Zara owner Inditex profits rise as quick-trend model pays off

Zara-owner Inditex posted a rise in first-half profits Wednesday thanks to a well-honed business model allowing the Spanish group to beat rivals in whisking new trends to the shop racks.

Zara owner Inditex profits rise as quick-trend model pays off
Clothes made for Zara can go from the design stage to store racks in a mere two weeks. Photo: AFP

The world's largest fashion retailer by turnover, owned by the publicity-shy Amancio Ortega who has become the world's second richest man, said higher clothes sales and a rise in new stores around the globe drove the eight-percent jump.

Profits rose to €1.3 billion ($1.4 billion) in the six months from February 1st while sales were up 11 percent at €10.5 billion, said the company which operates eight store brands including Zara, upmarket label
Massimo Dutti and teen chain Bershka.

Chief executive Pablo Isla said the main reason behind the sales jump was “the execution of our business model globally,” with the opening of more than 80 stores in the first half, including in the new markets of Aruba, Paraguay and Nicaragua.

While its competitors prioritise low production costs and outsource manufacturing to China, Inditex makes more than half of its clothes in factories in Spain, Portugal, North Africa, Turkey and Eastern Europe — relatively close to its main markets.  

This business model allows it to get clothes to stores much faster than its rivals and avoid excess inventory.

Clothes made for Zara, for instance, can go from the design stage to store racks in a mere two weeks.

By comparison the process takes Inditex's nearest rival H&M six months because it sources its collection further away in China.

Concern over growth prospects

While H&M regularly challenges it for the global number one spot, Inditex is currently the largest fashion retailer by sales, based on the two companies' first-half results this year.

But Noel Byrne, a business strategy professor at the Madrid branch of Boston's Suffolk University, warned that the Spanish group was bound to face tighter competition in the coming years as rival retailers adjust their own processes to match its quick delivery times.

“When you are making big profits it is one of the most dangerous times in business because the competition want a share of that, and they smell it and they inevitably come,” he told AFP.

As Inditex continues its push outside of Europe and plans to ramp up activities in China, it will also need to adapt its business model for Asia by opening design and production centres in the continent, Byrne added.

International expansion is crucial for the growth of the group, faced with Europe's slow economic recovery.

According to a study by the Barcelona-based EAE Business School, China, Russia and South Korea are the countries where clothes spending has increased the most since 2004.

Spain, meanwhile, only represents two percent of global clothes spending, and its share in Inditex's turnover has gone from 45 to less than 20 percent in just a decade.

Despite the good results, shares in the group fell 0.89 percent to €32.39 in mid-afternoon trading due to a mix of profit taking and concern over “growth prospects in the second half that are slightly lower than before,” said Manuel Pinto, an analyst at brokers XTB.

By Emmanuelle Michel / AFP

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


Zara founder’s cancer donation stirs controversy in Spain

The billionaire founder of clothing giant Zara is donating €320 million ($361 million) in cutting-edge cancer-fighting equipment to hospitals in Spain, an act that has raised stinging criticism -- to the dismay and incredulity of patients.

Zara founder's cancer donation stirs controversy in Spain
Amancio Ortega is the richest man in Spain. File photo: Miguel Riopa/Daniel Lobo/AFP

Far-left party Podemos and associations defending public health have said the donation via Amancio Ortega's foundation is inappropriate because his clothing company Inditex, which owns Zara and other brands, is accused of tax avoidance — a claim the group denies.

Ortega should “not be demonstrating his philanthropy but his desire to contribute to public finances in a way that is proportional to his profits,” the Federation of Associations for the Defence of Public Health Services said in a statement earlier this month.

READ MORE: Zara king Ortega falls foul of tax office

Luisa Lores, spokeswoman for the federation, told AFP it was also a “way to avoid paying taxes” as part of the donation is tax deductible.   

But this reaction has been met with incredulity by others — including cancer patients — who say any donation is welcome in a country where the public health system suffered from huge spending cuts during the financial crisis.

“I need to live, and there are thousands of people like me fighting cancer, we get up every day with side effects, we get up every day trying to smile, to fight for life,” Tina Fuertes, a cancer patient, said Wednesday on Spanish television.

“It hurts, I don't understand, this doesn't make sense,” she said of the controversy.

Podemos chief Pablo Iglesias has also hit out at Ortega, one of the world's richest men, accusing him of carrying out a marketing ploy and deploring that “philanthropy should be seen as a mechanism to finance public health” in Spain.   

The donation represents eight percent of last year's public health budget in Spain, where more than 200,000 cancers are diagnosed annually, according to Ortega's foundation.

Hospitals in Galicia in the north and Andalusia in the south have already received various pieces of equipment.   

The foundation told AFP it would continue implementing the programme in other hospitals.