Marketing

ARTEIXO, Spain—Zara stores have set the pace for retailers

around the world in making and shipping trendy clothing. Now

Pablo Isla, chief executive of parent company Inditex SA, says

Zara needs to speed up. As rivals catch up, Mr. Isla is attempting

one of the fastest global expansions the fashion world has ever

seen, opening hundreds of new stores and entering new markets.

To do that, as an economic downturn threatens sales, Inditex is

changing the systems that have driven its success at Zara and its

other store brands, to save time and money. Among the innova-

tions, it is introducing new methods to enable store managers to

order and display merchandise faster and adding cargo routes for

shipping goods. “There has been a clear change of mentality in

the company,” Mr. Isla, a former tobacco executive who arrived

at Inditex in 2005, said in an interview at the company’s head-

quarters here.

The world’s second largest clothing retailer by sales after Gap

Inc., Inditex is responding to a predicament shared by other com-

panies that come up with game-changing formulas: Eventually

competitors catch up, forcing the pioneers to do even better to keep

their edge. Low-cost carrier Southwest Airlines Co. is making big

changes to fend off rivals that have copied its efficient operat-

ing model. Inventory-control methods at Walmart Stores Inc. are

being mimicked around the world, and Google Inc. is updating its

search engine to keep users loyal.

The consumer slowdown is adding pressure. Inditex shares

have fallen nearly 24 percent in the last 12 months, in large part

because investors are worried about an economic downturn in

Spain, where Inditex generates over a third of its $12 billion in

annual sales. The company is pressing ahead with its expansion

plans even as consumers are slowing down. In the U.S., retail-

ers had their worst monthly sales results in nearly five years in

January, and some chains are planning to close stores and cut jobs.

U.K. retailer Marks & Spencer PLC recently reported its worst

quarterly sales performance in two years, and warned the pain

could extend into 2009.

The industry is watching the company’s logistical makeover.

Though it sells inexpensive trendy clothing—“fast fashion” in

industry parlance—Zara has been so successful in luring high-

paying customers that luxury fashion brands such as Gucci,

Burberry and Louis Vuitton have overhauled their own prac-

tices to send new fashions to stores more frequently. “They’re a

fantastic case study in terms of how they manage to get product

to their stores so fast,” Stacey Cartwright, chief financial officer

of Burberry Group PLC, says of Zara. “We are mindful of their

techniques.”

In recent years, competitors across the globe have adopted

Zara’s methods. Italy’s Benetton Group SpA now replenishes

stores up to once a week. Los Angeles-based Forever 21 Inc. and

Japanese apparel giant Fast Retailing Co., owner of the Uniqlo

chain, can get new looks to their stores within six weeks. Even

outdoor clothing maker Patagonia Inc. has doubled the number of

new styles it offers every year. As the popularity of cheap-and-chic

chains has zoomed, Zara’s rivals Hennes & Mauritz AB of

Sweden and Mango of Spain have also become fixtures on U.S.

shopping streets.

In addition to Zara, which makes up 60 percent of its busi-

ness, Inditex owns seven smaller store brands, including the more

upscale Massimo Dutti and the youth-oriented Bershka. In the

last 12 months Inditex added 560 stores, including entering new

markets in Croatia, Colombia, Guatemala, and Oman, to reach

3,691 stores in 68 countries. It plans expansion of a similar scope

over the next year.

The first Zara store opened in 1975 in La Coruña, a port town

near Arteixo in a remote corner of northern Spain. Its two key

traits were an eye for customer tastes and a production process

that started with the final price and worked backward to the most-

efficient production. In the mid-1980s, local business-school

professor José Maria Castellano, a technophile, joined Inditex

as right-hand man to founder Amancio Ortega Gaona, and the

company became a world-class logistical outfit, peddling “fast

fashion.” The first foreign store, in Portugal, opened in 1989,

followed by New York. In 2001, Mr. Ortega took Inditex public

and its stores are now on prime shopping streets around the world.

Stores are stocked with new designs twice a week. Collections

are small and often sell out, creating an air of exclusivity and cut-

ting down on the need for markdowns. The company ships clothes

straight from the factory to stores. Unlike competitors who manu-

facture most of their wares in Asia, Inditex makes two-thirds of its

goods in Spain and nearby countries such as Portugal, Morocco

and Turkey. The retailer says the higher labor costs are offset by

the flexibility of having production close to its warehouses and

distribution centers, which are all in Spain.

At “the Cube,” as employees call their futuristic-looking

headquarters outside La Coruña, sales managers sit at a long

row of computers, monitoring sales at every store around the

world. When a garment sells well—or flops—they quickly tell

designers sitting nearby to whip up fresh designs. In the base-

ment, stylists decide store layouts and window displays. One

room is built like a shopping street, its walls lined with lit and

decorated store windows that dictate how storefronts will look

from New York’s Fifth Avenue to London’s Regent Street. Every

two weeks, new decorations are photographed and e-mailed to

stores to replicate.

To speed up new store openings, Mr. Isla needed to cut start-up

costs. Inditex now avoids store openings in slow months such as

August. In the past, stores opened year-round, accruing costs from

the first day even if sales took longer to build. Mr. Isla’s goal is

for Inditex is to reverse a trend of costs growing faster than sales.

It met that target in the first half ended July 31, 2007, when costs

grew 16 percent over the same period the previous year, while

sales increased 19 percent.

In another move to cut costs, Mr. Isla installed software in

store computers to schedule staff based on sales volume at differ-

ent times. As a result, more salespeople work at peak times such

as lunchtime or the early evening. Inditex says the more flexible

schedules shaved 2 percent off the hours staff work. Alarm tags

Part 6 Supplementary Material

are now attached to garments at the factories. In the past, at a big

Zara location such as the four-floor store on Madrid’s Alberto

Aguilera shopping street, 10 people spent an average of 12 hours

a week putting on the tags. Now, Inditex estimates, those sales-

people spend 3 percent more time serving customers. “In the past,

a shipment would come in the morning, and the staff wouldn’t

have it unpacked till noon. They were just giving away three hours

of prime selling time,” Mr. Isla says.

Shipping papers now label the newest collections “NEWC.”

Those pieces are often rushed to the shop floor on plastic shipping

hangers and only later switched to Zara’s customary light wood

hangers. Zara regulars know to look for the black plastic hangers

with the latest looks, says Dilip Patel, U.K. commercial director

for Inditex. Store managers also use new hand-held computers

that show how garments rank by sales, so clerks can re-order best-

sellers in less than an hour—a process that previously took about

three hours. These orders arrive, together with new pieces, two

days later.

Also, each of the company’s various store brands shipped

merchandise separately in the past, concerned that mixing even

behind the scenes could dilute their images. Combining the brands

into larger volumes has allowed Mr. Isla to launch twice-weekly

air shipments with Air France Cargo–KLM Cargo. Planes from

Zaragoza, Spain, land in Bahrain with goods for Inditex stores

in the Middle East, fly on to Asia, and return to Spain with raw

materials and half-finished clothes. The company also started new

shipments with Emirates Airline.

Despite Mr. Isla’s efficiency gains, some experts caution that

Zara faces challenges it is not addressing. Keeping a large amount

of production close to home, some warn, loses its benefits when

a growing number of stores are far away. “The efficiency of the

supply chain is coming under more pressure the farther abroad

they go,” says Nirmalya Kumar, a professor at London Business

School.

For now, the company makes up for some of the cost by

charging more for goods sold overseas. In the U.S., for instance,

Zara clothes cost up to 40 percent more than they do in Spain.

However, that could lead to an inconsistent brand image, a risky

strategy in a globalizing world, some critics warn. Mr. Isla says

that when he joined the company, he considered a logistics center

in Asia, where the company produces around a third of its goods,

but decided it would only make sense if Zara had more stores

in the region. He says the group’s current logistics capacity will

suffice until 2013.

CIRCA 2009

Inditex SA, Europe’s biggest fashion retailer by revenue, said

Wednesday it plans a major push online for its flagship Zara-

brand, as it reported a 7.6 percent decline in net profit for the fiscal

first half.

Inditex, which also owns the Massimo Dutti, Pull and Bear, and

Bershka brands, is known for savvy use of information technology

to tightly control production and inventories. It collects data from

its 4,430 stores in 73 countries to detect trends and tweaks prod-

ucts based on consumer tastes.

Compared with its main competitor, Sweden’s Hennes &

Mauritz AB, however, Inditex is a bit of a latecomer to the

Internet. It started operating an online store for furnishing

brand Zara Home in 2007, but had so far shied away from the

Web for Zara clothing because of the complexity of managing

and selling its fast-changing collections online. So it caught

many by surprise when it said Wednesday that it will launch

online sales next year for Zara’s Autumn/Winter 2010 collec-

tion. “There had been some concern that Inditex was falling

behind competitors on e-commerce,” said Anne Critchlow, an

analyst at Société Générale.

Initially, the company plans to launch the online store www

.zara.com in Spain, France, Germany, Italy, the U.K. and Portugal.

Later, it will roll it out in all of Zara’s remaining markets. In the

medium term, Inditex may also launch its other six formats online,

said Chief Executive Pablo Isla. “The Internet is becoming a more

and more relevant channel, so it would be logical to continue

expanding online with the other formats,” he said. Neither H&M

nor Inditex disclose what proportion of sales comes from their

online outfits. U.S. rival Gap Inc. generated about 8 percent of its

Gap-branded sales in the U.S. on the Web.

For the first half ended July 31, Inditex’s net profit dropped to

375 million ($550.4 million) from 406 million a year earlier,

while sales were up 6.6 percent at 4.86 billion. Sales in stores

open at least a year, however, shrank by an annual 2 percent in the

fiscal first half, compared with a decline of .7 percent in second

half, and operating costs grew 8 percent as Inditex continued to

expand its empire. The retailer opened 166 new stores in the first

half, down from 249 a year earlier. Inditex’s gross margin fell to

55.3 percent of sales from 56.4 percent a year earlier. Analysts

attributed the decline to a stronger dollar, which is making it more

costly to source materials, and pricing pressures in the company’s

main market, Spain.

The retailer gave a resilient trading outlook, saying sales

in the first weeks of its fiscal third quarter were up 9 percent

when stripping out currency fluctuation, the same growth rate

as in the first half. Inditex’s much smaller U.K. rival, Next

PLC, which launched online sales in 1998, meanwhile, posted a

6.9 percent increase in first-half net profit. Cost savings helped

push net profit up to £131.8 million ($217.5 million) from

£123.3 million a year earlier, as revenue inched up to £1.51 billion

from £1.5 billion.

Next, which like Inditex sells clothes and home wares,

warned, however, that like-for-like retail sales are likely to

decline between 3.5 percent and 6.5 percent in the second

half. At Directory, its catalogue and online-shopping business,

which generates about 40 percent of operating profit, Next said

it expects sales to rise by up to 2 percent. The retailer never-

theless raised its full-year forecast, saying it now expects to

deliver pretax profit “close” to last year’s £429 million, subject

to its sales performance in the fourth quarter, which includes

Christmas.

CIRCA 2010

Spanish fashion retailer Inditex SA launched its Zara online

store in the United States in the fall of 2011, seeking to widen its

clientele beyond the big cities where it currently operates, chief

executive Pablo Isla said. Early indications showed the online

launch may have traction in the U.S. market. A Zara application

for Apple Inc.’s cell phone the iPhone has been downloaded by

more prospective clients in the U.S. than in any other market,

Isla said.

Speaking to Dow Jones Newswires after the presentation

of Inditex’s 2009 results, Isla said that more than a million

iPhone users have downloaded the App since it was first

Cases 3 Assessing Global Market Opportunities

released in December. “It’s a market where Internet sales are

very important, and it’s a way of accessing all those clients

that are interested in Zara,” said Isla. The App allows shoppers

to check out what’s new in the Zara collection, and to find the

nearest shop.

Inditex, based in La Coruna, northwestern Spain, last year

soared past Gap Inc. to become the most-selling fashion retailer

in the world, with more than 4,600 stores. Zara, which is present

in 76 countries, will roll out its online store first later this year in

six European countries, and then progressively add the remaining

countries where Zara operates. Inditex entered the United States

early, in 1994, but has expanded rather slowly, focusing store

openings in large cities like New York, Miami and Los Angeles.

It currently has 48 stores there. Isla said Inditex plans to grow

“selectively” there in the coming three years.

“We have to prioritize at every step, and ours are twofold:

Growing in Europe and in Asia,” Isla said. Inditex is opening

almost all of its new stores outside its Spanish home market,

which currently accounts for 31.8 percent of group sales. By

2013, Inditex expects the weight of Spain to drop to 20 percent of

total sales, while Europe, excluding Spain, is expected to rise to

50 percent and Asia, 20 percent. The remaining 10 percent will

come from the Americas.

QUESTIONS

1. What are the ways that Inditex ensures that “fast fashion” is

truly fast?

2. What are the important attributes of a “fast fashion” retailer

to customers? To store managers?

3. Why would a retailer introduce its online store country-by-

country? Why was Inditex slow to embrace online sales

when it is so tech-savvy in other ways?

4. Briefly describe five opportunities for continued growth

during the next five years for Zara’s parent, Inditex, SA.

5. Pick one of the five opportunities and outline the advantages

and disadvantages of pursuing it.

6. Take a look at its new U.S. website. What is good and what

is bad about it?

Sources: Cecilie Rohwedder, “Pace-Setting Zara Seeks More Speed to Fight Its

Rising Cheap-Chic Rivals,” The Wall Street Journal, February 20, online; Christo-

pher Bjork, “Zara Is to Get Big Online Push,” The Wall Street Journal, September 17,

online; Christopher Bjork, “Zara Has Online Focus for U.S. Expansion, Inditex CEO

Says,” Dow Jones Newswires, March 17, 2010; Armorel Kenna, “Zara Plays Catch-

Up with Online Shoppers,” Bloomberg BusinessWeek, August 29, 2011, pp. 24 –25.

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