2021 OCTOBER
CASE STUDY
HOW ZARA WADES
THROUGH
THE PANDEMIC
Written by Andrew Sia
Introduction
Zara is the crown jewel of the Inditex Group and it is known for its fast supply chain, from design approval to market takes only three weeks, and the production takes place on the Iberian Peninsula. With its 700 designers that work only in their headquarters at Arteixo in the region of Galacia. It is churning out 65,000 new styles a year, delivering the latest garments to its network of stores at least twice a week.
What went through with Inditex during the pandemic
At the beginning of the coronavirus, and it was on March 9, 2020, the company stopped all the new stock buying but honoring all those existing orders. A week later, it wrote off €287 million in inventory and suspended dividends. For the three months until the end of April, the company made its first loss of €409 million since it became the public listed company.
In mid-April, Inditex began to fulfil online orders from its shops, while the shops were remaining closed. Combining its tracking system and the fast supply chain, it was able to operate the business through online.
Inditex is known for its operating of 6,700 stores across the world but during the coronavirus period, almost all of the physical stores were closed. During that time, like everyone else, Inditex was depending solely on the selling through online. The company is handling one billion clothing items each year and they are using the RFID, better known as radio-frequency identification, to read the tiny circuits and antennas hidden in the security tags fastened to the clothing in the factory floors in the Inditex factories.
Inditex turns its stores into mini-distribution hubs by merging its online with bricks and mortar presence. This operation reduces the inventories, allows the stores to fulfill online orders in a very cost-effective manner. With its store network of over 6,000 which is equivalent to 6,000 regional warehouses that can ship out orders very efficiently.
This kind of operating system is extended to its sister brands—Massimo Dutti, Pull& Bear and Stradivarius and the rollout was completed in 2019, made it appeared that it was just in time for the pandemic.
Inditex took up online in 2010 and in 2019 online represented only 14% business of its €28 billion in total sales. But in 2020, this online portion jumped to 32% and it used the backrooms in its stores to pack and dispatch €1.2 billion orders taken from mobiles and computers.
By the end of 2020, Inditex’s online revenues soared 77%, more than three times than the peers whose overall increase were 22% in the global online clothing and footwear market.
Inditex has successfully integrated its online sales with its store sales. Last year its online sales reached €6.6 billion and became the world leader in online fashion.
It is using the “pull” system rather than the “push” system, it is all about to produce what sells rather than to sell what one makes. It is said that everyday there are 20 million people viewing Inditex products online on its app or social media.
Customers still prefer to visit the prime locations of the Zara shops and that is the heart of Inditex for what it is all about. Its founder Amancio used to say that the shop windows are the best place for advertising, and its prime shops have this advantage.
Following is what Inditex’s chief executive, Pablo Isla, told us, “The essence of Inditex’s strategy is the same as ever: flexibility in our business model—the integration of logistics, manufacture and design; production close to hand; and a capacity to react from time to time. Now with the integration between the digital and physical on top of all these, year 2020 was the key year in the strategic transformation of the company from every point of view”.
In recent years, Inditex and the other fast fashion companies are facing criticisms from the environmental activists, and one of the key areas for sustainability is the fast fashion clothes might have just been wearing twice. This is more of the behavior of those followers of fast fashion which is something that is hard to address to.
Like all the brands, Inditex can emphasize about their sustainability in areas like—using less water for dyeing, stop using single-use plastic, apply biodegradable yarns to increase the sustainability.
Lately, the labor activists are showing concerns about where the manufacturing are taking place. At this moment the French prosecutors opened a probe into Zara and three other fashion brands over the alleged use of forced labor by Muslim minority Uyghurs in Xinjiang province in China for the cotton production from there. With this Inditex dare not to make any statement but remain silent. Most of the fashion brands have observed for what happened with H&M over there and they faced the pressure from Chinese government and its consumers. We have to know that Inditex has 320 stores there.
Going forward Inditex is still planning for significant investments, such as spending €1.7 billion on stores and €1 billion on technology over three years. The group’s 15% revenue is still coming from Spain, but the country’s economy is suffering continuously from the pandemic and the growth will have to come from other markets.
During this time many rivals of Inditex closed their stores and more online only retailers come with lower prices and a wider range of products. One of the rivals—Shein from China who comes with a wider range of products and sell at very low prices. Shein can turn products around in shorter time, between product design and delivery than Zara’s own supply chain.
My personal opinion about the business model of Inditex
I feel that it is time I should express my opinion about Inditex and I would like to share my analysis as the following:
Inditex has several brands and the most distinguished ones are Zara, Massimo Dutti, Pull&Bear, and Stradivarius who have all been in business for more than twenty years. Many of these brands are serving a group of customers who are relatively more mature and affluent, and they are more conscious about sustainability, ethical credentials and hopefully that they can afford products at higher price with more value to offer.
With the new players out there, the extensive use of social media and online market with business model that does not hold stock of their own. Their business reacts to “read and response” which is nothing wrong but can only be faster and sharper. This group of fashion retailers we can call them “faster fashion”.
We have also seen those online retailers, such Asos and Boohoo, who are venturing into bricks and mortar. Both announced partnership with Nordstrom in the US and Alshaya in the Middle East. The idea is all very good, but in actual practice they may face problems that they would need to deal with. The relationship between the online and offline is separated with a very thin line in the eyes of the consumers. Especially during this time at the pandemic, the changing rooms in the stores are not fully operated and the return of goods can end up in chaos. Or if the customers have access to the changing room where they would try out the garments but would do their purchase from home without standing in queue in the stores. Then there is always the issue for the return of goods. We have noticed customers who bought online but return to stores. I am not really convinced that this arrangement between the two business entities can work seamlessly.
We are not going to speak about the second-hand clothes and rentals, I do not like to compare the business models here.
I am coming to my closing that Inditex has a business model which is already very admirable. I am very surprised to find them coming out from the pandemic during its first year 2020 reacting stronger and better. They seemed to have been able to make the very good use of their physical stores and turn them into shipping for their online orders. It is complicate to work and they seemed to have function in the way they like which is very important.
If Inditex can go leaner, and start to look seriously in sustainability and communicate with the customers with the bar code or QR code and make them feel connected. It is important to tell the customers that we are in this together and sustainability is a joint effort.
I particularly like their “pull” system and it all about to make what it sells rather than to sell what it makes. This is something that all the retailers should keep in their doctrine.
Lastly, sell the products a notch higher and forget the promotion unless it is the sharing of a totally new experience that you would like to share with your customers. After all we come to this world to enjoy and the spoil ourselves whenever we can. We are not here to take advantage. But remember to share what we have in excess as the others who are less fortunate than us can use.
Founder of Inditex - Amancio Ortega
Here is the background about Inditex’s founder Amancio Ortega who is 85 years old and still owns almost 60% of the stock. He is one of the richest man in the world with net assets estimated at close to $70 billion. He is holding most of it through his personal investment vehicle, Pontegadea, and this company is specialized in prime real estate across the world. He stepped down as the chairperson of Inditex in 2011.
Inditex chief executive, Pablo Isla, has been in charge for more than 15 years and he is in daily contact with the founder.