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, universally flattering mid-length frock has become so ubiquitous that someone has created to account for wearing it to the same event.
The frenzy around the garment epitomizes the ability of the parent's brand, Inditex SA, to ride a sartorial wave.
But the company, founded by Spain's richest man, Amancio Ortega, is coming under intensified pressure. Rivals in the U.S. and Europe are catching up to its short production lead times. Meanwhile, cheaper upstarts such as Associated British Foods Primark and Boohoo Group Plc, 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 proofs its mettle now more than ever. Otherwise, its advantages risk being gradually 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. But Inditex’s brands, led by Zara, which accounts for about 70% of group sales, produces most of their garments within the current fashion season. About 57% of products are made in their headquarters in Arteixo, northern Spain, including facilities in Portugal, Morocco and Turkey. This means clothes can go from design to shop to within a matter of weeks.
Just as important as the weather is its unique process of developing ideas.
It starts with Zara's army of store managers, who communicates what's selling and what trends are emerging to the commercial team within Inditex's sprawling head office. This is not some complex exercise on 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 the competitive landscape has become more difficult. Progress from here will be much harder work.
Social media makes it easier for retailers to see what is hot. Just take those polka dots: Even Topshop, now widely regarded as a fashion has-been, also managed to produce a stand-out spotty dress.
At the same time, retailers from Britain's Next Plc to Gap Inc. in the U.S. 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 the high cost of fulfilling these sales squeezes profitability. But the process is not all that different from what it is already doing, and that helps shield your 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. Indeed, Inditex is a digital company long before the rise of e-commerce.
Despite its advantages, Inditex's operating margin has been shrinking for the past six years. Consequently, the group is opening fewer, larger stores, and plans to increase space in prime locations by 5-6% this year. This is the right strategy, but it means that it 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 officer to Carlos Crespo. Inditex is clearly trying to get the maximum benefit from the business model, in order to continue to stay ahead of rivals.
At its heart is fashion. We are at the moment in retailing in which technology is often framed as the lead of any success or turnaround. Investors have been dazzled by newcomers StitchFix Inc. and Revolve Group Inc., which to 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, which is exactly where every organza halter-neck top and utility boiler suit is, much of its dominance is actually two that people want – even before they do.
Though cost control is always important, what is crucial for Crespo is ensuring that Zara's fashion compass stays perfectly calibrated. It is not necessary to ensure that it does not emulate rival Hennes & Mauritz AB and end with batteries of unsold stock.
As sales growth has slowed in recent years, there have been questions about whether or not Inditex has retained its fashion flair, particularly with few discernible trends to chase.
That polka-dot dress shows that it is still capable of churning out the blockbusters. To stay ahead of more nimble rivals, it must produce a steady stream of equally Instagram-friendly fashion hits.
To contact the authors of this story: Andrea Felsted at firstname.lastname@example.org Sara Halzack at email@example.com
To contact the editor responsible for this story: Jennifer Ryan at firstname.lastname@example.org
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked on the Financial Times.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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