Business World

Sunday 15 September 2019

You have to like Zara group's style as it sews up high street

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If Brexit is added to the conundrum along with a possible economic downturn, the idea of investing in the UK retail sector might best be avoided. Stock image
If Brexit is added to the conundrum along with a possible economic downturn, the idea of investing in the UK retail sector might best be avoided. Stock image

John Lynch

If there is one theme that has been more than adequately explored in this column in the last couple of years, it's the ongoing plight of the retail trade. The structural shift to e-commerce has been such a mountainous leap that companies which a decade ago were top of the heap, are now either struggling or have already fallen by the wayside.

Many believe the once world-beating Marks & Spencer formula may never be the same again. Debenhams is said to be in the emergency ward and it is too late for House of Fraser, BHS and many more.

If Brexit is added to the conundrum along with a possible economic downturn, the idea of investing in the UK retail sector might best be avoided.

However, some more interesting retailing options exist in Europe and one is the Spanish group, Industria de Diseno Textil SA, also known as Inditex.

We know it better as the holding company for the Zara chain and other fashion brands including Massimo Dutti and Pull & Bear.

The company was set up in La Coruna in north west Spain, 55 years ago, by Amancio Ortega, a man you certainly will not know from the gossip pages or 'Hello' magazine. Inditex's septuagenarian majority shareholder is notoriously secretive and is hardly ever photographed.

Keeping retail in fashion: Spanish company's route to the top
Keeping retail in fashion: Spanish company's route to the top

His company's style is to spend as little as possible on advertising and even less on central marketing.

Ortega won't be seen at flashy events, because his company never throws one. He also steers clear of high-profile designers, which marks the group out among its retail counterparts.

Despite this rather odd approach to modern business, Inditex has managed to become the world's largest clothing retailer. It is a pioneer and powerhouse in fast fashion that operates in 96 markets, generating more than half its sales in non-euro currencies. It has an array of brands like Zara Home, Bershka (urban styles), Stradivarius (casual), Oysho (lingerie) and Uterque (accessories).

While the company is considered the best in class in terms of bricks and mortar retailing, the real challenge it faces is e-commerce.

What sets Inditex apart from its rivals is its supply chain. It controls the chain from factory to retail and Ortega wisely kept production close to home while his competitors moved to Asia.

Today, Inditex has plants in Portugal, Turkey and Morocco and a highly automated factory in La Coruna.

As a consequence, it allows the company to turn out trendy clothes in small batches at startling speed. As the pioneer of fast fashion, it can respond to new fashion trends in a fraction of the time other retailers can. From design to retail outlets, it can take Zara as little as two weeks. In contrast, some of its competitors can take six to nine months.

Inditex was floated on the stock exchange 18 years ago and valued at the time at €9bn. Today its value is €78bn - happy days for the original investors.

In the past decade, the group's progress has been very impressive. In 2008, the company had sales of €10bn, profits of €1.8bn and 4,200 company shops. Last year, sales were €25bn; net profits were nearly double that of a decade ago and the number of outlets jumped 80pc in the same period.

Online growth is also encouraging, jumping 40pc last year, and now accounts for 10pc of group sales. The company will offer online sales across all brands in all markets by 2020.

The group's share price peaked last year at €34 but has since retreated to €25.

An added advantage for the company is its low stock levels, estimated at 10pc of sales, in contrast to its Swedish rival H&M which is 17pc.

Thanks to its size and margins, Inditex is a cash-generating machine with almost €5bn on the balance sheet. The group recently reported strong half-year results but the sell-off in emerging market currencies is of some concern.

Inditex is the apple of the fashion world.

It is a slick and resilient company with a winning business model. As an investment, it has style and worth considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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