A $69.90 polka-dot dress from Zara has become the fashion hit of the summer. Despite little email or social media promotion from the chain, the flowy, flattering mid-length frock has become so ubiquitous that someone has created an Instagram account to collect sightings of it out in the fashion wilds — including several that appear to show multiple women wearing it to the same event.
The frenzy around the garment epitomizes the ability of the brand’s parent, Inditex, to ride a sartorial wave.
But the company, founded by Spain’s richest man, Amancio Ortega, is coming under intensified pressure. Rivals in the United States and Europe are catching up to its short production lead times. Meanwhile, cheaper upstarts such as Associated British Foods’ Primark as well as Boohoo Group are burnishing their fashion credentials.
There is no doubt that Inditex’s business model has served it handsomely for more than four decades. But its approach must prove its mettle now more than ever. Otherwise, its advantages risk being gradually whittled away, along with the group’s industry-leading profitability.
The retailer, of course, is famous for its fast supply chain. Many competitors order from factories at least six months in advance. Inditex’s brands — led by Zara, which accounts for about 70% of group sales — produce most of their garments within the current fashion season. About 57% of products are made close to its headquarters in Arteixo, in northern Spain, including at facilities in Portugal, Morocco and Turkey. This means Zara clothes can go from design to shop floor within a matter of weeks.
Just as important as the tempo is its unique process of developing ideas.
It starts with Zara’s army of store managers, who communicate what’s selling and what trends are emerging to the commercial team within Inditex’s sprawling head office. This is not some complex exercise in big data; it’s a conversational approach to absorbing what shoppers want. Designers, who sit nearby, incorporate that feedback into their creations.
This has all added up to spectacular growth. But there are challenges: The company is maturing, and the competitive landscape has become more difficult. Progress from here will be much harder work.
Social media makes it easier for all retailers to see what’s hot. Just take those polka dots: Even Topshop, now widely regarded as a bit of a fashion has-been, also managed to produce a stand-out spotty dress.
At the same time, retailers including Gap Inc. are finally shortening their supply chains. They are still not as speedy as Inditex, but they are narrowing the gap.
Another risk is the rise of online shopping. Most stores find that the high cost of fulfilling these sales squeezes profitability. But Inditex’s process is not all that different from what it’s already doing, and that helps shield its margins from the digital onslaught. Store managers telling the head office that they need three puff-sleeve blouses and two pairs of chunky sandals is similar to an individual placing the same order from her laptop. Inditex is fond of pointing out that it was a digital company long before the rise of e-commerce.
Despite all its advantages, Inditex’s operating margin has been shrinking for the last six years. Consequently, the group is opening fewer, larger stores, and it plans to increase space in prime locations by 5% to 6% this year. This is the right strategy, but it means that the company won’t be able to count on large-scale store openings to boost revenue growth.
The company is also overhauling its management. Pablo Isla, executive chairman since 2011, will cede his chief executive role to Carlos Crespo. By elevating the chief operating officer to the top job, Inditex is clearly trying to wring the maximum benefit from the business model, in order to continue to stay ahead of rivals.
At its heart is fashion. We’re at a moment in apparel retailing in which technology is often framed as the linchpin of any success or turnaround. Investors have been dazzled by newcomers StitchFix Inc. and Revolve Group Inc., which tout their ability to use algorithms to create and buy the right product selection. Executives from the likes of Gap and American Eagle Outfitters Inc. emphasize more personalized digital experiences as a way to win over customers.
And while Zara counts on technology, such as by using radio frequency identification to know exactly where every organza halter-neck top and utility boiler suit is, much of its dominance is actually due to something more old-school: It knows how to make clothes that people want — even before people know they want them.
Though cost control is always important, what will be crucial for Crespo is ensuring that Zara’s fashion compass stays perfectly calibrated. Putting style at the center of everything the company does is essential, not only to ensure that Zara can continue to charge a premium for the latest looks but also for ensuring it doesn’t emulate rival H&M and end up with a pile of unsold stock.
As sales growth has slowed in recent years there have been questions as to whether Inditex has retained its fashion flair, particularly with fewer discernible trends to chase.
That polka-dot dress shows that it is still capable of churning out the blockbusters. To stay ahead of increasingly nimble rivals, it must produce a steady stream of equally Instagram-friendly fashion hits.