Research
The Evolution and Digital Strategy of Inditex, the World's Largest Apparel Company Behind ZARA
2022-10-14
Inditex (Industria de Diseño Textil, S.A.), one of the largest apparel companies globally and the owner of the ZARA brand, exemplifies the SPA (Specialty store of Private label Apparel) model, where it designs, manufactures, and sells its own products. Besides ZARA, the company owns other brands such as Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, ZARA HOME, and Uterqüe.
Although Inditex was impacted by the COVID-19 pandemic, particularly in its key markets of Europe and the United States, the company's robust digital strategy has helped it maintain a market capitalization of approximately 9.3 trillion yen (as of September 30, 2022). Inditex continues to hold a leadership position in the industry.
In this article, we will discuss the business strategies that Inditex has implemented to build a strong value position and how the company is pursuing its digital strategy in the era of after-corona.
Inditex's business strategy that created ZARA
ZARA, a Spanish brand founded by Amancio Ortega in 1975, became part of Inditex when the company was established in 1985. This marked the beginning of significant brand development, including international expansion to cities like New York and Paris1. ZARA has succeeded in winning the hearts and minds of its customers by selling mainly trendy fashions at affordable prices. Today, ZARA has grown into one of the world's largest apparel companies with approximately 6,700 stores in 88 countries (ZARA and ZARA HOME account for approximately 70% of the Inditex Group's total sales).
In general, items classified as trend fashion are prone to fluctuating sales from season to season. In addition to frequent losses due to unsold inventory and opportunity losses due to shortages, there is also a significant workload in dealing with inventory and the calculation of valuation losses.
In response, Inditex adopted a strategy that diverged from the industry norm of holding minimal inventory in small batches at the start of each season. Instead, they would adjust their inventory by adding products based on customer demand, informed by sales trends and fitting room data.
To grow to its current scale, Inditex has focused on the following specific initiatives
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ZARA has succeeded in meeting customer expectations and increasing the frequency of store visits by offering new products in a range of sizes in its stores twice a week on a fixed day without fail. In order to increase the speed and accuracy of its product planning, ZARA has focused on building an operation that gathers quantitative data such as sales and POS as well as information on customer response from store staff around the world to the Spanish headquarters. The more new products are introduced, the more feedback information is accumulated from stores around the world, making it possible to plan and sell products that better reflect customer opinions.
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Inditex has expanded its scale by locating production bases in neighboring regions such as Spain, Portugal, and Morocco, rather than in areas with relatively low labor costs. In order to send goods to stores around the world in a timely manner, we have worked to speed shipping to anywhere in the world within 48 hours, including the use of air freight at the expense of costs for shipping outside of neighboring European countries. We also built a production system that emphasizes speed over cost, including early adoption of automatic sorting and picking systems, which are now being introduced.
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With the policy that stores are the greatest advertisement, especially during the growth process of the brand, we have prioritized opening large stores in favorable locations in global cities and landmark areas rather than spending large amounts of money on promotions. In order to keep customers coming back to the stores more often and to keep them engaged, the company frequently changes the product layout in the stores and invests aggressively in window displays and upscale décor.
The company's short-cycle merchandising (merchandising), which is said to take two to four weeks, has been recognized as a growth driver for Inditex and ZARA, and its ability to consistently execute everything from planning to production and store operations is also notable. However, the company's ability to execute consistently from planning to production and store operations is also worthy of special mention. As a result, Inditex has not only grown to become the world's largest apparel company in terms of sales, but also boasts a higher profit margin than other SPA-type apparel companies (15% operating margin in FY01/2022)2.
Inditex's digital strategy accelerated by the Corona disaster
The global COVID-19 pandemic significantly impacted Inditex, a company that had traditionally maintained its market position by offering superior value through its brick-and-mortar stores. Strict lockdowns and behavioral restrictions in major European and U.S. cities, Inditex's key markets, led to a significant drop in store sales throughout 2020, resulting in lower revenues and profits for the fiscal year ending January 2021 2.
Despite the inevitable damage caused by Corona, Inditex has accelerated its digital strategy in the face of the Corona disaster. As a result of its previous aggressive investment in e-commerce, the ratio of e-commerce to sales has remained higher than that of Fast Retailing, which is in a similar industry, but since 2020, when the Corona disaster struck, it has grown even more significantly23.
In June 2020, under the concept of "Global Fully Integrated Store & Online," FAST RETAILING will close 1,000 to 1,200 stores, mainly small stores and stores with overlapping trade areas, to further promote its omni-channel strategy. The company has also indicated its policy to promote its omni-channel strategy more strongly. In addition, the company announced a DX investment of 1 billion euros (approximately 120 billion yen at the then current exchange rate) between 2020 and 2022, and has announced that it will improve the digital experience using its own apps and strengthen the opening of large stores that can respond to digitalization4.
The main digital initiatives that Inditex (ZARA) has implemented in the recent past are as follows.
Making customer contact seamless through an app.
- In addition to traditional e-commerce functions, the company has successively expanded functions that can also be used in stores, such as "CLICK & FIND," which allows users to search for product locations by store, and "CLICK & TRY," which allows users to reserve fitting rooms.
- Enhanced measures to encourage store visits, such as "CLICK & GO" (BOPIS = Buy online, Pick up in store), which allows customers to pick up items in stores after ordering via the app, and a mobile payment function.
- Barcodes and QR codes have been added to product tags so that customers can check detailed product information on their smartphones without having to ask a staff member in the store.
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Digitization of in-store operations.
- Implemented a service that allows delivery directly from the storefront to the customer, rather than from EC-dedicated inventory and warehouses. In addition to improving operational efficiency by integrating in-store and EC delivery operations, the ratio of same-day and next-day deliveries has been increased.
- Completed the introduction of RFID (Radio Frequency Identification) for all products and achieved SINT (Single Inventory Integration) for stores and EC in each country, further improving inventory efficiency.
- Promoted store renovations to accommodate digitalization, including interactive digital fitting rooms and self-checkout systems
In addition to its traditional strengths of engaging in-store experiences and operational excellence, Inditex is making bold and rapid digital investments like the ones described above to create a smooth customer experience that blends online and offline. In the future, we expect to see more and more new OMO (Online Merges with Offline) type store formats like this one, not just from Inditex.
In terms of KPIs and financials, the company's EC ratio was 27% in FY01/02, one year ahead of its original target of 25% by the end of FY2022. In addition, Inditex's app has reached 146 million active members and 228 million social media followers worldwide (as of January 2022)2. Of course, the decline in store sales due to the Corona disaster has had a negative impact on overall sales, which is the denominator, and thus the high EC ratio, but it can be inferred that the online experience and OMO strategy offered by the company has received a certain amount of recognition.
Inditex has set a new target of increasing its EC ratio to more than 30% by 2024, and intends to continue to aggressively pursue its digital strategy and investments.
About Inditex's new initiatives
Inditex has maintained a high growth rate and profitability for many years as a leader in the industry, but in the future, in addition to competition from fashion apparel companies such as Fast Retailing and H&M, we expect to face increasing competition from tech giants such as Amazon, which is planning a full-scale entry into the fashion market, and emerging apparel companies such as SHEIN, which is experiencing rapid growth, especially among the Generation Z. In addition to competition from fashion apparel companies such as Fast Retailing and H&M, competition is expected to intensify with tech giants such as Amazon and emerging apparel companies such as SHEIN, which are growing rapidly, especially among Generation Z consumers. In particular, SHEIN's operating company, Roadget Business, has been growing rapidly, with its enterprise value exceeding that of Fast Retailing and Inditex, and the company's future global expansion is attracting attention to changes in the competitive environment5.
In addition, public focus on ESG and sustainability continues to grow, and as an industry leader, the company is expected to address more complex issues, such as transparency in its production and disposal processes. It is undeniable that the casualization of people's lifestyles and fashion, which has changed after Corona, may affect ZARA's value proposition of trendy fashion and office fashion demand.
In response to these challenges, Inditex has undertaken several initiatives, including the use of recycled polyester and linen, the adoption of renewable energy in production facilities, garment recycling, and the implementation of sustainable supply chain programs. A notable new initiative is the creation of the Sustainability Innovation Hub, aimed at promoting sustainability innovation. To date, more than 30 R&D projects are underway in collaboration with around 150 startups (new carbon capture Lanzatech, which has developed a new carbon capture technology, and CIRC, which has a textile recycling technology). In its most recent financial results for fiscal year 2021, Inditex highlighted that the percentage of renewable energy used by the company was 91%, and that the percentage of products that meet ZARA's "Join Life" sustainability commitment reached 47% of the total. The company is actively engaged in initiatives and information dissemination 2.
In addition to sustainability initiatives, the company has also launched a new collection of sportswear for athletes called "Athleticz" and the "ZARA Origins" series, a basic yet contemporary line, which, along with the "ZARA HOME" interior design brand, has recently We are making strategic investments in response to changes in the business environment, including a shift from trend fashion brands to lifestyle brands that are more in line with the times and people's lifestyles.
Building on these non-digital strategic initiatives, the omni-channel strategy is expected to accelerate in the future. "6 in which he mentions the importance of a global, fully integrated omnichannel.
Inditex boasts a business model capable of adapting to any environment and an international reach underpinned by a solid strategic approach. inspiring fashions combined with a fully integrated omnichannel offer in each region, and supported by technological innovation, has enabled us to Its inspiring fashions combined with a fully integrated omnichannel offer in each region, and supported by technological innovation, has enabled us to extend our store leadership to the digital world, with online sales now accounting for one-quarter of the total.
In addition, to create new digital experiences, we have collaborated with South Korea's Ader Error to develop avatar clothing through ZEPETO, an avatar creation application, and are working to expand our services in a wide range of digital domains, including the company's first foray into the Metaverse7. 7].
Through cutting-edge digital technology and sustainability innovation, Inditex (ZARA) aims to be a leader in DX and ESG within and outside the industry. We will continue to closely monitor Inditex's future efforts, not only with regard to its digital strategy.
In this article, we have introduced the strategies that have created Inditex's competitive advantage and its DX initiatives. We hope that this article will be of some help to you in your discussions and strategic considerations.
脚注
Inditex Careers / Inditex - History ↩
Fast Retailing IR information ↩
ZARA to close 1,200 stores, less than 20% of the world's stores, and increase EC ratio to 25%. ↩
China-based clothing retailer SHEIN rapidly expands, its corporate value surpassing that of UNIQLO. ↩
Inditex Annual Report 2021 CEO's Statement ↩
ZARA collaborates with "Ardor Error" from South Korea, first foray into Metaverse with ZEPPET (FASHIONSNAP.COM) ↩
About the Author
Kohei Minami. After graduating from Keio University with a degree in economics, he worked at Deloitte Tohmatsu LLC and PwC Advisory LLC before joining Rakuten Group, Inc., where he led and executed M&A, JV investments, and startup investments. In 2022, he joined ROUTE06 Inc., where he is responsible for finance, business development, and marketing as the head of the President's Office. He is a certified public accountant.
