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SJ Special Report: Cracking Inditex — Zara, Massimo Dutti, Sustainability, and Beyond Can the Spanish retailer survive success?

Inditex, parent company of Zara and new-to-New-York retailer Massimo Dutti, has taken the world by storm in the last decade, growing to become the largest fast fashion firm in the world. Its nearest rival, Hennes and Mauritz (parent of H&M and other lines), has 2500 stores worldwide, compared to 5900 stores for Inditex. The company has been opening stores at the breakneck pace of 500 per year – more than one a day. They are present in 82 markets, with 110,000 employees. Analysts and executives wonder, what has driven this expansion, and is it sustainable?

Zara is by far the largest unit of the Inditex group. Of the 500 new stores expected to open in 2012, over half of them will be Zara stores, in Asia. In 2011, the unit produced 64.8% of overall revenue, on a total Inditex turnover of $17.5 billion (up from $15.9 billion in 2010). It is the flagship brand, internationally recognized and globally competitive.

Zara rides high by under-producing fast fashion goods. This means consumers frequently return to stores to check for new items. Zara often clears inventory on a product in less than 45 days, so their items rarely go to discounting. This keeps margins high, which subsidizes a higher level of quality than is found at other fast fashion firms.

The model wouldn’t work without a strong in-house design team, close pairings between factories and designers, and rigorous supply chain management. At its root is inventory management, driven by customer feedback. When a new item is released, stores only receive a few pieces in each style, but store managers can request more based on demand and get them quickly delivered.

Store employees are also trained to elicit comments from customers about the clothes and relay those to their manager. Managers upload the information to headquarters daily, where it is relayed to the huge design staff and quickly translated into new clothing styles. Their flexibility and rapid response is unmatched.

Inditex uses a counterintuitive manufacturing strategy that makes the feedback process viable. More than half of the manufacturing takes place in factories in Spain, Portugal, or Morocco. Much of it is in factories owned by the company and the rest is outsourced to long-term partners. Fast fashion items are made in those factories because the manufacturing teams can work closely with the designers and the lines can deliver goods in two to three weeks. The higher labor cost in those markets is made up for by the higher profit margin on fast fashion items and tight inventory control.

The rest of the production – their basics line, home items, and some accessories, along with knitwear – are primarily manufactured in China, Vietnam, Bangladesh, and Brazil.

The genius of the company is in three areas – it has mechanisms for finding out what customers want and it has the ability to design those things, it has the ability to make goods on a timeline that maximizes their market value, and it can distinguish which goods need to be made quickly and which can be made slowly.

Inditex’s marketing model is also atypical. When a new Zara store opens, rather than blasting consumers with advertising on billboards and trains, ala Joe Fresh, the company makes a simple announcement. It relies on careful store placement, on the fashionable streets, and historical and interesting locations, to drive foot traffic. Much of the advertising is word of mouth, which only increases consumer tendencies to return to the store again and again.

The company is also savvy when expand into new markets. Rather than blitz the United States with new stores, for example, the company has grown steadily but slowly. As more feedback comes in from customers and store managers, the chain ramps up production at its facilities and brings its designs more in line with US tastes. In the short term, it may be frustrating not to reap the profits of a massive expansion plan, but in the medium and long term the firm is protecting the integrity of its supply chain. It is also back-stocking brand loyalty, as tourists visit major metropolitan areas, shop at Zara, and then go home to markets that will someday be reached.

Expansion is also straining their logistical model. With factories and designers in Spain, stores in Asia and the United States mean longer shipping times. Also, consumer feedback becomes more difficult to interpret. That’s part of why the brand has been so slow to roll out in the United States and China.

To keep their model intact, they would essentially have to replicate their design and manufacturing structure in Asia and North America, vastly increasing costs and fragmenting their process administration. As they get bigger, they run the risk of losing control of quality and efficiency.

In the meantime, recent consumer feedback has indicated some loss of interest in the fast fashion race. Consumers are seeking more expensive, higher quality, more durable goods in lasting styles. True to form, Inditex has responded by expanding its Massimo Dutti line, which offers higher quality clothes for office professionals. It is unclear where Zara will fit into this picture, but profits and margins are still looking good.

Additional concerns have been raised about the long-term environmental sustainability of fast fashion. The disposability of fast fashion means that consumers purchase and throw away a high volume of goods. However, the goods require almost the same amount of labor and resources as more durable goods. This has created an enormous and, some say, unnecessary waste stream. This backlash may force the company to slow down its quick turn cycle, though it has goals of reducing carbon output by 20%, is analyzing chemical products used in its processes, and produced over 1.9 million organic cotton garments in 2011.

At this point, Inditex is the largest fashion retailer on the planet, with a model that is matched by none. It is expanding in key markets, staying true to its DNA, and innovating. It shepherds a stable of brands that seem able to respond to shifting consumer tastes. To stay on top, Inditex will need to stay flexible, and diversify its revenue streams away from flagship Zara.

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