Zara: Taking the Lead in Fast-Fashion

When it comes to quick response to clothing trends, this Spanish retailer is beating
the pants off H&M and everyone else

ByRachel Tiplady

With its bright-red H&M logo on 1,200 stores, Swedish retailer Hennes & Mauritz has
long been the world's leading purveyor of cheap-chic apparel. No more. On Mar. 29,
Spanish retail group Inditex -- best known for its Zara stores in Europe -- reported 21%
sales growth in 2005, to $8.15 billion. That puts Inditex ahead of H&M, which posted
$7.87 billion in sales last year.

Zara's secret? It moves fast. With an in-house design team based in in La Corua, Spain,
and a tightly controlled factory and distribution network, the company says it can take a
design from drawing board to store shelf in just two weeks. That lets Zara introduce new
items every week, which keeps customers coming back again and again to check out the
latest styles.

Zara's success is all the more surprising because at least half its factories are in Europe,
where wages are many times higher than in Asia and Africa. But to maintain its quick
inventory turnover, the company must reduce shipping time to a minimum. The fast-
fashion approach also helps Zara reduce its exposure to fashion faux pas. The company
produces batches of clothing in such small quantities that even if it brings out a design
that no one will buy -- which happened during an unseasonably warm autumn in 2003 --
it can cut its losses quickly and move on to another trend.

BASIC BLACK.

Zara's fast pace means that some popular items appear and disappear within a week,
creating an image of scarcity that many shoppers find irresistible "They've built up an
excitement around snapping up new clothes before they go," says Kris Miller, a New
York-based retail analyst with Bain & Co. "As well as keeping sales high throughout the
year, it also keeps margin-stripping markdowns to a minimum," Miller says. That helps
explain why Inditex profits soared 26% last year, to $973 million.

H&M uses a slightly different strategy. Around one quarter of its stock is made up of
fast-fashion items that are designed in-house and farmed out to independent factories. As
at Zara, these items move quickly through the stores and are replaced often by fresh
designs. But H&M also keeps a large inventory of basic, everyday items sourced from
cheap Asian factories.
To add pizzazz to its lineup, the Swedish retailer has also struck deals with high-fashion
designers Stella McCartney and Karl Lagerfeld to create limited, one-time collections,
which generally sell out within days. H&M is a strong financial performer too. Sales
during the first three months of this year were up 20%, after rising 14% in 2005.

RAPID EXPANSION.

No wonder fast-fashion companies such as H&M, Zara, Spain's Mango, and Britain's Top
Shop, are among the brightest stars in Europe's retail landscape. A 2004 Bain & Co.
study found that fast-fashion outlets in Spain and Britain posted average double-digit
sales growth, compared with 4% growth in overall retail sales in those countries.

These companies are expanding rapidly. Zara's parent, Inditex, whose other retail chains
include Massimo Dutti and Bershka, opened 448 new stores last year, while H&M
inaugurated 145. This year Inditex expects to add as many as 490 stores, which includes
its first Chinese outlet, opened recently in Shanghai. By 2010, its global total could grow
from 2,700 to 5,000.

So far, Inditex and its European counterparts have expanded cautiously in the U.S. Zara
has only 19 stores stateside. H&M has 91, but that's tiny compared to the company's
1,200 worldwide total. NPD Group, a New York-based market research outfit, says that
fast-fashion accounts for only 1% of the $181 billion U.S. apparel market. That compares
with 18% in Spain, 12% in Britain, and 8% in France, according to Bain & Co. estimates.

HOMEGROWN COMPETITION.

The U.S. represents a tempting opportunity for Inditex. But some analysts think the
Spanish company should slow down a little. "Inditex's cost growth is exceeding its sales
growth at the moment," warns Lehman Brothers (LEH) retail analyst Allegra Piaggi. "I'd
like to see more penetration of existing markets before it moves into others." Others
worry that Zara will be unable to stick to its fast pace, with so many more stores to
supply.

But Zara and its European counterparts know that if they don't lead the parade toward
fast-fashion in the U.S., homegrown retailers certainly will. Chico's FAS (CHS), a
Florida-based women's apparel chain, is already introducing new styles at more frequent
intervals, luring shoppers with the slogan, "You'll find something new every day at
Chico's."

That's tough competition, all right. But Chico's still can't match Zara's efficiency: The
U.S. company takes about six months to get an item from the drawing board onto store
shelves, compared to as little as two weeks at Zara. Better keep an eye on this nimble
Spanish retailer.