Zara’s Owner Bets Crisis Will Speed Up Fashion’s Big Trend

Global clothing retailer Inditex is doubling down on the industry’s digital transition with a plan to operate fewer, larger stores.

By guest author Carol Ryan from Wall Street Journal

Zara’s owner has a reputation for spotting fashion trends early. Now, the world’s top clothing retailer expects the Covid-19 crisis to turbocharge the shift toward e-commerce.

Caption and Graphic courtesy by Wall Street Journal

On Wednesday,  June 10, 2020, Spain-based Inditex said it was speeding up its digital plans. Executive Chairman Pablo Isla wants more than 25 % of group sales to happen online by 2022, almost double the 14 % recorded in the company’s last full year. The new target, announced alongside quarterly results, is punchy: Online’s share increased by just 4 percentage points between Inditex’s 2017 and 2019 fiscal years.

It was a tougher first quarter for the company than analysts were expecting. Demand was strong online, but sales in the three months through April still fell 44% compared with the same period last year. Less than one-fifth of its physical locations were back open by the end of April.

To quicken the digital transition, around 1200 stores will be closed between now and 2022, shrinking the retailer’s global network by up to 12 %. Shops that remain open will be larger, however, and in better shopping locations.

Inditex thinks purchases that previously took place in the small stores marked for closure will happen in nearby flagship shops or online instead. If management is right, sales densities and profitability in the remaining stores should increase.

Inventory levels can be managed more efficiently in large flagships, meaning fewer items end up on the sale rack. This is already Inditex’s strong suit. It shifts up to three-quarters of its inventory at full price compared with 60 % for its rivals, according to a former Inditex executive recently interviewed by UBS.

Even this year’s store closures don’t seem likely to break this record: Inventory levels remain surprisingly healthy. At the end of April, Inditex had 10% less stock than after its first quarter last year. As the company sources much of its clothing in Europe, it was able to turn off supply more quickly than rivals who buy from factories in Asia.

Zara’s owner has been working on its digital strategy since 2012 and has net cash of EUR 5.8 billion. That gives it a leg up over rival global fashion retailers, like Hennes & Mauritz, many of which are farther behind in their online transformations and locked into long leases in weak locations.

Inditex is betting the coronavirus crisis will accelerate the existing big fashion trend. It also looks in a stronger position than competitors to prepare.

Global clothing retailer Inditex is doubling down on the industry’s digital transition with a plan to operate fewer, larger stores.

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www.inditex.com