In an Australian market where retailers spend heaps on advertising and promotion or focus on outsourcing the production of their goods, comes the business model of Zara, the brand of Spanish retailer Inditex. A good model to imitate for cross border investments by Australian companies too.
No advertising, no outsourcing: Why Zara is beating expectations despite a languishing economy
Myer chief Bernie Brooks says times are as tough as he’s seen them, yesterday describing retail in Australia as a “tale of woe”. Going by the balance sheets of Australia’s brick and mortar retailers, it’s an understandable statement.
But one brick and mortar competitor to Myer and David Jones isn’t down about the conditions it has to operate in. Inditex, the Spanish company that owns fashion retailer, Zara, overshot the analysts’ expectations on Wednesday, posting a record profit of 432 million euros ($AUS545.79 million) between March and May. This is an increase of 31% compared to the same time last year, despite growth in recently bailed-out Spain stalling. Inditex’s profits were driven by profitable growth in new markets. Its success has little to do with online retailing.
Zara launched in Australia last year, shaking up the local fashion sector. ”They’re popular in Australia because Australia’s been regarded, well, as a third-word country when it comes to fashion,” says retailing expert Brian Walker, CEO of the Retail Doctor Group. “Zara, along with things like [fashion retailer] TopShop, is bringing a global influence to our shores.”
The fashion house has stores in Sydney and Melbourne. Worldwide it operates 5,618 stores in 85 countries, after more than a decade of extraordinary growth (there were only 1,000 stores in 2000). Zara is planning to take on China later this year.
Inditex was founded in 1963 by the reclusive Amancio Ortega, the son of a railway worker who is now the fifth richest man in the world. Still a board member, he has $US35.5 billion in personal wealth.
Inditex owns a number of brands, but Zara is by far its largest. Since listing in 2001, the group has used expansion to boost its net profits from 91.7 million euros to 432 million euros, making it Spain’s largest company and the world’s biggest fashion house.
It prides itself on its fast-fashion business model, and has maintained its tight adherence to its strategy even as Zara pursues break-neck expansion. Whenever a Zara store opens, the hype leading up to it means it sells out its stock in minutes.
“Zara are the inventors of the concept of fast-fashion, and that has certain principles,” Melbourne Business School professor of marketing Mark Ritson says. “Product is ultimately the thing that carries the brand.”
Walker tells LeadingCompany Zara will design and start selling products based on the latest catwalk in just three or four weeks. Before Zara, Australian retailers were taking 12 to 16 weeks to do the same.
They can do this because Zara has no stock, explains Ritson. Store managers pick from a catalogue what they would like to stock in their stores, and it’s made and dispatched from Spain as quickly as possible. “This means they don’t have any seasons… They literally just react to demand.”
New items appear in Zara’s stores twice a week.
Inditex is able to achieve this through ownership and masterful control of their supply chain – from design to fabric, manufacture and distribution to store. The group rarely outsources manufacturing, and when it does, it uses cheap neighbouring European countries from which the output can be quickly driven back to headquarters. It cuts fabrics in-house at its La Coruña headquarters in northern Spain, and then sends them to local cooperatives for sewing. The cooperatives sew and package the items (adding price-tags and hangers), and send them back to be driven and flown to Zara stores all over the world.
Its designers, also based in La Coruña, are in daily contact with Zara’s store managers. And if that isn’t enough, they can also view the point-of-sale data that comes into HQ immediately from every Zara store, showing what’s selling, and even what customers try on but do not buy – by scanning the items as people exit the fitting room.
This makes the designers very responsive to customer feedback. Walker relays one famous example. At a store in New York, customers kept asking whether the stores stocked a certain jacket in cream as opposed to white. “Two weeks later that cream jacket was put into the store. It happened within a fortnight,” he says.
And, of course, Zara wouldn’t be anywhere as successful if their product wasn’t appealing. The clothes are reasonably priced, and despite being inspired by the latest fashion shows, are realistically designed. “Their designs work in everyday life,” Walker says. “They’re not way out there, everyone could wear them.”
The group also pays a lot of attention to tailoring, using tailoring methods that make its clothes fit better and appear to be of higher quality than is normally offered at their price range, Walker says.
The fashion house makes use of the scarcity principle to boost demand, he continues. “They might make 30,000 copies of an item,” he says. “But their supply is spread very thinly across their stores.”
Ritson says a traditional brand has two major seasons, and choses an iconic piece it will spend between $5-$10 million promoting globally. “They use the particular product to reel in the customer,” he says.
Zara doesn’t do this. There is no definitive Zara “style” or “piece”; their appeal is purposely broad.
Intriguingly, the group almost never advertises.
Ritson says the typical fashion retailer will spend 20%-30% of their revenues on advertising. Zara spends less than 0.5% – a big saving.
Where they do place an emphasis is on their windows. “Their research showed some years ago that windows are a much more important source of traffic than media advertising,” Ritson says.
Store managers are in charge of ordering the stock they like from Zara’s catalogue, but the windows are centrally controlled from Spain.
“Most Australian brands go wrong in spending money on print advertising that is largely a waste of time,” Ritson says. “They often ignore the windows because what you put in them is almost free. But that doesn’t mean it’s not important and influential.”
This style suits the preferences of Ortega, Inditex’s founder. He once called advertising a “pointless distraction”. He never gives interviews. The group has a useful media backgrounder to give you the bare facts, but isn’t interested in commentary or promotion. Even its press releases contain no quotes from its leaders, doing nothing more than providing investors with the relevant numbers.
Inditex lets the hype around a new Zara store opening build organically. It works – when the first Australia store opened in Sydney in April 2011, 80% of the stock was sold within three minutes. When it comes to hype, the opening of a new Zara store is a lot like the opening of a new Apple store. But Apple spent US$113 million on advertising in 2010.
Zara’s stores remain relatively popular long after the queues have subsided. Its customers visit their local store six times more than the industry average, leading local retailers to dread the day the Spanish giant reaches their city.
“You go there because there’s always something new and different,” Walker says.
Between February 2011 and February 2012, Inditex turned over 13,793 million euros for a net profit of 1,932 million euros. In January this year, it employed 109,512 people worldwide.