Economist last month (“Global stretch: When will Zara hit its limits?”) addressed the issue of how long Inditex can cope with the competition — in particular Sweden’s H&M — when price differentials between countries could be as high as 60%. According to a researcher at Sanford Bernstein, cited in that article, the company might be able to sustain price differentials of only 30%.

The point is crucial now that the company relies on e-commerce. Inditex recently announced that during the autumn/winter 2011 season Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Uterqüe will open their own online shops. Meanwhile, Zara’s online shops, which supply 16 countries today, will expand into the United States and Japan.

Finally, García-Canal notes that another great challenge for Inditex “will be to maintain the centralization of the bulk of its operations and logistics in Spain as the company globalizes.” According to The Economist, the company is considering whether it might make sense, now that 15% of its sales are in Asia, to create a second base of design and logistics in Asia. After all, some of the products being manufactured in China by or for Inditex are sent to Spain, from which they then return to Asia for sale there. Opening such a site in Asia is not in the company’s plans, according to Pablo Isla, who crafted the group’s international expansion over the last five years.

Isla will take over for Ortega, Inditex’s founder, after the company’s next general meeting in July. After three decades as president, the 75-year-old Ortega will deliver to his successor a company with a healthy balance sheet. In 2010, Inditex enjoyed net profit of €1.73 billion, 32% higher than in 2009. Nevertheless, the company will need to resolve the significant challenges of a new time.