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Wednesday, 23 May, 2001, 15:47 GMT 16:47 UK
Spain's retail success story
By BBC News Online's Orla Ryan
Retailers' hard luck stories are two a penny.
But as Marks & Spencer and Gap join retailers reporting falling profits, a Spanish retailer has taken investors by storm.
Investors around the world have rushed to buy shares in Inditex, the company behind high street chain Zara, whose shares were traded for the first time on the Spanish stock exchange on Wednesday.
Its founder has now become one of Spain's richest men. But while customers pile into his stores and rivals seek to emulate his success, Amancio Ortega is planning to step down.
Even midweek, Zara's store near Oxford Circus, London is busy.
"Good fabrics, good colours, reasonably priced," is how 25 year old Dawn Gough summed up the appeal of Zara in Oxford Street.
"The clothes you get are slightly different to mainstream clothes....they are affordable.If I am shopping on Oxford Street, I will pop in," said Heidi White, 31.
Even outside the London centre, the appeal of the clothes store is strong.
"It is very cheap...because fashion is so transient you don't want things that are going to last for ages, you just want to get the look of the moment at a really good price. The stores are huge, the dressing rooms are big and they have a really big range, " 22-year-old Sile said.
"Anytime I go shopping, which is at least once a week, I would always look at Zara. They don't just do clothes, they have shoes and bags, it is the kind of place where you could buy a whole outfit for £100 and it would look a lot more," she added.
But while Zara appears to have hit its target audience with ease, even well-established rivals such as Gap - with whom analysts frequently compare it - have seen their profits fall.
Profits at Gap fell 51% in the first quarter of this year.
Millard S. Drexler, president and chief executive officer admitted business was difficult but said: "We are focused on offering customers the newness they expect when they shop at our stores."
Providing this "newness" is what Zara has excelled at.
The company takes its inspiration from the catwalks, targeting the fickle, fashionable young, one of the riskiest parts of the clothing market.
Unusually for a clothes retailer, Zara designs all its own clothes, makes most of them in Spain and distributes all of them itself. And many observers attribute Zara's success to this control of the business from factory to shopfloor.
It means that it takes just three weeks to move from notepad sketch to the clothes hanger in a shop. Not bad considering the industry average is nine months.
"They are producing the fashionable clothes themselves, which are the clothes where you take the biggest risk if you outsource it to people," Anne-Catherine Delaye, European fund manager at Rothschilds said. And because they make and design it themselves, colour and design can be easily tweaked to what the customer wants.
This sureness of touch about identifiying or responding to trends is crucial to sustaining profits. Last August, Gap's drop in sales was partly attributed to the mistaken strategy of targeting the teenage market with its Old Navy stores.
Likewise, H&M of Sweden was burdened with high inventories when it misinterpreted a trend.
So, Zara's constantly changing range not only means that one unpopular item won't hurt profits, it also means customers are more likely to drop into shops regularly to see the new stock.
The company also relies heavily on shop manager feedback. "They ask them to update them with which products are the best sellers and which are the laggers, if people are asking for it in that colour," Rothschilds Anne Catherine Delaye said.
While there are clear lessons to be learnt from the success of Zara - not least by its money saving decision to eschew advertising - some factors are uniquely advantageous to the Spanish retailer.
Paul Smiddy, retail analyst at Credit Lyonnais, said: "It would be difficult for UK retailers to replicate it. Inditex's success comes from having sources of supply close to the base which it controls. It is efficient to produce clothes in northwest Spain, but it is not in the UK."
Word of mouth
Its success in building a customer following without a hefty advertising budget is by no means unique. Indeed, Marks & Spencer and John Lewis have only recently begun to spend money on advertising.
"If you have a wonderful selling proposition, information about what you are doing spreads by word of mouth, "Professor Joshua Bamfield, director of Centre for Retail Research in Nottingham said.
He points to Next's initial success, which saw over a hundred women queue at Next's store in Dudley, waiting for it to reopen. "That wasn't advertising. That was word of mouth. People come along with brilliant ideas and they don't need to advertise," he said.
It goes without saying that, as with Marks & Spencer, all brilliant ideas can lose their luster or at least their resonance with customers.
So far at least, analysts see the Zara story as a win-win situation.
Its share price rose some 26% on Wednesday, adding to the excitement already generated by Spain's biggest share sale this year. The shares sold internationally were more than 53 times oversubscribed.
Many investors have been attracted by the company's growth, with the firm reportedly opening a new shop on average every three days.
The sale was part of company founder Amancio Ortega's plan to step down from the business he founded.
He opened the first Zara shop in La Coruna in Spain in 1975, expanding to Portugal in 1988, and now has a presence in 33 different countries.
17 May 01 | Business
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