What’s behind Zara’s crazy sales gains?
While management at other apparel retailers have put forth all kinds of theories as to why their businesses are struggling, Inditex, the parent of international fast fashion chain Zara, reported an 11 percent increase in same-store sales with total revenues jumping 16 percent for the first six months of the year.
Zara’s fast fashion production model is typically given credit as the primary factor in its success. The chain, which accounts for roughly two-thirds of Inditex sales, manufactures new clothing in smaller lots in its factories, primarily in Europe, that are closer to stores, rather than sourcing larger inventories of apparel from suppliers in Asia.
The chain’s growing e-commerce business is also credited with helping it achieve growth levels that exceed its rivals, including other fast fashion chains H&M and Primark. What’s not clear is just how big a contribution e-commerce is making to Zara’s success. Inditex does not break out sales registered online from those in its physical stores.
In June, chairman Pablo Isla touted the company’s omnichannel capabilities on an earnings call with analysts.
“We operate a global sales platform that fully integrates stores and online and offers huge growth potential,” said Ms. Isla. “Our business model combines stores and digital seamlessly, and we are ready for the opportunities that this brings with current and new customers.”
Inditex reported that it saw its sales revenues, including stores and online, increase 13 percent in local currencies between Aug. 1 and Sept. 18.
Articles on both the Bloomberg and Wall Street Journal sites suggest that a shift to more online sales may have something to do with the company posting a net income gain (eight percent) that trails its jump in revenues.
Inditex’s gross margins actually declined one percent for the first six months of the year, which could have something to do with higher costs related to a market-by-market rollout of e-commerce operations across the globe. Zara, for example, will launch online sales in Turkey beginning next month.
Lower margins could also point to greater discounting to stay ahead of its rivals. Regardless of the reason(s), it seems like nitpicking when the business is posting the types of results it has year-to-date.
- Interim Half Year 2016 Results – Inditex
- Interim Half Year 2016 (Presentation) – Inditex
- Inditex, the Superstar Retailer – Bloomberg
- Zara’s Success Shrouded in E-Commerce Secrecy – The Wall Street Journal (sub. required)
DISCUSSION QUESTIONS: Why do you think Zara has managed to grow its business at a double-digit pace when so many other retailers have struggled to post any gains? Has Zara created a sustainable point of difference for itself compared to other apparel retailers competing for the same customers? What can/should other apparel retailers do to close the gap?