TFR | Strategy Consulting

The Fashion Retailer has not accepted promotional or guest post since it was created in 2017. If it mentions fashion retailers, startups, or tech solutions, the main reason is describing best practices based on research and also more than 15 years of experience working for leading apparel brands. Today, I’m excited to introduce a collaboration post with Pau.

Pau Almar is an expert in fashion and apparel retailing that has held several senior management positions in Mango and Zara menswear for the last 10 years in commercial areas optimizing decision-taking, stock efficiency and in-store operations. Additionally, Pau is the editor of Very Good Retail a LinkedIn weekly newsletter about retail and the author of two books on strategy.

A guide for potential double digit long-term growth in a mature environment, by Pau Almar for the fashion retailer (part 1/2)

Inditex is currently changing its whole strategy from top to down. The top of the iceberg was the resignation of President Pablo Isla, the replacement of current CEO and the takeover of the Ortega family. Before that, more than half top managers in Zara, Massimo Dutti, Zara Home and Bershka had been changed, especially in the new roles that Mr Isla created in its first years.

Chances are that you read one of the multiple Business cases from IESE, Harvard or ESADE about Inditex’s secret sauce. While they give a good idea about the industry, most tend to oversimplify the supply chain stating that it only takes 3 weeks to make all products or that all Zara stores have the best locations in the world. All that is half true. I am telling you from an insider standpoint. Only very few products take 3 weeks to get to the store and Zara stores have good locations in Europe, but in the US or Asia that is not the case. You can see what happened recently in Madrid. Zara opened a new superstore in Plaza España, which is at the end of Gran Via, the high street in Madrid. It is a great location and a great store. But it is not in the centre of Gran Via where there’s the traffic. Which store is in the centre? Primark. And who is the tenant of Primark? Mr Ortega (founder and owner of Inditex).

But then, what is the secret ingredient from an insider’s point of view?

• Zara has an outstanding amount of people watching every day what it sells, what it sells not and what the new trends look like trying to figure out the perfect balance between image and “saleability”. Every day, all the collection is re-assessed and modified based on the latest data. Orders get prioritized, reduced, cancelled or postponed.

• More than a hundred business controllers are working in the commercial areas deciding together with designers, buyers and product managers. Controllers help to make decisions better using extensive data.

• In addition, engineers, mathematicians and big data scientists work to optimize decision-making processes. Whose idea was it? Mr Pablo Isla (former Executive Chairman at Inditex).

• On top of that, the Transport and Customs teams are impressive. They can move what is stuck on a port on the other side of the world. They know who to call to get things done. Otherwise, you could not deliver twice a week to over 7,000 stores in less than 4 days transit time. Who helped expand this department? Mr Pablo Isla, as well.

• In the last 15 years, the Expansion department helped multiply by three the number of stores, create a network of global eCommerce fulfilment facilities and two new distribution centres.

• Last but not least, RFID, technology and CSR are key success factors.

The Inditex new mindset

After the exit of President Isla, the balance of powers changed. Creative guys backed by Commercial Director Bea Padin gained influence and started to work on changing Inditex‘s mindset towards a more creative and less data driven. Intuition is progressively becoming more and more important. That’s why, buyers, designers and visual merchandisers are gaining weight. Capsule collections like Origins, Zara Surplus, Athleticz or Campaign collections are becoming more relevant. Even though these collections account for very little in terms of sales, they concentrate a significant effort on Zara’s staff and budgets.

Most of the videos use best-known models, are shot by best fashion photographers like Steven Meisel or are recorded by luxury Art Directors like Fabien Baron. Even if many of the videos reach less than 20k views on Youtube, they account for a large part of the marketing budget.

Zara’s website has become a high-end website. It is closer to a Louis Vuitton website than to an Amazon. The website aims to entertain with good images and videos, rather than optimizing conversion or profiling users to offer their most fancy articles. Again, it is the image on top of numbers. In short, the customer has to be excited again to drive long term growth. Is this the best strategy? Honestly, I can’t say, only time will tell.

The opportunity was hidden in the pandemic crisis

COVID 19 struck everyone in the fashion arena. Even those digitally born brands suffered from either overdemand or undersupply. Physical retailers suffered more as much of the stock was stuck in closed stores. Even though the high exposure to physical by Inditex, it managed through the crisis using:

• RFID technology is used all across the supply chain, but especially in the stores. With this technology, it could use physical store dead stocks for being offered through the websites and operate stores to process orders. This is what is known as SINT and SINT+ (Integrated Stock Management).

• Actions were taken to cut aggressively orders from suppliers even if they were being made. Using Inditex purchasing power, most providers were forced to accept reductions in quantities, prices and schedules.

• Nearshoring providers proved to be less prone to problems in the supply chain as it happened with chronic Chinese port delays, Suez channel blocking, a sharp increase in transport cost or lack of space in air shipping.

• Price increase in certain key products before even making it public in the latest shareholders meeting. For instance, most circular products like sweatshirts or sweatpants were increased to cool off demand.

• Speeding up closures of 1,200 stores that had performed badly since their opening. Stores located in low-traffic shopping malls, small towns or poorly managed. Everyone in the company already knew that they were bound to be closed, but the pandemic accelerated the pace.

Thanks to the less relative impact of COVID19, Inditex reinforced its market position in comparison to its largest rivals H&M, Uniqlo, GAP and the minor ones.

Is growth over?

So Inditex made the most of its position during the pandemic and is shifting its mindset towards a more creative approach. But does that imply the growth is over? How likely is it to see Inditex growing double-digit from now on? That is the million-dollar question that nobody dares to answer.

Inditex is now mature. With 6.700+ stores in 87+ countries. Inditex is in every market where it’s likely to sell fashion. That includes almost every country in Europe, the Americas, Asia and Oceania. Africa remains a continent with few stores, but most relevant markets do have stores basically in the North and South. With this in mind, it is difficult to continue to grow double-digit yearly and most of the future increase in profit is likely to come from optimising internal operations rather than opening new markets.

Additionally, there is a new threat in the market. It is not H&M, nor Uniqlo, Primark, Asos or Amazon… it is SheIn. A new company that emerged in China creates more alternatives in a single day than all season-long in a regular fashion company. And they do it in super reduced-price shipping directly to anywhere in the world by plane.

Finally, the European Union, which hosts the biggest Inditex markets, is working on directives to deter the use-and-throw fashion model. The new regulations will force new quality standards so that clothes could last longer and be repaired, thus affecting the revenues of major fashion companies.

The forecast doesn’t look as nice as it was for the last 20 years. But, is growth for Inditex over? No way! The world is still too big to refuse to grow.

A guide for potential double digit long-term growth in a mature environment