CASE 34 Continued Growth for Zara and Inditex Circa 2008 ARTEIXO, SpainZara stores have set the pace for retailers around the world in making and shipping trendy clothing. Now Pablo Isla, chief executive of parent company Inditex, SA, says Zara needs to speed up. As rivals catch up, Mr. Isla is attempting one of the fastest global expansions the fashion world has ever seen, opening hundreds of new stores and entering new markets. To do that, as an economic downturn threatens sales, Inditex is changing the systems that have driven its success at Zara and its other store brands, to save time and money. Among the innovations, it is introducing new methods to enable store managers to order and display merchandise faster and adding cargo routes for shipping goods. \"There has been a clear change of mentality in the company,\" Mr. Isla, a former tobacco executive who arrived at Inditex in 2005, said in an interview at the company's headquarters here. The world's second largest clothing retailer by sales after Gap Inc., Inditex is responding to a predicament shared by other companies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. Low-cost carrier Southwest Airlines Co. is making big changes to fend off rivals that have copied its efcient operating model. Inventory-control methods at Walmart Stores Inc. are being mimicked around the world, and Google Inc. is updating its search engine to keep users loyal. The consumer slowdown is adding pressure. Inditex shares have fallen nearly 24 percent in the last 12 months, in large part because investors are worried about an economic downturn in Spain, where Inditex generates over a third of its $12 billion in annual sales. The company is pressing ahead with its expansion plans even as consumers are slowing down. In the US, retailers had their worst monthly sales results in nearly ve years in January, and some chains are planning to close stores and cut jobs. U.K. retailer Marks & Spencer PLC recently reported its worst quarterly sales performance in two years, and warned the pain could extend into 2009. The industry is watching the company's logistical makeover. Though it sells inexpensive trendy clothing\"fast fashion\" in industry parlance Zara has been so successful in luring high-paying customers that luxury fashion brands such as Gucci, Burberry, and Louis Vuitton have overhauled their own practices to send new fashions to stores more frequently. \"They're a fantastic case study in terms of how they manage to get product to their stores so fast,\" Stacey Cartwright, chief nancial ofcer of Burberry Group PLC, says of Zara. \"We are mindful of their techniques.\" In recent years, competitors across the globe have adopted Zara's methods. Italy's Benetton Group SpA now replenishes stores up to once a week. Los Angeles-based Forever 21 Inc. and Japanese apparel giant Fast Retailing Co., owner of the Uniqlo chain, can get new looks to their stores within six weeks. Even outdoor clothing maker Patagonia Inc. has doubled the number of new styles it offers every year. As the popularity of cheap-and-chic chains has zoomed, Zara's rivals Hennes & Mauritz AB of Sweden and Mango of Spain also have become fixtures on U.S. shopping streets. In addition to Zara, which makes up 60 percent of its business, Inditex owns seven smaller store brands, including the more-upscale Massimo Dutti and the youth-oriented Bershka. In the last 12 months Inditex added 560 stores, including entering new markets in Croatia, Colombia, Guatemala, and Oman, to reach 3,691 stores in 68 countries. It plans expansion of a similar scope over the next year. The first Zara store opened in 1975 in La Coruna, a port town near Arteixo in a remote corner of northern Spain. Its two key traits were an eye for customer tastes and a production process that started with the final price and worked backward to the most-efficient production. In the mid-1980s, local business-school professor Jose Maria Castellano, a technophile, joined Inditex as right-hand man to founder Amancio Ortega Gaona, and the company became a world-class logistical outfit, peddling "fast fashion." The first foreign store, in Portugal, opened in 1989, followed by New York. In 2001, Mr. Ortega took Inditex public and its stores are now on prime shopping streets around the world. Stores are stocked with new designs twice a week. Collections are small and often sell out, creating an air of exclusivity and cutting down on the need for markdowns. The company ships clothes straight from the factory to stores. Unlike competitors who manufacture most of their wares in Asia, Inditex makes two-thirds of its goods in Spain and nearby countries such as Portugal, Morocco, and Turkey. The retailer says the higher labor costs are offset by the flexibility of having production close to its warehouses and distribution centers, which are all in Spain. At "the Cube," as employees call their futuristic-looking headquarters outside La Coruna, sales managers sit at a long row of computers, monitoring sales at every store around the world. When a garment sells well-or flops-they quickly tell designers sitting nearby to whip up fresh designs. In the basement, stylists decide store layouts and window displays. One room is built like a shopping street, its walls lined with lit and decorated store windows that dictate how storefronts will look from New York's Fifth Avenue to London's Regent Street. Every two weeks, new decorations are photographed and e-mailed to stores to replicate. To speed up new store openings, Mr. Isla needed to cut start-up costs. Inditex now avoids store openings in slow months such as August. In the past, stores opened year-round, accruing costs from the first day even if sales took longer to build. Mr. Isla's goal for Inditex is to reverse a trend of costs growing faster than sales. It met that target in the first half ended July 31, 2007, when costs grew 16 percent over the same period the previous year, while sales increased 19 percent.In another move to cut costs, Mr. Isla installed software in store computers to schedule staff based on sales volume at different times. As a result, more salespeople work at peak times such as lunchtime or the early evening. lnditex says the more exible schedules shaved 2 percent off the hours staff work. Alarm tags are now attached to garments at the factories. In the past, at a big Zara location such as the four-oor store on Madrid's Alberto Aguilera shopping street, 10 people spent an average of 12 hours a week putting on the tags. Now, lnditex estimates, those salespeople spend 3 percent more time serving customers. \"In the past, a shipment would come in the morning, and the staff wouldn't have it unpacked till noon. They were just giving away three hours of prime selling time,\" Mr. Isla says. Shipping papers now label the newest collections \"NEWC.\" Those pieces are often rushed to the shop oor on plastic shipping m hangers and only later switched to Zara's customary light wood hangers. Zara regulars know to look for the black plastic hangers with the latest looks, says Dilip Patel, U.K. commercial director for lnditex. Store managers also use new hand-held computers that show how garments rank by sales, so clerks can reorder best-sellers in less than an houra process that previously took about three hours. These orders arrive, together with new pieces, two days later. Also, each of the company's various store brands shipped merchandise separately in the past, concerned that mixing even behind the scenes could dilute their images. Combining the brands into larger volumes has allowed Mr. Isla to launch twice-weekly air shipments with Air France CargoKLM Cargo. Planes from Zaragoza, Spain, land in Bahrain with goods for lnditex stores in the Middle East, y on to Asia, and return to Spain with raw materials and half-nished clothes. The company also started new shipments with Emirates Airline. Despite Mr. Isla's efciency gains, some experts caution that Zara faces challenges it is not addressing. Keeping a large amount of production close to home, some warn, loses its benets when a growing number of stores are far away. \"The efciency of the supply chain is coming under more pressure the farther abroad they go,\" says Nirmalya Kumar, a professor at London Business School. For now, the company makes up for some of the cost by charging more for goods sold overseas. In the US, for instance, Zara clothes cost up to 40 percent more than they do in Spain. However, that could lead to an inconsistent brand image, a risky strategy in a globalizing world, some critics warn. Mr. Isla says that when he joined the company, he considered a logistics center in Asia, where the company produces around a third of its goods, but decided it would only make sense if Zara had more stores in the region. He says the group's current logistics capacity will sufce until 2013. Circa 2009 Inditex SA, Europe's biggest fashion retailer by revenue, said Wednesday it plans a major push online for its agship Zara-brand, as it reported a 7.6 percent decline in net prot for the scal rst half. Inditex, which also owns the Massimo Dutti, Pull and Bear, and Bershka brands, is known for savvy use of information technology to tightly control production and inventories. It collects data from its 4,430 stores in 73 countries to detect trends and tweaks products based on consumer tastes. Compared with its main competitor, Sweden's Hennes & Mauritz AB, however, Inditex is a bit of a latecomer to the Internet. It started operating an online store for furnishing brand Zara Home in 2007, but had so far shied away from the web for Zara clothing because of the complexity of managing and selling its fast-changing collections online. So it caught many by surprise when it said Wednesday that it will launch online sales next year for Zara's Autumn/Winter 2010 collection. \"There had been some concern that Inditex was falling behind competitors on ecommerce,\" said Anne Critchlow, an analyst at Societe Generale. Initially, the company plans to launch the online store www.zara.c0m in Spain, France, Germany, Italy, the U.K., and Portugal. Later, it will roll it out in all of Zara's remaining markets. In the medium term, Inditex also may launch its other six formats online, said Chief Executive Pablo Isla. \"The Internet is becoming a more and more relevant channel, so it would be logical to continue expanding online with the other formats,\" he said. Neither H&M nor Inditex discloses what proportion of sales comes from their online outts. U.S. rival Gap Inc. generated about 8 percent of its Gap-branded sales in the U.S. on the web. For the rst half ended July 31, Inditex's net prot dropped to 375 million ($550.4 million) from 406 million a year earlier, while sales were up 6.6 percent at 4.86 billion. Sales in stores open at least a year, however, shrank by an annual 2 percent in the scal rst half, compared with a decline of .7 percent in the second half, and operating costs grew 8 percent as Inditex continued to expand its empire. The retailer opened 166 new stores in the rst half, down from 249 a year earlier. Inditex's gross margin fell to 55.3 percent of sales from 56.4 percent a year earlier. Analysts attributed the decline to a stronger dollar, which is making it more costly to source materials, and pricing pressures in the company's main market, Spain. The retailer gave a resilient trading outlook, saying sales in the rst weeks of its scal third quarter were up 9 percent when stripping out currency uctuation, the same growth rate as in the rst half. Inditex's much smaller U.K. rival, Next PLC, which launched online sales in 1998, meanwhile, posted a 6.9 percent increase in rsthalf net prot. Cost savings helped push net prot up to 1318 million ($217.5 million) from 123.3 million a year earlier, as revenue inched up to 1.51 billion from 15 billion. Next, which like Inditex sells clothes and home wares, warned, however, that like-for-like retail sales are likely to decline between 3.5 percent and 6.5 percent in the second half. At Directory, its catalogue and online-shopping business, which generates about 40 percent of operating profit, Next said it expects sales to rise by up to 2 percent. The retailer nevertheless raised its full-year forecast, saying it now expects to deliver pretax profit "close" to last year's f429 million, subject to its sales performance in the fourth quarter, which includes Christmas. Circa 2010 Spanish fashion retailer Inditex SA launched its Zara online store in the United States in the fall of 2011, seeking to widen its clientele beyond the big cities where it currently operates, chief executive Pablo Isla said. Early indications for the U.S. were good: A Zara app for Apple Inc.'s cell phone, the iPhone, was downloaded by more prospective clients in the U.S. than in any other market, Isla said. Speaking to Dow Jones Newswires after the presentation of Inditex's 2009 results, Isla said that more than a million iPhone users downloaded the app since it was first released in December of that year. "It's a market where Internet sales are very important, and it's a way of accessing all those clients that are interested in Zara," said Isla. The app allows shoppers to check out what's new in the Zara collection, and to find the nearest shop. Inditex, based in La Coruna, northwestern Spain, that year soared past Gap Inc. to become the most-selling fashion retailer in the world, with more than 4,600 stores. Zara, which is present in 76 countries, rolled out an online store first later that year in six European countries, and then progressively added the remaining countries where Zara operates. Inditex entered the United States early, in 1994, but expanded rather slowly, focusing store openings in large cities like New York, Miami, and Los Angeles. "We have to prioritize at every step, and ours are twofold: growing in Europe and in Asia," Isla said. Inditex is opening almost all of its new stores outside its Spanish home market, which currently accounted for 31.8 percent of group sales in 2011. The weight of Spain Page CS3-15 was expected to drop to 20 percent of total sales, while Europe, excluding Spain, was expected to rise to 50 percent and Asia, 20 percent. The remaining 10 percent would come from the Americas.Circa 2018 In 2018, Spain-based Zara holds the position of the world's largest clothing retailer. Owned by Inditex, its strategy is being hailed as one to bring people into stores and into the brand, rather than pushing clothing and branding out to the customer, as rival H&M is known for. It is introducing an augmented reality experience in its stores. Shoppers can use their mobile phones to see models wearing selected fashions when they click on sensors in the store or displayed on ARenabled shop windows. It has been initially launched in 120 stores worldwide; such technology is irresistible \"digital-honey\" to draw millennials into the store and shop. In studying these two oft-compared brands, the essential differences revolve around their overall approach to marketing. H&M still is xed on the old 4Ps of marketing modelProduct, Price, Promotion and Placewhere the company and the brand is the focus. Zara has replaced the traditional four P5 of marketing with what it calls the four EsExperience replaces Product; Exchange is the new Price; Evangelism is the new Promotion; and Every Place is the new Placethat puts the customer at the center. \"While Zara is an excellent purveyor of product, it also capitalizes on the store experience by continuously offering reasons for customers to visit the stores and catch the hottest trends at affordable prices,\" according to Shelley E. Kohan, assistant professor at Fashion Institute of Technology. The company's store location strategy is another aspect of its success. Zara currently operates in 2,213 stores across 93 markets and 39 online markets. The agship locations are located in the most critical markets that appeal to their most loyal shopper. \"Zara has the courage to continually strengthen their portfolio of stores by closing unprotable ones, opening new markets, and expanding sister brands in existing markets (Zara Home, Massimo Dutti),\" Kohan says