Don’t be fooled by red replacing black as this season’s colour at Zara-owner Inditex.
The Spanish fast-fashion behemoth reported its first loss since it went public in 2001 after shutting stores during Covid-19 lockdowns worldwide. But nimble retailers will still prosper as economies open back up again, and Inditex is among them. In fact, with a big investment plan to bolster online sales, the company could well emerge even stronger than before the pandemic.
The world’s largest fashion retailer is also aggressively overhauling its store network to focus on more muscular flagships. It has already been closing smaller outlets, while opening fewer, larger stores for the past few years. This will accelerate over the next two years, with between 1,000 and 1,200 stores closed, many belonging to Inditex brands other than Zara, such as Pull&Bear, Oysho and Stradivarius. The aim is to transfer their profit contributions to bigger shops or online.
There are important costs related to that transformation. The first-quarter net loss of 409 million euros ($465 million) included a 308 million-euro charge for closing stores. And Inditex hasn’t been completely insulated by the retail dislocation. Net sales fell 44% in the three months from February 1 to April 30 due to the coronavirus impact.
But Inditex’s business model came into its own during the pandemic. Most garments are ordered within the fashion season, and the company, which gets about two-thirds of its revenue from Europe, has kept its supply chain tight. About 60% of products come from manufacturers in Spain, Morocco, and Portugal.
In early March, the company scaled back purchases when it saw how the pandemic was developing. In early May, it sped them up again to make sure it had enough playsuits and flimsy blouses on hand for June and July. The strategy worked. Inditex actually ended the first quarter with 10% less stock, an impressive feat when other retailers have been saddled with a mountain of unsold spring and summer garments.
At the same time, its online business thrived thanks to efforts including the introduction of radio-frequency-identification technology that tracks where every maxi dress and balloon-sleeve blouse is. This enables online orders to be fulfilled from wherever the stock is, be that in warehouses or stores. Online sales rose 95% year-on-year in April.
To capitalise on this trend, Inditex will spend 1 billion euros between now and 2022 to bolster its internet sales, and a further 1.7 billion euros upgrading its stores and further integrating them with its digital platform. Shops will become distribution hubs as well as places that customers can browse and buy products in real life. The aim is for more than 25% of sales to come from digital channels by 2022, up from 14% in 2019.
Despite its strengths, Inditex has not been immune from the pre-Covid-19 pressure on the apparel retail sector, with women generally buying fewer clothes and cheaper rivals, such as Boohoo Group Plc and Associated British Foods Plc’s Primark chain, nipping at its heels.
—Bloomberg