Thematic investing involves capitalizing on secular trends, disruptive innovations and economic forces that are reshaping the world. Of particular interest are investments that are at the intersection of multiple themes. Two of our more expansive themes are next-generation technologies and the urbanization of wealth. Both have lead us to study changes in consumer spending, retailing and the retail supply chain (see “Finding Opportunity in Disruptive Change: Retailing and its Supply Chain”). We observed:
“Next generation automation is allowing consumer goods companies to speed time to market. Apparel companies today typically place orders as much as a year in advance – which doesn’t align well with constant demand for current fashion and customizable options. Nike says that the inability to react quickly to demand signals can result in hundreds of millions of dollars of lost profits. Today, most footwear and clothing are produced in Asia by a multitude of contractors and subcontractors. A shirt might be stitched in one factory from cloth woven, dyed and cut in three separate factories owned by three different companies, with time between each step of production. This system evolved to cut labor costs, which in Asia can be as little as one-tenth the labor cost in the U.S. Automation makes it possible to locate production closer to the end consumer. While labor costs in developed markets are higher, the cost is more than offset by reduced transportation costs, faster time to market and the need for fewer workers.”
Advances in retail automation and the buying preferences of wealthy consumers concentrated in and around urban areas have contributed to “fast-fashion”. Fast fashion describes clothing designs that move quickly from catwalks and celebrities to retail stores, allowing mainstream consumers to purchase trendy clothing at affordable prices.
Fast fashion is a boon for retailers because constant introduction of new items encourages more frequent store visits which result in more purchases. The speed of fast fashion helps retailers avoid markdowns and preserve margins. Instead of replenishing stock, companies replace sold out items with new items. As a result, shoppers tend to purchase an item when they see it, with scant regard to price, knowing it won’t be available for long.
Fast fashion retailing, made possible by innovations in supply chain management, is challenging traditional fashion line retailers who typically introduce new items on a seasonal basis.
Our research in this area lead us to Inditex, a world leader in the design, manufacture and distribution of apparel. We believe this Spanish retailer has achieved a competitive advantage in the global fashion industry through its investments in technology and integration of its supply chain. Inditex is the largest fashion group in the world with eight brands and 7,490 stores in 202 markets. It’s largest, first and best known brand, Zara, was established in 1975.
- Ninety-five percent of Inditex items are produced in regional clusters of suppliers and manufacturers. Inditex owns 12 factories and within the regional clusters, Inditex obtains preferential treatment from non-owned factories given its scale and leverage.
- An essential element of the supply chain is a distribution center known as “The Cube.” The Cube is a vast warehouse in Spain connected to various manufacturing sites by a 124 mile network of high-speed monorails.
- Zara has several set garment designs which are recycled allowing for faster design times, cost efficient production and tight quality controls.
- A typical retailer has committed to and manufactured up to 80% of a seasonal line before the start of a season, while Zara has committed to only 50-60% of a line.
- Zara can take a design from runway to a store in the U.S. in 25 days. Other retailers take up to six months.
- Items arrive at stores ironed, on hangers, tagged with RFID chips, labeled and priced. Inditex was an early adopter of RFID for inventory tracking. All Zara items were tagged beginning in 2015 and, almost all items of Inditex’s other brands were RFID tagged by the end of 2018.
- Each Zara store receives two deliveries per week on the same day at the same time. Customers know when to visit stores based upon the delivery schedule. Items can be delivered to customers and stores in Europe within 36 hours of an order being placed and to the rest of the world within 48 hours.
- The average “high street” Spanish retailer expects a customer to visit three times a year. Zara expects the average customer to visit 17 times a year.
- A typical retailer sells 60-70% of its items at full price with unsold items accounting for 17-20% of inventory. In contrast, 85% of Zara items sell at full price with unsold items accounting for only 10% of inventory.
- In a unique inventory management system, Zara retail stores serve as alternative fulfillment centers for online orders when warehouses are out of a particular item, or if it provides more timely and cost-efficient fulfillment. In fact, Zara is now delivering more online orders from stores than warehouses.
In 2018, Inditex generated three times higher same-store sales growth, 20% higher inventory turnover and 30% higher gross margins than industry averages. We believe Inditex has created a globally integrated business model that is the future of retail.