The market value of Zara’s parent company has exceeded one trillion yuan, but why has it lost momentum in my country?

In the fast fashion wave, Zara once led the trend, but now it is facing the double pressure from local brands and emerging channels. How will it deal with it? To regain the trust of consumers, Zara needs not only localization transformation, but also strategic transformation of online and offline linkage.

Inditex Group, the parent company of the Spanish fast fashion leader Zara, recently announced its financial report for the first quarter of fiscal year 2024, showing a year-on-year increase of 7.1% in net sales. This achievement has pushed its market value above RMB 1 trillion, and has doubled in the past two years.

However, the fast fashion giant's journey into the Chinese market has not been smooth sailing.

Looking back to 2016, when Zara opened its first store in China on Nanjing West Road in Shanghai, it probably did not expect that it would need to close stores to improve profitability today. In the past decade, the dividends of my country's fast fashion market have made Zara prosperous, but now it faces a completely different competitive situation.

Zara not only has to face the sudden rise of my country's local fast fashion brands such as UR, MJSTYLE, TOPFEELING, but also has to face the new brands based on Douyin, Taobao, and Xiaohongshu, such as XUELI, LOOKNOW, LMDS, LABELHOOD and other trendy buyer stores that are "eager to try".

1. Zara’s parent company achieved impressive first-quarter results. What is its future growth potential?

But its financial report shows that global performance is still impressive.

In the three months ending April 30, 2024, the group's sales increased to 8.2 billion euros. If calculated at a constant exchange rate, the growth rate is as high as 10.6%. Although this growth rate has slowed down from 15% in the same period last year, it still exceeded the expectations of market analysts and demonstrated Inditex's strong strength in the fast fashion field.

With the increase in sales, Inditex's gross profit in the first quarter also increased by 7.3% to 4.9 billion euros; net income jumped to 1.3 billion euros, an increase of 10.8% compared with 1.17 billion euros in the same period last year. This series of impressive data has undoubtedly injected a shot in the arm for Inditex's stock price. As of the close of June 5, the Inditex Group's stock price rose 3.73% from the previous day to 45.57 euros per share. It is worth mentioning that in the past 12 months, its stock price has climbed 42.27% cumulatively, and its latest market value is as high as 141.863 billion euros.

In its financial report, Inditex Group attributed the success of this season to the creativity of the team and the strong execution of a fully integrated business model. The group said that the "very satisfactory sales growth" was driven by the spring and summer series products that were well received by customers. According to the latest data, this growth momentum continued from May 1 to June 3, 2024, during which store and online sales increased by 12% year-on-year at a constant exchange rate.

Supported by strong operating performance, cash flow from operating activities increased significantly, laying a solid foundation for the Group's future expansion and development.

In terms of store expansion, the Inditex Group opened a series of new stores in the first quarter of fiscal year 2024, and 48 stores reopened. It is worth mentioning that the group opened its first store in Tashkent, Uzbekistan on February 29, marking the further deepening of its global layout. As of now, the Inditex Group operates a total of 5,698 stores worldwide, demonstrating its strong market expansion capabilities.

In addition, Inditex Group also pointed out that although it currently operates in 214 markets around the world, its share in this highly fragmented industry is still low. This means that the group still has huge growth potential. It is expected that in the next few years, the total store area growth rate of Inditex will remain at around 5%. At the same time, store space will be combined with the strong development of online sales to jointly promote further sales performance.

Faced with operational challenges in 214 markets around the world, how can Inditex Group seize growth opportunities and further expand its market share?

2. Inditex’s financial report reveals: Four key strategies drive strong growth, and live streaming becomes a new battlefield

Inditex Group's first-quarter sales and gross profit both increased, and its stock price continued to rise. What is the secret? Inditex Group revealed that it is because the company continues to see strong growth opportunities.

The company also announced that it will continue to focus on four key areas: unique fashion proposition, improving customer experience, sustainable development, and commitment to talent.

In terms of fashion proposition, Inditex Group emphasizes the core position of creativity and design quality. The financial report mentioned that in fiscal year 2024, the group will continue to focus on product creativity, quality and design, and plans to launch a series of new product lines, such as The Leather Edition of Zara women's clothing and Venetian Veil of Massimo Dutti, aiming to bring more high-quality choices to global consumers.

Inditex Group has made great efforts to improve customer experience. The group plans to invest $1.9 billion in the next two years to strengthen logistics and expand the store network to improve operational efficiency and expand the brand's global influence. In addition, Inditex will also introduce new safety technologies in its stores to significantly improve customer experience and optimize the purchase process.

In addition to store optimization, Inditex Group is also actively expanding online channels to interact more closely with consumers through live broadcasts and other means. The financial report shows that in 2024, the group will launch weekly live broadcasts in the United States and the United Kingdom to explore new ways of communication to improve customer experience.

In terms of sustainable development, the Inditex Group also performed well. The financial report mentioned that the Zara Pre-Owned platform has been launched in 16 European markets and will gradually enter other new markets. The platform helps customers extend the life cycle of their Zara clothing by donating, repairing or reselling, thereby recycling resources and reducing waste. In addition, Inditex's Sustainable Development Innovation Center is working with a number of start-ups to jointly promote the development and application of environmentally friendly innovative technologies.

Inditex Group also attaches great importance to talent training. According to the financial report data, more than 12,700 people in the group were promoted throughout the 2023 fiscal year, and 72% of the vacancies were filled by internal personnel. This data fully demonstrates Inditex's emphasis on talent training and internal promotion. At the same time, the group also provides employees with abundant training opportunities to improve their professional skills and comprehensive quality.

In terms of online sales, the Inditex Group has also achieved remarkable results. Financial report data shows that online sales in fiscal 2023 increased by 16% to 9.1 billion euros. This achievement is due to the group's efforts to continuously optimize the online shopping experience and strengthen customer relationship management.

In April this year, the news that Zara closed 9 stores in the Chinese market attracted widespread attention. However, Inditex my country quickly clarified that the actual number of stores closed was far less than this number, and emphasized that my country is still an important strategic market for Zara. In addition to offline stores, Zara also provides services to consumers through multiple online channels, such as official websites, mini programs, apps, Tmall and Douyin. This online and offline integration model enables Zara to better meet the diverse needs of Chinese consumers.

It is worth mentioning that Zara has also achieved remarkable results in the field of live streaming. Last November, the brand tried a novel live streaming sales format on the Douyin platform, combining catwalks with live streaming, led by supermodel You Tianyi, presenting a visual feast. This live streaming not only received nearly 1 million views, but was also praised by netizens as the "ceiling of live streaming in the fashion industry."

Now, Zara plans to replicate this successful experience in the British, American and European markets to further expand its global influence.

3. Fast fashion changes in 2024: Why did the former giants collectively "lose momentum" in my country?

However, different voices are constantly heard. Some industry insiders claim that "in 2024, fast fashion brands have collectively 'cooled down' in the Chinese market." What kind of business perspective and observation of consumption changes is this?

It’s not as glamorous as the financial reports say. Behind the prosperity, by 2024, the fast fashion industry in the Chinese market has actually encountered unprecedented challenges.

Looking back over the past seven years, the number of ZARA stores in mainland my country has dropped from 183 to 96, almost halving. Similarly, leading international fast fashion brands such as H&M, Uniqlo, and GAP have not been spared. The number of H&M Group stores has dropped from 5,076 at the end of fiscal year 2019 to 4,369 at the end of fiscal year 2023, while GAP plans to close 350 stores by early 2024, equivalent to 33% of the total number of stores in North America.

However, contrary to the store closures, ZARA is gradually raising the prices of its products. Since January 2022, ZARA's starting prices have increased by more than 10% every month compared to the same period last year, and in April they rose by an average of 18.5%. This strategy seems to have worked, as ZARA's global revenue and profits have continued to grow despite a reduction in the number of stores.

The situation of Gap in my country is also not optimistic. The brand has been clearing out warehouses and closing stores on a large scale in many cities in my country, involving first-tier cities such as Beijing, Shanghai, and Guangzhou. Currently, there are only more than 110 stores left. In fiscal 2022, Gap's overall price-to-earnings ratio was -10.71, and its losses in the first three quarters reached 49 million US dollars. As for Uniqlo, which once threatened to open 3,000 stores in the mainland, its net increase in the number of stores in the Chinese market has also continued to decline, with a net increase of 66, 64, and 35 stores from fiscal 2021 to fiscal 2023, respectively. At the same time, single-store revenue is also declining. In fiscal 2023, the single-store revenue of stores in my country fell by 3% compared with fiscal 2019.

The decline of fast fashion brands in the Chinese market is certainly affected by the epidemic and the global economic environment, but the more fundamental reason is the change in the background of the times and the consumer population, as well as the rise of domestic brands in my country. The post-70s and post-80s, as loyal consumers of fast fashion brands in the early days, are now middle-aged, and their consumption needs and concepts have changed. The growing Z generation pays more attention to personalized experience and environmental sustainability, and no longer blindly pursues trends.

In this context, the product quality and brand concept of European and American fast fashion brands represented by ZARA have failed to keep pace with the times. Consumers gradually discovered that the product quality of these brands did not match the style of the stores. Clothes often deformed and faded after washing a few times, and were even worse than street stall goods. In addition, the styles of fast fashion brands are becoming increasingly out of touch with reality, completely ignoring the body characteristics of Chinese people, the tailoring is not suitable for Asians, and the model's body shape and movements are also lacking in reference value.

At the same time, the improvement of the supply chain capabilities of domestic clothing companies and the rise of national trends have also brought huge competitive pressure to fast fashion brands. Domestic fast fashion brands such as UR, Hotwind, and MJstyle have emerged, and local brands such as Jiangnan Buyi, Maimeng, and UR have extended their tentacles to fourth- and fifth-tier cities, with a significant increase in coverage in the sinking market. The rise of online e-commerce platforms and the gradual return of consumers to rationality have also intensified the reshuffle of fast fashion brands.

The failure of fast fashion brands in the Chinese market is also related to their unclear category positioning and lack of unique mental assets. Compared with lululemon's high-end yoga sports positioning, fast fashion brands such as ZARA have never had a clear category definition and cannot provide effective category support to tell consumers why they choose you instead of other clothing. In the clothing industry where sub-categories are rapidly differentiated, this defect is particularly fatal.

In addition, the supply chain advantage of fast fashion brands is no longer a core barrier. Take SHEIN as an example. It only takes 7 days from sampling to listing, and the number of new models in one month is equivalent to that of ZARA in one year. This "fast" is based on algorithms, which also means that in the future there may be other brands that are faster, more popular, and more overwhelming than SHEIN.

One of the reasons why fast fashion brands failed in the Chinese market is that they were not “attentive” about localization. In the past, senior executives of brands such as ZARA insisted that stores were the best advertisements and disdained to advertise and interact with celebrities, bloggers, and KOLs. During the e-commerce bonus period, ZARA did not enter the Tmall platform until 2014, missing the golden period of e-commerce development.

In order to find a solution, fast fashion brands have begun to turn to localized, differentiated, and refined operations. ZARA has increased its average customer spending, taken the route of large stores, and transformed itself into high-end fashion. The high-end line Zara Studio has also been launched. However, these high-end attempts have not been able to completely win back consumers. Compared with real high-end brands, the high-end sub-brands of these fast fashion brands lack a cultural depth; compared with designer brands and trendy brands, they lack a sense of niche independence; compared with luxury brands, they are even less competitive.

It can be said that fast fashion is no longer popular in my country. Behind the decline of brands such as ZARA and H&M is the rise of domestic brands and the change in consumer concepts.

IV. Conclusion

In order to regain the trust of consumers, Zara needs to do more than just understand the needs of Chinese consumers. It also needs to deeply localize its products, from clothing design to marketing strategies, to be close to the preferences of Chinese consumers. In addition, embedding Chinese culture and IP and telling stories that resonate with consumers are also key.

Of course, no brand can rely on past successful models unchanged. The implementation of localization strategies needs to be more careful and meticulous, and cannot simply "repeat the old path." Brands need to establish unique mental assets and clarify their category positioning in order to occupy a place in the hearts of consumers.