Inditex’s flexible model still driving growth; its momentum unlikely to fade any time soon

Inditex's flexible modelInditex store

Spanish retailer Inditex is the largest in Europe, more than twice the size of the number 2. Kering. With over 7,000 stores and 150,000 employees globally, it continues to outpace its rivals mainly due to its flexible business model.

In its recent report on Spain, Goldman Sachs Global Investment Research believes the Galician-based firm is not going to lose its momentum “any time soon.”

Analyst Richard Edwards explains the reasons for this view:

“The group’s success can be largely attributed to its short lead-time model, as the importance of in-season sourcing continues to grow and long lead-time retailers lag behind. For apparel retailers, where fashion is the primary point of customer differentiation, supply chain lead times have become an increasingly important performance driver.”

In 2016, traditional long lead-time retail models (like H&M, Next, M&S) delivered either flat or falling like-for-like (LFL) patterns “in contrast to the high single-digit/low double-digit LFL sales growth trends from short lead-time models such as Inditex,” Edwards notes.

One of Inditex’s key advantages is that around 50% of it product is designed, produced and distributed in Spain and the neigbouring markets of Portugal and Morocco. In this way it has gained speed in its go-to market strategy. It has also substantially reduced its product design and manufacturing time, giving it the edge on its competitors. According to Edwards:

 “The difference between long and short lead-time supply chains isn’t as simple as relocating product manufacturing closer to a retailer’s end markets. Importantly, the design function typically needs to be reduced to 3-4 weeks (vs. the traditional 3-6 months), and product requires c.1 week to manufacture (vs. the traditional 3 months).”

Turning to Inditex’s flagship brand Zara, Edwards points out it was the top performing brand (alongside H&M) in Goldman Sachs’ April 2017 survey of over 2,000 fashion-focused millennial US consumers. Inditex opened its first US Zara store back in 1989 on Lexington Avenue in New York and now has 744 stores in America

“Zara turns around new in-season designs within 4-6 weeks, vs. the traditional industry model of 3-6 months,” Edwards notes.

Goldman Sachs is upbeat about Inditex’s on-line business going forward. It expects the evolution of online penetration to “accelerate” total LFL sales growth.

The Zara clothing brand was not launched on-line until 2010, which some analysts considered to be rather late in the day for such a successful concept. Of Inditex’s eight store brands only one – housewares retailer Zara Home – had sold directly to internet users up till then. But Edwards highlights how Inditex’s on-line sales have grown spectacularly over the last ten years, without too much of a cannibalization impact on its stores:

“Online apparel penetration appears to be entering the steepening part of the S curve in Europe. For Inditex, we believe that growth in the online channel will have little store-based sales cannibalization impact, given its still fairly immature global apparel market share (c.1%) across eight store formats.”

“Following the UK precedent, we now forecast that Inditex’s online penetration will double to c.19% by January 2021E, and thereafter see an acceleration in the penetration rate, taking online penetration to 30% by 2025E.”