New fashion giant Zara takes the gap

Spanish fashion chain Zara has expanded so rapidly in recent months that it has overtaken its main US rival, Gap, to become the world’s largest clothing retailer. Beloved by proponents of fast-fashion, Zara has spread its reach across the world at a time when Gap has suffered from plummeting consumer spending in the United States.

Inditex, Zara’s parent company, recorded a 9% increase in sales to €2,22-billion in the first quarter of its financial year. It also benefited from the strength of the euro to edge ahead of Gap, which saw its revenues fall by 10% and recorded sales of €2,17-billion in the same period. The difference may be tiny, but Inditex claims it is significant: for the first time the Spanish group has inched past its American rival.

The group, whose high-street store brand Zara has led the charge, hopes to consolidate its lead over rivals later in the year as it continues to expand overseas in spite of the economic downturn. It is three years since Inditex overtook H&M to become the biggest clothing retailer in Europe.

But the rapid growth is nothing new for a company which first started in 1963 in the bedroom of chairman Amancio Ortega’s home in Galicia, northwest Spain, making bathrobes.

The first Zara store was opened in 1975, in A Coruna in Galicia. Rapid expansion followed across Spain during the 1980s, followed by the opening in 1988 of the first Zara store outside Spain, in Porto, Portugal.

Other shops followed swiftly in New York in 1989 and Paris in 1990. Now the group has nearly 3 900 stores in 70 countries around the world. Inditex has managed to get so far, so fast largely through the use of innovative management and logistics techniques, which have now become the subject of studies in business schools around the world.

In simple terms, it follows the same “oil stain” pattern when moving into a new market. This involves opening one “insignia” store aimed at building up its name in a new location, before setting up smaller shops of different brands to reach a certain density of outlets that allows it to create economies of scale and boost profit margins.

For a company that spends very little on advertising, its shops have always been its principal marketing tool, so many are purpose-built to look like fashion boutiques.

The key to Inditex’s brand diversification lies in the group’s vertical integration. Almost all the phases of developing and selling a new product are carried out in-house — from design and production to logistics and sales.

Shop staff are encouraged — even expected — to keep Inditex designers in touch with any fashion trends as soon as they spot them, so the group can turn them around as soon as possible. A small team of in-house designers then works to keep up — if not ahead — of trends such as its 2008 autumn/winter collection and get them on to the high street as soon as possible.

An Inditex spokesman said: “The success of the model lies in being able to adapt what you’re offering in the shortest time possible to what clients want.

“For Inditex, time is the principal factor to take into account, more so than the costs of production.”

Last year, Inditex saw profits rise by 25% to €1,25-billion. Zara remains Inditex’s most important brand, with sales of €6,26-billion in 2007, which represented two-thirds of the group’s total revenues of €9,43-billion. Inditex has managed to branch out to a younger generation with its Bershka brand.

This is where rivals have struggled to attract fickle, younger customers.

In particular, Gap has found that as its core customer base has aged and looked elsewhere, the chain has struggled to attract younger shoppers. The company’s Banana Republic chain in the United States has fared better, although a cheaper brand, Old Navy, has been a patchy performer. For much of the past four years, Gap’s sales have been falling. Last year the company brought in a new chief executive, Glenn Murphy, to turn around its performance, but just as things were showing signs of improvement, the US economic slowdown caused a dip in consumer spending.

Gap has 3 100 stores globally and employs about 150 000 people. A Gap spokeswoman declined to comment on the loss of the top spot to Zara. —

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