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The Rupp Report: The Right Idea To Be Successful

For decades, especially in Europe, everybody has complained that producing textiles in Europe is truly unprofitable. Over the years, the Western textile industry lost most of its experience and know-how by closing virtually every apparel-producing company.

The Fall Of Benetton
The last remaining successful label was Benetton with the extraordinary idea to produce all of its garments in raw white. Then, only when the orders — that is, the colors — were set, did they do the dyeing. The Benetton brothers and sisters established an empire with their slogan "United Colors of Benetton." Nobody ever believed that this empire could fall one day, but it did. Some retail shops are still there, but the name Benetton has lost its fascination for various reasons — some of which are well-known in the trade.

Go East?
To carry on, all big brands moved their production to Asia — to survive, as they said. Production costs went down, and the quality as well. Cheap retail chains emerged with the declaration to have the cheapest products, and they are. The names of these companies don't have to be mentioned — this is not of importance. But the fact is important that some of the biggest retail chains with big mail-order business in Europe, and mainly in Germany, went bankrupt and were sold for a nickel and a dime to venture capitalists. Countless retail stores were closed and the people lost their jobs. What went wrong? First of all, as in many cases, there was mismanagement, or, as it came through the grapevine, family mismanagement. However, one reason is definitely the move toward the Far East. Everybody who is not a big bulk customer these days knows the problem. And production takes time.

Verticalization
As the old saying goes, time is money, and fashionable apparel must be available very quickly. Producers have to be extremely fast with new trends: a film or an event can change shapes and, in particular, colors. Not to mention the quality: Years ago, a textile producer told the Rupp Report that the quality and transport expenses from producing in the Far East are unjustifiable if one is establishing a true calculation, including the cost of sending its own people to remote places and other such reasons. What should be done?

Well, more and more textile producers are establishing vertical production from fiber to finished garment, with short production cycles and transport routes. Not possible, many people said years ago, and still say so today. Not possible? Of course it's possible. Do you know, dear reader, Mr. Amancio Ortega Gaona from Spain? No? He is the founder of Zara, which today is the biggest fashion group in the world.

Incredible growth
According to the Bloomberg news network, 76-year-old Ortega is among the top five richest men in the world; his fortune was estimated on August 6 to total $46.6 billion. The business started quite humbly in 1963 with a small garment manufacturing company, producing bathing suits. In 1975, he opened the first Zara shop in La Coruña, Galicia. Even in those days, his company operated under the just-in-time regime. In 1985, Ortega put Zara under a new holding company, Industria de Diseño Textil S.A. (Inditex).

Growth has always been the business mantra for Ortega: "Growth is the mechanism of surviving," he once said. Today, Inditex is the biggest textile company in the world, with 5,618 stores in 84 different countries. In the first quarter (1 February to 30 April) of 2012 alone, the company opened 91 new shops. And the success continues: for the first quarter of 2012, net sales rose by 15 percent to 3.4 billion euros. Net income totaled 432 million euros, which is 30-percent higher than in the first quarter of 2011.

Also, the group's physical growth continues at an enormous speed: It will expand its 90,000-square-meter (m2) headquarters in La Coruña suburb Arteixo by another 70,000 m2. In 2006, Zara established its own stores in China. In a few weeks, it plans to launch online sales in China.

Most Exclusive Sales Points
Another reason for success is the choice of exclusive sales points: The usual way of entering a new market is to start with a small number of stores, which test the possibilities in each country before achieving a critical mass of customers. Zara opened its 91 new stores in 26 different markets, illustrating the global growth potential of the Inditex Group's retail concepts. The new stores included the global flagship Zara store in New York City at Fifth Avenue and 52nd street, and Inditex's first stores in Ecuador. Inditex now has a presence in 85 markets.

Stay West!
Certainly, the major reason for such a successful story is the fact that production throughput is extremely fast: It is claimed that the time from production to retail is about two weeks, and the time from the designer to retail is about five weeks. This is extremely fast compared to Zara's biggest competitor, H&M, with its 2,481 retail shops. The time frame for H&M from production to retail is estimated to be three to six weeks, and the time from design to retail is one to 12 months. Zara is therefore able to react very quickly to new fashion trends. Its computerized sales system informs the headquarters online if one product is successful. Within 24 hours new merchandise is in the shop.

This quick time to market is possible only because Inditex produces 65 percent of its articles in Europe, having the whole production in hand and under control with short transport routes. Zara's philosophy is not to be the cheapest supplier, but the best in terms of the quality/price ratio. While H&M's average sales price is 10 to 15 euros, Inditex is selling at an average price of 15 to 20 euros. "Nobody is just buying because of the price," Ortega said. "The power of the brand is extremely important and the right place for the shop is important too."

He must be right.

August 14, 2012

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