Made to Measure

4 minute read

Every rag-trade magnate seems to have a rags-to-riches tale. Amancio Ortega Gaona’s begins in the ’50s, when he was working at the Espuma clothing store in his Spanish hometown, A Coruña. A basic but expensive quilted housecoat got Ortega to thinking: he could make a more affordable version, and women would buy it. In 1963 he set up shop in the family kitchen with his sister and brother, producing dressing gowns and lingerie.

Today, the Ortegas’ company, Inditex, is an innovative fashion powerhouse valued at more than $8 billion. Its biggest chain, Zara, has emerged as a serious challenger to Gap, Benetton and H&M. Next week, Inditex stock begins trading on the Madrid exchange. The float is one of the year’s most hotly anticipated European IPOs, or initial public offerings, and an early step in what Inditex executives have called the “institutionalization” of the family-led firm.

While Ortega’s share of Inditex will drop from 74% to 61% in the ipo, his stakeworth an estimated $5 billionwill still make him Spain’s wealthiest man. More significantly, though, the IPO signals a recognition that the reclusive 65-year-old can’t lead the company forever. While he has no plans to retire, he also has no relatives interested in taking his place when he does. The flotation is part of the transition from family control, bringing in new shareholders and greater public accountability.

The listing also gives Inditex a higher public profile as it grows. Last week, ceo José María Castellano announced plans to invest more than $900 million over the next two years to expand and upgrade retail outlets. The group already has 1,100 clothing stores in 34 countries, including Barcelona-based chains Massimo Dutti and Stradivarius, as well as Bershka and Pull & Bear, which target younger shoppers.

Zara is the golden child in the Inditex family. Launched in 1975, it does for designer clothes what Ortega initially did with housecoats: sell stylish, low-priced options. Zara generates 78% of Inditex’s sales and almost all of the headlines, despite a marketing budget of almost nothing. When asked to name the brand they bought most often, readers of French Vogue named Zara by a wide margin.

Speed is key to Inditex’s way of doing business. Its competitors farm out production to factories in developing countries, which cuts labor costs but reduces flexibility. That works for a retailer like Gap, which markets garments seasonally. But Inditex figures there can be as many fashion seasons as customer whims. Its trend spotters around the world file daily reports on what’s hot. Designers in Spain then check a database for these dispatches as well as daily sales numbers, using the information to create new lines and tweak existing ones. If enough shoppers ask for a top in coral rather than in the available turquoise, Zara can often have that color in stores in less than two weeks—though some say that quality is sacrificed for speed.

It helps that production is close to home; last year, 80% of Zara clothes were made in Europe. “Their manufacturing process is very technologically advanced,” says David Bovet, a vice president at Mercer Management Consulting. “They’ve invested a lot in the latest machines.” So most capital-intensive work, such as cutting and dyeing, is automated and done at the company’s own A Corua facility, while small factories nearby handle assembly.

These manufacturing methods have helped Inditex post very attractive numbers: pretax profits have grown by an average of 27% over the past three years, versus 17% for both H&M and Gap. But Sagra Maceira de Rosen, an analyst at J.P. Morgan in London, points out that the companies’ operating models are different. She views Gap and H&M as high-risk, high-reward retailers, since they gamble on a fashion look without benefit of in-house manufacturing that can quickly change direction. “If you get that right, there’s no better thing,” Maceira de Rosen says. “But they do get it wrong sometimes.” By contrast, Inditex offers more balanced risk because it can respond almost immediately to customers’ wants. Of course, some analysts would argue that Inditex’s model is in fact riskier, as it has so much money tied up in capital equipment. They also question how Inditex will maintain its speed and cost efficiency as it expands further into the U.S., where its six stores are now supplied by air.

Ortega wrote in his 2000 chairman’s letter that Inditex’s goal—”to satisfy the needs of the customer with the latest in fashion”—hasn’t changed. Today, as ever, customers need underwear. This fall, Inditex will launch Oysho, a lingerie chain selling bras, slips—and maybe, for old times’ sake, house-coats.

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