Fashion: A better business model

Inditex has become the world’s largest fashion retailer. But how long can its dizzying expansion last?

Cut above: details of the cloth and cut can be inspected by the design team straightaway, before they are scanned and sent to nearby production facilities

A few weeks from now, young women all over the world will decide that what they really want to wear this summer is a long, flowing trenchcoat with a buckle belt and soft shoulders. They don’t know it yet. But Manuel Ruyman Santos knows, and Inditex knows, and €17bn in sales says they will be right once again. 

For Inditex, the biggest fashion retailer in the world, the success or failure of one trenchcoat is of marginal importance. It is just one of 18,000 individual designs made every year for its chain of Zara shops alone. Add in the group’s seven other brands – from upmarket Massimo Dutti to casual Pull & Bear – and the number rises to more than 30,000. The new coat is nothing but a tiny thread in a much bigger story – but one that illustrates how a small family-owned clothes manufacturer on the edge of Spain turned into one of the most striking corporate success stories of recent years.

The rise of Inditex holds valuable lessons for business leaders, highlighting how important it is to challenge industry conventions and turn entrenched practices upside down. “Our business model is the opposite of the traditional model,” says Pablo Isla, the group’s chairman and chief executive. “Instead of designing a collection long before the season, and then working out whether clients like it or not, we try to understand what our customers like, and then we design it and produce it.”


The expansion so far has been relentless. For more than a decade, the group has opened at least one new store every day. In 2010, it overtook Gap to become the world’s largest fashion retailer by sales. A year later, it usurped Banco Santander as the biggest company in Spain. Inditex shares have risen sevenfold since the group went public in 2001, turning its reclusive founder into the third-richest man on the planet. Today, it is the undisputed industry leader, a company studied in business schools and management books, hailed at home and abroad as a rare European success story in a continent scarred by stagnation and unemployment.

Speed is of vital importance to Inditex. Industry analysts say no other company reacts to fashion trends as quickly as the Spanish group, and none is faster when it comes to turning sketches into products ready for shipment. “The essence of the Inditex model is to push the moment of production as close as possible to the moment of sale,” says José Luis Nueno, a professor of marketing at Iese business school. Many of the items you see in Zara stores today will have been designed back in Arteixo as little as two weeks before.

This rapid response time has prompted analysts to describe Inditex as the leading exponent of “fast fashion”. But top managers at the Spanish group wince when they hear the term. “I don’t identify with the concept of fast fashion,” Mr Isla says. “We are not about selling a million striped T-shirts as fast as possible.” He insists that Inditex’s success is based not on speed but on accuracy, on understanding exactly what customers want, week by week, and store by store.

Another short walk away is the vast on-site manufacturing plant, where textiles are cut, stitched and ironed. From there, another elevator takes you to the packaging floor, where conveyor belts race along at dizzying speed to drop the right T-shirt into the right cardboard box ready for dispatch to Shanghai or Seattle. Every Inditex store receives fresh deliveries twice a week – a feat of logistics that helps encourage customers to return to the store as often as possible.

According to Prof Nueno, Zara customers typically visit the shop four or five times more often than clients of a more traditional fashion store. “They sell in small batches and they are producing what they already know will sell,” he adds. This means, crucially, that Inditex has much lower inventories than its rivals, and less need to discount unsold goods. According to research by Société Générale, the investment bank, only 15-20 per cent of Inditex stock is marked down, as opposed to 45 per cent for a competitor like H&M.

In the early years, says José María Castellano, who served as Inditex’s chief executive until 2005, the company’s location made it hard to attract talented managers and designers. In fact, the decision to open a store in New York as early as 1989 was partly motivated by the need to make Inditex more attractive for new employees by adding a dash of glamour, he recalls.

Attracting designers is no longer a problem (Zara alone employs 350 in Arteixo). The challenge facing management today is how long Inditex can keep on growing, and at what pace. Fears that the group’s expansion would run out of steam have been around for a long time. When the group listed on the stock exchange in 2001, one analyst warned bluntly that “highly complex supply and distribution models tend not to be scaleable”.

Store openings have indeed slowed down markedly in recent years. But Ms Critchlow argues that this reflects a shift in company policy towards fewer but bigger outlets, as well as the new focus on selling Inditex products over the internet. Far from dying, she sees the Inditex model as the one that will set the standard for the whole industry: “Inditex is already where the rest of the industry will eventually end up.”

The argument is certain to rage for years to come. For Mr Isla, talk that Inditex is running out of room to grow is premature. The group has never come up with a fixed number of stores they believe can be sustained by shoppers around the world. “Our company is perfectly used to growing at a gradual and sustainable pace,” he says. “It is very difficult to see where the limit is.”

Article published by Tobias Buck in The Financial Times. June 18, 2014





To read the full article, please click on the following link:

Tags: , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *