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Europe’s Richest Man Aims to Fill Gap With Massimo Dutti: Retail

Inditex Seeks to Win U.S. Market as Massimo Dutti Hits Manhattan
Massimo Dutti’s revenue growth has been exceeding its retail space expansion. Photographer: Simon Dawson/Bloomberg

In a reverse of the age-old maxim, Inditex SA has made it pretty much everywhere except New York. Tomorrow’s opening of its Massimo Dutti chain for urban professionals on Fifth Avenue marks the Zara owner’s push to change that.

From its home base of Arteixo, a town of 30,000 people in northern Spain, Inditex has come to dominate the fast-fashion category from Sao Paulo to Shanghai over the past five decades by getting $59.90 Zara jeans from design table to dressing room in weeks. With Massimo Dutti, it’ll target a more upscale market, selling suits and A-line dresses to legions of New York office staff seeking alternatives to Gap Inc.’s Banana Republic.

“It wasn’t until now that we felt it was the right moment for us to enter the U.S. market with Massimo Dutti,” Inditex Chief Executive Officer Pablo Isla said last month, adding that the company will expand the chain with other U.S. outlets in cities where Zara is already present.

Inditex, whose success has made founder Amancio Ortega richer than Warren Buffett, has been reticent to expand more aggressively in the U.S. because the market is both more suburban and crowded than what it is used to and Gap was previously too dominant with its omnipresent khakis. Spain’s most valuable company, which plans to open stores at a rate of about 10 shops a week this year, has seven times more shops in China and three times more in Turkey than the 44 Zaras it operates in the world’s biggest apparel market. Seven of those are in New York, while the company has more than 30 Zaras in the Paris area alone.

Frightened Off

“It’s not that Inditex was just scared of Gap per se, but scared about the whole U.S. market,” said Javier Hombria, a specialist in equity sales at Ahorro Corp. Financiera in Madrid. “They’re entering now because they’ve learned more about the market’s peculiarities.”

The U.S. has more established clothing chains than Spain, including Gap, J Crew Group Inc. and Nordstrom Inc. Margins are narrower as long distances between big cities in the U.S. mean higher distribution costs and finding good locations can also be more difficult, according to Antonio Diaz, director of Nebrija Business School in Madrid.

Massimo Dutti targets cosmopolitan men and women between 25 and 50 years old who like to wear classical, contemporary clothes, according to Evaristo Saenz, the brand’s image director. To celebrate the New York opening, Dutti has created the 689 5th Avenue Collection, which will offer higher quality and more expensive garments for men and women and be sold in about 40 stores worldwide. Products for sale in the U.K. include a 125-pound silk, pleated skirt and a 195-pound leather briefcase. Massimo Dutti declined to disclose the prices in New York ahead of the opening.

Growing Up

Massimo Dutti has become a more mature format, Isla said, after sales reached 1 billion euros ($1.3 billion) in the year through January 2012. The brand’s revenue growth has been exceeding its retail space expansion, and the chain was Inditex’s most profitable last year, with an operating margin of 24 percent compared to Zara’s 19 percent.

By focusing on expansion in Europe and emerging Asian markets, Inditex has more than doubled its annual operating profit in the past six years. With more than 5,500 shops, Inditex’s sales have gained every year for the past decade to 13.8 billion euros last fiscal year, making it the best performer in the Stoxx 50 since its May 2001 initial public offering. The shares have gained 56 percent this year, giving it a market value of 61.5 billion euros.

U.S. Focus

Gap, on the other hand, has been more focused on the U.S. market, getting 85 percent of sales from North America. Annual revenue last year was $14.5 billion, 11 percent down from a peak in fiscal 2005 as Americans sought alternatives to its chinos. Gap’s shares have gained less than 10 percent since Inditex went public.

Gap has bounced back from a dismal 2011 when it was squeezed by higher cotton prices and marketing missteps at Old Navy. The stock has almost doubled this year as same-store sales rose 4 percent in the first two quarters, the best first half since 2003.

“We are seeing big opportunities for Massimo Dutti to grow in the U.S. market,” Saenz said in a telephone interview, declining to give specific targets. “That said, customers here are very demanding. They not only seek to buy good quality garments at a reasonable price, but also be treated very well.”

The chain is often compared to Banana Republic, whose most expensive products for men on its website include a $400 double-breasted topcoat. John Schellhase, a 29-year-old graduate student at New York University, said his tight budget may not allow him to spend much on Massimo Dutti’s garments even though he wants to try something new.

Something New

“Banana Republic and all its stuff looks basically the same after a while,” he said. Massimo Dutti’s potential higher prices may be an issue as he spends about $50 a month on clothes mainly from Banana Republic and Fast Retailing Co.’s Uniqlo. “If Massimo Dutti prices were a little more expensive than Banana Republic, I’d still be willing to shop, but not very often. For me, Banana Republic is slightly expensive already.”

Inditex entered the U.S. in 1989 with Zara. Hennes & Mauritz AB, which has been present in the U.S. since 2000, has 250 shops in that market.

Foreign retailers that entered the U.S. more aggressively have had mishaps. H&M reported its first earnings decline in four years in 2000 when startup costs for that market exceeded expectations, and it took years for the U.S. to become profitable for the Swedish company.

Similarly, Inditex will find it difficult to find its niche in an already crowded U.S. clothing market, said Dorothy Lakner, a New York-based analyst at Caris & Co.

Entry Barriers

“They will face many entry barriers, as this is a very competitive market with lots of clothing retailers,” Lakner said in a phone interview. “It’s going to take time for Massimo Dutti until people really recognize the brand.”

Inditex’s no-advertising strategy may make it difficult to attract customers such as Schellhase. Zara and Massimo Dutti generally limit marketing to the decorations in their storefronts, relying on word of mouth to connect with consumers.

Still, Inditex may be ready to enter the U.S. with a second brand now that it surpasses San Francisco-based Gap in revenue, Nebrija Business School’s Diaz said. Twelve years ago, Gap had more than five times as much in annual sales, a difference that was “overwhelming,” the professor said.

“Inditex has gained the financial muscle, the size and the brand recognition needed to compete with Gap,” Diaz said. “Inditex had been scared of competing with Gap in its home market because the difference in size between them was huge. However, nowadays Gap is suffering, so Inditex is boosting its presence.”

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