This Clothing Retailer Leaves European Suppliers Behind
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The European continent is losing ground as a production supplier for the Inditex SA Group, despite accounting for 70% of its sales in 2011, a drop that was replaced by the non-E.U. and Asian countries. A total of 40 countries produce for the Group, with Africa and the Americas also registering a slight increase compared to the previous year. However, Inditex prefers to assign more than 50% of its production to proximity producers, such as the clusters in Portugal and Morocco, and also works with Turkey, India, Bangladesh, China and Brazil - with the additional production audits that the Asian and South American continents incur.
This strategy is essential for the Spanish group, which professes a rapid, efficient and flexible answering capacity. From its logistics centers in Spain, the products get to the shops across Europe in 24 hours, and in 48 respectively, for the rest of the world. From the final client angle, the proposals of Inditex are said to travel from designers´ sketches to tangible products in the stores in two weeks, far beyond the nine-month industry average.
Inditex rigorous supply and response model definitely contributes to the Group´s stock performance. Since its debut in 2001 on the stock market, with a price of €14.7/share, Inditex has done extremely well, with a 52-week high of €91.10 this year and a 52-week low of €61.26.
In the middle of Spain's harsh economic downturn, Inditex has somehow gone against the stream: it basically almost tripled its value during these last four years, reaching now over €53.700 billion and overcoming its American competitor, GAP (NYSE: GPS), which follows a descending trend since 2010, from $148 to $17.11 billion at the end of last month, as well as a struggling decline in gross margins since 2007.
The Spanish retailer is present in 84 international markets and totals 5,618 shops worldwide. Its shop opening strategy follows a constant rhythm, of approximately 450 shops per year – compared to the 10-to-15 target of H&M - and seems to be the best advertising tactic also, placing shops in strategic points of the selected metropolises such as the one inaugurated on New York´s Fifth Avenue in April 2012. However, this shop-opening strategy strictly respects one rule: there is almost no opening in Spain, everything happens outside the country, since Spain, which accounts for 25% of the Group´s commercial activity, only gained 1% in sales in 2011. In order to spur sales at the national level, the Group announced that it will absorb the rise of VAT from 18% to 21% since September, in all its brands.
Inditex business model is focused on designing, producing and distributing designer clothing at an affordable price for a middle-income class. It has managed to segment the market extremely well : Zara and Massimo Dutti are obviously addressing a different segment than Pull&Bear or Bershka.
Retail apparel industry competition remains stiff, with company flexibility, market trends and pricing policy playing a central role to the rise or decline of the different competitors, as well as their profit margins. According to market evaluations, positioning in the trendy luxury segment, Abercrombie & Fitch (NYSE: ANF) reported a 67% gross profit margin for denim products of $89.50, while a lower price strategy based on the casual concept of Aeropostale (NYSE: ARO) bring a 35% profit margin.
Although these competitors are also doing excellent work in terms of clothing design style and quality, what Inditex has is a pioneering logistics and supporting technology, rapid answering capacity, good value for money, worldwide presence covering the northern as well as the southern hemisphere, producers´ loyalty philosophy and client attention being a central pillar - in fact, it registers one complaint per 64,619 clothe items on sale. It can be called a sixth commercial sense. Given the capricious nature of the stock markets, it´s somehow safer to know that the business and sales strategy of a company follows and responds to actual, market-based research, answering to, and not interfering with, clients´ needs, and transforming them in desires right away in the form of affordable and stylish cloth items.
Fool Blogger Cristina Tanase does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.