Armani on a budget?

Most people know of Zara, but how many have heard of Inditex, the parent company that is transforming the playing field of the fashion industry, and is taking the Middle East retail market a notch up.

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By  Massoud Derhally Published  January 30, 2002

|~||~||~|With construction mania going on in the region and a proliferation of international retail brands in the Middle East, one brand that is sure to expand the number of its outlets from the Gulf across to North Africa is Spanish based Inditex.

Inditex, as many of you may not know, is the world’s third largest clothing retailer and it’s doing more than simply ruffling feathers, it’s reinventing the fashion industry and making its mark in the retailing industry in the Middle East. The company has 24,000 professionals, 1,271 stores in 35 countries and sells 90 million garments a year. Its makes $2.6 billion a year in total sales and has an average annual growth in net revenues of 28%. Foreign sales account for the larger portion of sales at 52%.

The company, which was started by Spanish Tycoon Amancio Ortega Gaona in 1975, is worth $6 billion after going public last September. If Inditex does not ring a bell yet then Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius and Oysho. Every Inditex brand has a fascinating story to tell but Zara is clearly the star performer, contributing 75% of the company’s sales.

The company has been growing exponentially and growing too fast can dilute a brand name, but with Inditex it is exactly the opposite, expansion has enabled it to successfully market its merchandise in various markets. After conquering the European continent it has branched out to Asia, the Middle East and North and South America. The company has 1,100 stores in 35 countries and sells 90 million garments a year. Inditex has 24,000 professionals around the world, and an average annual growth in net revenues of 28%. Foreign sales account for the larger portion of sales at 52%.

“Our experience has confirmed that fashion is an international phenomenon. Inditex is present in 35 countries of different geographical and cultural areas. Because of this we can conclude that there are no borders that stop us from sharing the same clothing culture. Our retailing chains follow the trends that the market demands,” Jose Maria Castellano, deputy chairman and CEO of Inditex told Arabian Business.

In the Middle East, Inditex’s presence is becoming more visible by the minute. In Saudi Arabia, the company has 14 stores, UAE 10, Kuwait 4, Lebanon 4, Qatar 2, Jordan 1, and Bahrain 1. Only Oysho, the lingerie chain that Inditex launched last September, has no presence in the region. With its six fashion chains, Inditex has been able to divide the market into segments. More importantly, the parent company provides a high level of synergy to its chains in terms of organizational structure and knowledge management.
In the Middle East, as in other regions where the company does not have a deep understanding of the market, it has decided to collaborate with one local partner. In each one of these markets, Inditex reached an agreement with a company that it believes is dedicated to fashion distribution and consolidation of the textile retailing business in a particular country. In the UAE the partnership is with the Daher Group, who also run Virgin Megastores.
An integral component of the fashion industry is time and the speed at which a garment can be manufactured, distributed and placed in a store. Inditex’s investment in two dozen manufacturing plants has without doubt enabled it to master the art of manufacturing and distribution, much like the Japanese did with the manufacturing of cars with their ‘just in time’ philosophy.

Today for instance, Zara, which accounts for 75% of Inditex sales, gets its merchandise in two to three weeks. That is not the time it takes to ship the products. Rather, it’s the time it takes for a design team to sketch, the manufacturers to stitch, and a shop in the Middle East to shelve the merchandise. It takes a normal design house usually 6 to 8 months to do what Zara does in such a relatively short period of time. Daniel Piette, fashion director of the French luxury goods group LVMH, has called Zara “possibly the most innovative and devastating retailer in the world.”

Morgan Stanley Dean Witter who took Inditex public last May is just as enthusiastic. Zara, it says in a recent report, “is way ahead in its ability to respond rapidly to fashion trends and inventory supply.” Goldman Sachs has singled out Zara among the three “global winners” of the fashion industry (the others Gap and H&M). “It’s Armani on a budget,” says the Goldman Sachs report.

It is certainly an impressive time cycle that makes one think twice. “From design to distribution of the garments there is a leading time of two to three weeks in case we already have the fabric in our factories. The delivery takes practically the same time to arrive to all the geographical areas where we are present. In any case never takes longer than 48 hours,” explains Castellano.

This mechanism of manufacturing has helped the company invigorate fresh ideas into its group’s collection but it has also helped minimise the costs associated with the manufacturing and distribution process. “The vertical integration in which the Inditex model is based, allow us to have much more efficiency in all the processes of the production chain, which implies a better-cost control,” explains Castellano.

But that’s not the only factor that contributes to the success of Inditex. In the extremely competitive and global fashion industry, “it is crucial to know what customers will want before they know they want it”, says David Stauffer of Harvard Business School. Unlike the regular four collections stocked by design houses, Zara’s 100 designers are always on top of the ball, keeping their fingers on the pulse by checking the trends amongst teenagers, people on the street and prowling hangouts of target consumers, according to Andersen’s European deal survey.

Inditex is also able achieve so much in so little time because “It has bet heavily on the integration of its production process (design, purchasing, production, logistics and store management) obtaining spectacular results,” says Javier Mata, analyst at Banesta Bolsa, a Spanish investment bank that covers Inditex. While Inditex does pay close attention to speed and flexibility it does not neglect quality. “We constantly try to improve our quality in every single step of the production process, which, afterwards, reverts in the quality of the products,” says Castellano.

Stores in the Middle East carry the same collections as stores in Paris, London or New York and the only difference is the change of season between the Northern and the Southern hemispheres, according to Castellano. The company invests little in advertising and that is “because the main image of Inditex is the shops themselves, which are located in the main commercial areas of the cities,” says Castellano.

“We only use the conventional publicity in very specific moments and just with an informative purpose, such as the opening of a new store or the beginning of the sales period. Although at this moment expansion is focused mainly in Europe, Castellano says Inditex will keep on opening shops from all of its chains in countries it already operates in and that include the Middle East. —by Massoud A. Derhally

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