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Runaway sales

Zara needs e-commerce push to become truly global

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Fiona Maharg-Bravo
Last Updated : May 19 2014 | 12:12 AM IST
Inditex recently nearly doubled the size of its headquarters in Arteixo, Spain. The small municipality in the northwest region of Galicia is the unlikely home to the world's biggest fashion retailer. It's hard to believe the trendy designs that dress millions of fashion-conscious Zara shoppers spring forth from unassuming buildings near the Atlantic fishing port of A Coruña.

In 2000, Inditex was a fraction of the size of Gap. Today, its market value is five times that of the US retailer, and 50 per cent larger than its Swedish rival Hennes & Mauritz (H&M). The Zara brand accounts for 65 per cent of global sales, and seven other brands make up the rest. But there are clear gaps in its global footprint. Two-thirds of Inditex sales are in Europe. At last count, it had 457 stores in China, 386 in Russia, but only 47 in the United States, where it launched in 1989. Market penetration is still tiny in most of the countries where it operates.

The group is betting that an internet push will change that. Web sales are key to luring in new customers in markets such as the US, with few stores but many virtual shoppers. Inditex is coy with numbers and does not disclose online sales or profitability. With shares trading at 25 times forward earnings - a seven per cent premium to rival H&M - there isn't much pressure to release figures.

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Inditex arrived fashionably late to online and only launched Zara's platform in 2010. It caught up quickly - the fast pace of e-commerce comes naturally for Zara. The small collections are constantly updated based on customer demand, avoiding markdowns. Inditex sources around half of its clothes from Spain or nearby countries. This costs more than manufacturing in Asia but response time is quick. Adapting Zara's nimble distribution network for web sales has been relatively easy.

Paradoxically, Inditex is also investing more in bricks and mortar. It recently spent millions on a makeover of its flagship stores, which are located in glitzy locations such as Manhattan's Fifth Avenue. Inditex does not advertise, so its retail network is key for its brands. Stores are getting bigger, but Zara.com could obviate the need for secondary stores.

Inditex still plans to grow space by around nine per cent a year. Here, e-commerce might help again, in two ways. First, the website is an important marketing tool where stores are scarce, like in the US. 

Second, the nearly five million daily visits on its websites provide a wealth of information on trends and potential store locations. Zara's fashion-forward cuts don't suit the average American. It is pricier than rivals. Figure-hugging grey sweatshirts with big blue flowers may not appeal to men in the Midwest, for example. Yet Zara.com's growth is so far strongest in the US, where consumers are fast shifting online.

How big can web sales get? For Mango, a much smaller Spanish rival with stores in more countries than Inditex, online sales were 6.7 per cent of the total last year, up 77 per cent. Mango launched its online offering back in 2000, and also sells through third-party websites like Amazon. Assume Inditex is slightly lower at five per cent of its €16.7 billion sales, and that it grows at a more modest annual 30 per cent. Online sales could then reach €2.4 billion by 2017.

Web margins are probably higher, too. Bernstein reckons savings in rent and labour translate into a five to 10 percentage-point difference.  

Inditex faces other headwinds, like a strong euro and wobbling emerging market currencies. Not all of its brands are as successful as Zara. But the model, boosted by e-commerce, remains intact. Inditex recently purchased a large plot of land adjacent to its bigger headquarters. It will probably need the space.

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First Published: May 18 2014 | 9:21 PM IST

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