Too Many Stores Have Become The Biggest Burden Of Zara, And Profitability Is Under Attack.

In a short span of two years, the income growth of fast fashion giant Zara dropped from double digits to low single figures, and the ceiling gradually appeared.

According to documents submitted to the Spanish stock exchange by Inditex group of Zara parent company, the rental cost of operating entities increased by 1.4% to 2 billion 392 million euros last year, or 18 billion yuan, which is 10% of total revenue. Obviously, with the changing shopping habits of consumers, too many physical stores have become the biggest trouble for Zara. The gross profit margin of the group has fallen for 3 consecutive years since 2016. At the beginning of last year, the brand closed its first flagship store in New York.

Because the group's brand stores are all over the world, the rental contracts, laws, and the nature of the owners and the economic environment in each country are different. The rental of Inditex group is calculated according to the proportion of the sales of the stores, rather than the regular monthly payment at a fixed amount, and the average length of the lease is between 10 and 15 years. As of January 31st, Inditex group has 7490 stores in 96 countries and regions around the world.

In fact, from the 2016 fiscal year, the profitability of Inditex group has been shrinking, and the huge entity shop has become the biggest burden. In December 2017, the Inditex group suddenly announced that it had signed a leaseback agreement with 16 buyers from Spain and Portugal, with a total spanaction volume of about $472 million and began to slow down the pace of opening stores.

However, Inditex group's performance is still no sign of improvement. Sales in fiscal 2018 increased 3% to 26 billion 100 million euros compared with the same period last year, while net profit increased 2% to 3 billion 444 million euros, a further slowdown compared with the 2017 fiscal year, the worst performance in 5 years.

Coincidentally, according to the British The Sunday Times, Britain's fast fashion Topshop parent company Arcadia has begun subleasing 67 stores in the prime locations of its 570 UK stores, and hopes that other stores that remain in operation can reduce about 30% of the rent. As an exchange, he will provide the group with the most 20% stake in the group, but the landlords have not indicated whether they accept this condition.

Previously, British fashion retailers such as New Look, French Connection, LK Bennett and House of Fraser have also applied for bankruptcy protection or sold for sale, and Martha plans to close 100 British stores or cut 1000 jobs.

Some analysts have pointed out that the decisive factor that really threatens the traditional fast fashion is the form of operation. The slow growth of the overall performance means that the fast fashion format of the Inditex group has grown from maturity to maturity, and there is little room for change. "They are deeply aware that double-digit growth will not happen again." In order to appease investors, Inditex group has announced a 17% increase in dividends to 0.88 euros per share, and its share price has recorded an increase of 26.7 euros for 5 consecutive days, with a market value of about 83 billion 200 million euros.

The Inditex group was founded in 1963 by the Spanish richest Amancio Ortega. In addition to Zara, the group's brands also include Bershka, Massimo Dutti, Pull&Bear, Stradivarius, Zara Home, Home and Stradivarius.

Referring to the successful experience of multi brand matrix, Amancio Ortega once said, "Inditex group does not want to miss any market segments." Therefore, whether it is the Pull&Bear which was founded in 1991 or the four brands such as Massimo Dutti acquired in 1995, Inditex group is widely laying entity stores in the shortest possible time to highlight its "fast" advantage. However, in the process of rapid expansion, growing consumers are getting tired of the Zara style "fast food fashion".

From the data point of view, the so-called multi brand matrix also did not create a favorable situation for Inditex group to create steady growth. Now Jinniu and star products are all core brands Zara, which account for nearly 70% of the group's total sales, while the remaining 7 brands account for only 30% of the total sales.

Fast fashion has been exhausted. How to improve efficiency in a short time has become a top priority. Inditex group is "making ourselves faster" through constant reflection and comprehensive investment.

Inditex Group CEO Pablo Isla recently emphasized that the group should become a fully digital enterprise within two years. It will create a fully integrated, digitalized and sustainable online high-tech shop network. In his eyes, the future stores should integrate entities and online.

According to Pablo Isla, the visit of Inditex group's official website last year increased 500 million times to 2 billion 900 million times last year. It also recorded a record of 9500 orders per minute. Last year, Inditex group's revenue in digital channels rose 27% to 3 billion 200 million euros, accounting for 14% of total revenue. Between February 1, 2019 and March 9th, the Group recorded a 7% increase in store sales and online sales at fixed exchange rates, but still lagged behind in terms of the digitalization of apparel industry and the average proportion of online sales of 30%.

It is reported that Inditex Group invested a total of 1 billion 800 million euros in 2017, and the total investment in the past 5 years has exceeded 7 billion 700 million euros, of which 1 billion 500 million euros has been designated for upgrading technology and logistics. In the new headquarters that was put into use early last year, the group put together Zara, Zara Home's design, products, technology and sustainable development team to further enhance operational efficiency.

In addition, the Inditex group has also upgraded its various distribution centers. Besides the introduction of machines that can quickly classify cosmetics, it has 6 new robot distributors. The future group will also build a distribution center in Holland, and share some pressure for 10 distribution centers in Spain.

Faced with competitors, UNIQLO constantly relied on technology to break through. Inditex group also set up an innovation department internally, and hired talented people from start-ups to develop new technologies. It is reported that the newly established innovation department is led by the former Data Engineer Alejandro Ferrer and the founder David Alayon. The Department aims to further improve the group inventory management by introducing new and high technology to further shorten the new cycle of products.

The new Department has also worked with California's robotic company Fetch Robotics to plan to use robots instead of labor in inventory management. Another initiative is to develop a machine that can quickly detect the number of clothes in the packaging box with Intel, a chipmaker. Felipe Caro, a professor at the Anderson School of management at University of California at Los Angeles, believes that if Zara wants to further shorten the delivery date, there must be no shortcut to local production.

In addition to technical efforts, Inditex group is also adjusting its own operation mode. Central stock will be adopted to centrally manage the distribution of brand products. The number of new products distributed to all stores worldwide will be increased to two times a week, and online official website will be synchronized on the same day or the next day.

In the shop, Inditex group also began to accelerate the layout of new retail through technology, and hired Sergio Alvarez, co-founder of Carto, a technology startups, to participate in the research and development of "intelligent operation" system linking physical stores and online businesses, such as sonic technology to track the flow of stores and virtual assistants for consumers. Through the intelligent operation equipment, consumers can download the App before downloading the store, and switch to the store mode, then they can quickly find the desired product and get relevant information, and encourage consumers to try out online order online.

At the same time, Zara has fully introduced RFID technology, and its Massimo Dutti and Uterq u E have begun to introduce this advanced technology step by step. RFID refers to an electronic label system based on RFID, through which the retailer can conveniently trace the whole chain dynamics of goods from factories to retail stores, and make the operation efficiency higher.

Pablo Isla said that after the launch of the RFID technology, 60% of the returns on Zara online orders are now being carried out in online stores. It is reported that the goal of Inditex group is to allow RFID technology to penetrate into other brands in 2018 and plan to fully promote it in 2020.

For its other brands, Inditex group plans to continue to build flagship stores in the world's major markets and renovate existing stores with new retail technology. Pablo Isla also stressed that the more precise production of products and less waste have become the way to promote the sustainable development of Inditex group. Inditex group has combined Zara and Zara Home to produce synergies and improve profitability.

In addition, Inditex group also began to increase investment in social media platforms such as Instagram. The total number of fans of its 8 brands in social media increased by 22 million to 143 million compared with the previous year. Among them, the most active accounts were Stradivarius, which was often cooperating with KOL, and Pull&Bear and Bershka also worked with Miley Cyrus and other stars.

It is noteworthy that the founder of Inditex group Amancio Ortega is about to become the landlord of Amazon. Its 655 million euro purchase of part of Amazon headquarters in Seattle is about to be completed. This spanaction is also the largest real estate spanaction in Seattle since 2015. In addition, he also has joint office and other non residential real estate investments in central locations in Spain, Britain, France, the United States and Asia. According to the relevant agencies, the total value of real estate portfolio of Amancio Ortega in 2017 was about 8 billion 759 million euros.

Some analysts speculate that in order to find new growth momentum, Inditex group or start a new acquisition, "according to the size of the Inditex group, any acquisition will be profitable in the short term, because it is easy to have synergy." In response, Inditex group advisers revealed that whenever a potential takeover target emerged, group management was always too cautious, resulting in no agreement between the two sides.

After experiencing pure clothing retailers, to listed companies, and then to the fast fashion benchmark all over the world, Zara, 44, is standing at a crossroads.