Fashionably wealthy
Monday, 25 August 2008
Last Updated: Monday, 25 August 2008
By James Thomson
A unique model for supply has snared fashion label Zara accolades in the global fashion stakes. Here's how founder Amancio Ortega stitched up the number one spot.
Last week, Spanish clothing company Zara became the world’s largest fashion retailer when its first quarter sales rose 9% to $3.75 billion, just in front of US giant Gap, which posted a 10% fall in sales to $3.68 billion.
This news reportedly made Amancio Ortega, the founder of Zara and its parent company Inditex, extremely happy.
We say “reportedly” because despite being Spain’s richest person with a fortune of $23.2 billion, Ortega is incredibly private. He has never given an interview to the media and is said to have been photographed only twice.
Despite his reclusiveness, 72-year-old Ortega is almost universally acclaimed by fashion commentators as the man who revolutionised clothing retailing by building a business model based on speed, technology and flexibility.
As Louis Vuitton fashion director Daniel Piette said recently: “Zara is possibly the most innovative and devastating retailer in the world.”
Ortega joined the rag trade early, working as a delivery boy for a shirt maker at the age of 13 and later as a draper's and tailor's assistant. In the early 1960s, Ortega became the manager of a local clothing shop.
In 1963, Ortega and his first wife started a business from their home making robes and lingerie and selling them to local shops. At the age of 27, Ortega started his clothing factory.
Ortega’s early clothing industry experiences taught him two things. First, clothing makers who could deliver products directly to customers had a distinct advantage in terms of costs, profit margins and flexibility. Second, working in the clothing shop he learnt than only rich people could afford designer fashion. The middle class market was badly underserved.
The first Zara store open in 1975 in the Spanish town of La Coruña in Galicia. Using a strategy that would become one of the hallmarks of Zara’s expansion, Ortega picked an extremely prominent shop opposite the town’s biggest department store to attract maximum foot traffic. Over the next decade, Ortega expanded rapidly across Spain.
But in 1984, Ortega met someone who would change his business – and the fashion industry – forever. José María Castellano was a local professor and computer boffin who joined Inditex and helped develop a business model that allowed clothing to go from drawing board to shop floor in as little as 10 days.
The model relies on Inditex having total control of design, production, distribution, marketing and sales – complete vertical integration.
The process starts with Zara’s team of designers (of which there are reportedly 200) monitoring the catwalks and adapting (some would say copying) the designs they think will work. Cloth is then prepared and dyed in northern Spain and Asia before being sent to Zara for cutting and then on to contractors for sewing. The clothes are sent back to Zara’s warehouse and then directly to the stores. The whole process usually takes just two weeks.
The speed and flexibility of this model are crucial to its success. Zara essentially offers its retail stores new product ranges every fortnight, reportedly producing 22,000 different products each year, twice or even four times more than rivals. This gives the company the ability to respond quickly to changing trends, fads or even weather patterns.
The ability to quickly increase or decrease a product range also means Zara can keep its inventory costs lower than its rivals, which in turn reduces the need for markdowns on dud products, the bane of every retailer’s life.
The constantly changing product line-up encourages customers to make repeat visits to stores – the Telegraph newspaper in Britain quotes an online survey that said customers visit 17 times a year compared to four or five at other chains. This and the prominent placement of its stores allows Zara to do very little marketing, instead relying on word-of-mouth.
The lack of advertising has also given Zara’s brand a sort of chic cache and exclusive feel. This in turn allows it to charge what are seen as premium prices and run at industry-leading margins.
The “fast fashion” concept is now a common part of clothes retailing, but Zara has continued to look for ways to stay ahead. Zara’s store managers now have hand-held computers that allow them to constantly track stock levels and replenish hot selling items even faster.
There is an Australian angle to the Zara story. Billionaire Solomon Lew owns the exclusive rights to the Zara brand in Australia. But despite the incredible success of the chain – there are now 3900 stores across 70 counties – no date has been given for the launch of an Australian store. According to one report, Inditex must decide when to come to Australia and it remains worried about issues such as logistics and the different seasons in the southern hemisphere.
Given the incredibly secret way he lives, it’s not clear how Ortega celebrated Zara’s ascendency to the top of the fashion tree. He’s said to own a horse-jumping circuit and part of a soccer league, so perhaps a spot of riding or a kick around was in order. But who can say for sure?
The only thing that is certain is that the party wouldn’t have lasted very long. The next product range is only ever a few days away.
