Review about the story and business strategy of Inditex Group, the owner of Zara brand, and its founder Amancio Ortega
On one side of the room there is a digital mirror which allows you to try on clothing without removing it fr om the shelf. Right next to it is a self-service checkout where you can pay for your items and remove any security tags without requiring assistance fr om personnel. This is how retail will operate in the future.
They are in a room filled with new technology, located in a massive industrial complex in Arteixo, a small town based in northern Spain. This industrial estate may look like any other across the globe, but the difference here is that it is home to the largest fashion retailer worldwide. This is a company which has expanded the boundaries of what can be expected fr om a clothing store on the high street.
This offers a rare insight into the world of Zara’s owner, Inditex. This is a company which does not advertise, relies quite heavily on the managers in its stores and still manufactures its products in Europe.
It is a well-known fact that this company is private and protected, a legacy of Amancio Ortega, its founder. He was born in northern Spain during 1936 to a humble home and today is the third richest man globally.
Ortega, with his business partner, Rosalia Mera, opened their first store in A Coruna, close to Arteixo, during 1975. Their first choice for their store name was Zorba, as Zorba the Greek was their favorite movie, but a bar down the road had already claimed the name. As the name Zorba was already on their store, they wanted to make use of as many of the letters and that is how Zara came into being.
This form of efficiency and flexibility is evident at Inditex, a company which started as Zara, but now owns 6500 stores in 88 countries and includes seven other brands, including Massimo Dutti, Pull & Bear and Bershka.
Ortega operates a unique business model. The stores across the globe receive two deliveries per week and the products designed at the head office are delivered to stores three weeks later. This is a tight turnaround time, which is aided by the fact that around 51% to 55% of their products are manufactured in what is called ‘proximity’ markets, Portugal, Morocco, Spain and Turkey, rather than in Asia.
The success of the company can be attributed to the link between its in-house designers, stores and factories.
Store managers submit orders to headquarters twice a week, based on sales data and what shoppers like and dislike. The order is compiled by the commercial team, after they have added in new products and balanced it with demand from other stores. It is then sent on to the manufacturing division, which results in the store receiving their order within two days.
Simultaneously, the commercial team works hand-in-hand with the in-house designers, who are located next to them at the Inditex HQ. Once sales trends have been identified, either from the catwalk or store evidence, the two teams work together to develop products to meet these trends. New fashion trends are produced in small quantities, which makes it easy to discard flops after their initial appearance of to follow up hit trends quite rapidly.
The design and commercial teams are huge. This structure allows the product range in Zara stores to evolve quickly. Instead of relying on a single product range for each season, the retailer produces four or five bouts of new products after the initial launch of the season. Store managers and the commercial team are able to examine the new ranges in a mock high street of stores, which is built into the HQ setting.
The store managers have great influence and this means that they are paid more than the average for the industry. They are also able to earn 100% of their salary in bonuses offered when they hit their sales targets.
Every item that is sold through Zara goes via Spain, even if it was manufactured in China for a Chinese store. At the base in Arteixo, which houses 6000 staff from 30 countries, there is a carousel within a tunnel network which moves the clothing from the factories on-site, which produce 5% of the products, to the massive distribution area. The clothes continue their travel along the carousel in the distribution center until it reaches its allocated box. The boxes are marked for individual stores and are packed with different product types, which will reach its destination within 36 to 48 hours.
This speed and flexibility is what has helped the company to expand overseas. It can adapt quickly if clothing is not selling in a particular store.
The company is still in the expansion process. Like-for-like sales have increased by 17% over the past few years and it has been able to open 11m square feet of new shop space. It regularly opens new stores in over sixty countries globally on an annual basis.
The plan is to expand the shop space of the company by 8% to 10% annually over the next three to five years, including in the UK wh ere it already has 99 stores. It also includes China, wh ere the company has 450 shops. At its present growth rate, China may well become its biggest market other than Spain over the next few years.
This road shows the distance the company has come since its first store was opened in A Coruna wh ere it still sits next door to a dentist, on a street corner. The methods adopted by the company have remained the same, which is evident by Ortega who still owns about 60% and although he now holds a non-executive board position, he still enjoys lunch in the staff cafeteria on a daily basis.