Slide Show >>
It's fast, it's fashionable, and it's out to conquer the world from a remote corner of northwestern Spain. Inditex, parent of cheap-chic fashion chain Zara, has transformed itself into Europe's leading apparel retailer over the past five years, and is now aiming to rev up growth in Asia and the U.S. But as Chief Executive Pablo Isla maps out plans for global expansion, some are wondering whether Inditex is moving a little too fast for its own good.
Make no mistake: The company's track record is pretty impressive. Since 2000, Inditex tripled its sales and profits as it has doubled the number of stores of its eight brands. (Zara is the biggest, accounting for two-thirds of total revenues.) Now Isla, 42, expects to open more than one outlet each day in coming years, for a total of more than 4,000 by 2009, up from 2,800 today. Zara already has some 40 stores from Bangkok to Tokyo, while its first shop in Shanghai opened earlier this year. In the U.S., Zara plans to double its store count, to more than 50, by 2009, focusing largely on the coasts. Too fast? No way, says Isla. "We think we can keep up the pace of expansion without endangering profits," he says.
Others aren't so sure. As Zara ventures deeper into far-flung territories, it risks losing its speed advantage. That's because Zara turns globalization on its head, distributing all of its merchandise, regardless of origin, from Spain. With more outlets in Asia and the U.S., replenishing stores twice a week -- as Zara does now -- will be increasingly complex and expensive. The strain is already starting to show. Costs are climbing and growth in same-store sales is slowing: At outlets open two years or more, revenues were up by 5% last year, compared with a 9% increase in 2004. "The further away from Spain they move, the less competitive they will be," says Harvard Business School professor Pankaj Ghemawat. "As long as Zara has one production and distribution base, its model is somewhat limited."
So far, the company has managed to offset that problem by charging more for its goods as it gets farther from headquarters. For instance, Zara's prices in the U.S. are some 65% higher than in Spain, brokerage Lehman Brothers Inc. estimates (LEH).
With its breakneck expansion, Zara is a growing threat to rivals such as Gap (GPS) and Sweden's H&M Hennes & Mauritz. A decade ago, Inditex was a middling retailer focused largely on Spain, with sales of $1 billion and net income of $100 million. Today, it boasts stores in 64 countries. Last year sales rose 21%, to $8.5 billion, while profits jumped 26%, to $1 billion. The Gap may have more stores and bigger revenues -- $16 billion last year -- but Zara's 16.2% margins are much better than the Gap's 10.9%. And although H&M has slightly higher sales and profits and better margins (21.5%), it is in just 22 countries and can't match Zara in reacting to the latest trends. "No one does speed like Zara," says Rita Clifton, London chairman for branding consultancy Interbrand.
Zara has succeeded by breaking every rule in retailing. For most clothing stores, running out of best-selling items is a disaster, but Zara encourages occasional shortages to give its products an air of exclusivity. "We don't want everyone to wear the same thing," Isla says. With new merchandise arriving at stores twice a week, the company trains its customers to shop and shop often. "If you see something and don't buy it, you can forget about coming back for it because it will be gone," says Elisabeth Garcia Cueto, a 23-year-old student in Barcelona.
And forget about setting trends; Zara prefers to follow them. Its aim is to give customers plenty of variety at a price they can afford. Zara made 20,000 different items last year, about triple what the Gap did. Rifling through the racks at Zara's store on New York's Fifth Avenue, Dana Catok, a 25-year-old administrative assistant, says: "At Gap, everything is the same." It's a sentiment echoed by Zara fans the world over. "You'll never end up looking like someone else," says Mariela Raimundez, a 34-year-old architect and a regular Zara shopper in Madrid.
FEWER FAUX PAS
Collaborations with big-name designers and multimillion-dollar advertising campaigns? Zara eschews both. Instead, it uses its spacious, minimalist outlets -- more Gucci than Target (TGT) -- and catwalk-inspired clothing to build its brand. "Our advertising is our stores," says Isla. "The money we save is spent on top locations." Zara is on some of the world's priciest streets: Fifth Avenue, Tokyo's Ginza, Rome's Via Condotti, and the Champs-Elysées in Paris.
Keeping those locations flush with an ever-changing supply of new clothing means striking the right balance between flexibility and cost. So while rivals outsource to Asia, Zara makes its most fashionable items -- half of all its merchandise -- at a dozen company-owned factories in Spain. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.
The tight control makes Zara more fleet-footed than its competitors. While rivals push their suppliers to churn out goods in bulk, Zara intentionally leaves extra capacity in the system. That results in fewer fashion faux pas, which means Zara sells more at full price, and when it discounts, it doesn't go as deep. The chain books 85% of the full ticket price for its merchandise, while the industry average is 60%. "We have greater flexibility," says Isla. "We can commit to a low level of purchases at the beginning of each season, so that when new trends emerge we can react quickly."
Zara's nerve center is an 11,000-square-foot hall at its headquarters in Arteixo, a town of 25,000 in Galicia. That's where hundreds of twentysomething designers, buyers, and production planners work in tightly synchronized teams. It is there that the company does all of its design and distribution and half of its production. The concentrated activity enables it to move a dress, blouse, or coat from drawing board to shop floor in just two weeks -- less than a quarter of the industry average.
This summer, Zara managed to latch onto one of the season's hottest trends in just four weeks. The process started when trend-spotters spread the word back to headquarters: White eyelet -- cotton with tiny holes in it -- was set to become white-hot. A quick telephone survey of Zara store managers confirmed that the fabric could be a winner, so in-house designers got down to work. They zapped patterns electronically to Zara's factory across the street, and the fabric was cut. Local subcontractors stitched white-eyelet V-neck belted dresses -- think Jackie Kennedy, circa 1960 -- and finished them in less than a week. The $129 dresses were inspected, tagged, and transported through a tunnel under the street to a distribution center. From there, they were quickly dispatched to Zara stores from New York to Tokyo -- where they were flying off the racks just two days later.
By Kerry Capell, with Marina Kamenev in London and Nichola Saminather in New York