Zara’s Indian unit Inditex Trent made profits in two out of the three years

Sagar Malviya & Rasul Bailay, The Economic Times

Mumbai/New Delhi, February 4, 2013

With a rotten economy and an unemployment rate of 26%, Spain’s brand image may be in tatters, but not that of one particular Spanish brand – Zara. In India, where some of the best-known international labels have met their Waterloo, Zara has proven to be adept at selling fine feathers to the fashion-conscious.

The world’s most popular ‘fast fashion’ brand, Zara’s Indian unit Inditex Trent – a joint venture between the brand’s owner Inditex with Tata Group’s retail arm Trent – has made profits in two out of the three years it has been around. In contrast, Levi Strauss continues to be in the red despite being in India for over a decade.

Zara has replicated a model that has worked for it globally – creating affordable, copycat versions of the latest fashions or designer-wear and making them available to shoppers in double-quick time. Inditex not only owns Zara, it also controls almost every bit of operations – from design to distribution and a large chunk of manufacturing. If a new style is not a hit within a week, it goes off the shelves. Even popular styles don’t stay long. There is no warehousing and reorders are rare.

"Zara is known for its fresh fashion delivery every week. Their weekly delivery supply chain is the best in the world. Consumers always think these clothes will go out of stock if they don’t buy them quickly," said Vineet Gautam, country head for Bestseller Retail, a rival of Zara’s that sells brands such as Vero Moda and Jack & Jones.

In the first half of 2012, Inditex clocked revenues of US$9.3 billion (Rs. 49,000 crore).

The Indian unit made profits of Rs. 38.3 crore and Rs. 22.5 crore in the previous two financial years, documents filed with the registrar of companies show. Zara declined comment for the report.

Jaspal Singh Sabharwal, a partner with Everstone Capital, a private equity fund with investments in retail chains, said Zara in India churns out more than 10,000 designs in a season and that helps it stay relevant to customers. Moreover, customers visit Zara stores – there are nine of them – some 14 times on average in a year, resulting in 85% of merchandise being sold at full price compared with the industry average of 60%.

Zara’s early success in India reflects its global growth.

Amancio Ortega Gaona, who was last year named the third-richest man in the world, founded Zara as a maker of lingerie in the northern Spanish town of La Coruna in 1963. Today, there are 1,600 Zara stores in 85 countries.

Industry executives said demand is only part of the reason for Zara’s financial success in India. It strikes hard bargains with landlords and mall owners, keeping real estate costs in control. Most of Zara’s back-end and merchandise sourcing are handled by Inditex while the Tata expertise is mainly for identifying real estate and locations. Of the eight directors on the board of Inditex Trent, just three – Trent’s vice-chairman Noel Tata, Inditex Trent’s Chief Financial Officer P Venkatesalu, and the company’s MD Sanjay Rao – are Indians. Rao, who was financial controller at Inditex in North America, moved to India to launch the operations.

As Zara expands in India, experts said the challenge will be to sustain sales momentum. "There might not be many locations which could give them high sales per square foot. Also, as they open more stores, the initial scarcity value could erode," said Devangshu Dutta, chief executive of retail consultancy Third Eyesight.

Inditex Trent plans to open over 18 stores in the next three years in cities such as Mangalore, Surat and Indore, said a person aware of the plans.

The pitfall could be that shoppers in these cities may not have the same attraction for Zara despite having the propensity to spend on international brands. Several mall owners are also getting wary about renting stores to Zara.