“Zara is not market leader on the high street by accident.”
Although my theoretical physicist son may disagree with me, it seems that time is flowing more quickly these days. I don’t think that is just because I am getting older, it is primarily because we live in a more connected and rapidly evolving world. New ideas get seen and disseminated more quickly and this has put pressure on many industries to improve their responsiveness to change. For clothes retailers this is a big deal and some have responded better than others.
Whilst Esprit is floundering at the moment, Zara is unquestionably the market leader on our high streets and in our malls. H&M is a fellow traveller in this “fast fashion” space also offering trendier and cheaper clothes. Zara follows the catwalks and produces clothes which are very on-trend, but also more simple classic styles which are hard to beat for the price. Esprit is no match whatsoever in style terms. Zara nails the chic European thing in a way which is attractive to women in Britain but also in many other markets around the world.
Of course, there are many things you have to get right to build a global network of 5618 stores, like Zara has, but as Esprit show us, just having shops and filling them with stuff isn’t enough to dominate your sector. No, to do that you need a meaningful competitive advantage that is hard to replicate and Zara has the right one for its industry in 2012. It has designed its business to be particularly responsive to change and has a business model based on rapid and agile production. This allows it to simply outpace its rivals. It has taken literally the idea of being in the fashion business better than anyone else right now.
Inditex, the owner of the Zara clothes chain has reported a 30% increase in net profits in the first quarter. Not bad with the European economy contracting and with high street rival Esprit reporting a 74% drop in net profits for the half year to February. Zara is the world’s largest clothes retailer and is now Spain’s largest company by market capitalisation as well.
Esprit has been in trouble for a while now and recently embarked on an $18HK turnaround plan, so the surprising announcement of the departure of both its Chairman and CEO, on the same day, has sent its share price into something of a tailspin. The CEO was leading the turnaround so there is now some understandable concern about it ever happening. It is in the rather careless position of being leaderless and with a new top team that has no retail experience. It is actually quite hard to see how anyone gets themselves into quite such a silly position.
The contrast between the two businesses is stark, but it isn’t the ridiculous leadership muddle Esprit is in at the moment that separates the two businesses. Zara has a strategy based on a meaningful and probably sustainable competitive advantage, responsiveness and production agility, whereas Esprit doesn’t. It’s as simple as that. So what? Well, do you have a strategy anywhere near as compelling? If you don’t you might want to think about it.