Zara Flagship Store in China Closed: Dwindling or Fine-tuning? | China Unlocked

By TMTPost/ Translated by Gao Jing

While many brick-and-mortar clothing companies are suffering from retail and market saturation, Zara, a high-street fashion brand owned by the Spanish conglomerate Inditex group, was previously a textbook example of how retailers can maintain high revenues. Known for its efficiency, Zara only needs two weeks to develop a new product and have finished goods arrive in its stores.

However, Zara’s situation has begun to change in recent years. It shut its flagship store in the heart of downtown Chengdu this February.

The store, opened at the De Luxe Shopping Center on Zongfu Road at the end of 2011, was once Zara’s single largest retail outlet in China.

Nevertheless, Zara’s parent company did well last year. Inditex’s net profits increased in 2016, to which Zara made a great contribution compared with other brands owned by the group.

 

Slowing Store Expansion

In terms of store expansion, Uniqlo, a Japanese casualwear retailer, stands out among the international high-street fashion brands competing in China. It opened a total of 100 new outlets in the country between 2013 and 2014, while few of its competitors expanded their store network over the last two years.

Differing from Uniqlo — which is still pursuing an aggressive strategy — Zara revealed last year that it would slow store expansion and invest more in building its e-commerce platforms.

According to a 2016 Wall Street Journal report, Inditex’s offline sales grew at a rate of 6 to 8 percent, lower than the expected 8 to 10 percent.

In addition, Chinese customers are now changing their ideas on consumption. As their buying power grows, more and more Chinese have turned their eyes to quality international fashion brands. Considering that the quality of Zara products is inconsistent and the styles are repeatedly copied, it is inevitable that Zara is no longer customers’ first choice.

Inditex CEO Pablo Isla noted that the store expansion slowdown doesn’t necessarily mean a diversion from offline retail, but is simply a reflection of a strategy to optimize the allocation of resources. The world’s largest fashion retailer plans to prioritize larger flagship stores located in prime areas in major cities.

Therefore, the shutdown of a lower performing site is probably just part of Zara’s ongoing normal fine-tuning of its store network strategy in China.

Online Competition

At present, nearly all high-street fashion brands are strengthening their e-commerce capabilities while easing their pace in expanding offline chains. Inditex CFO Ignacio Fernández said that the company prefers development on all platforms as more and more people prefer to make purchases via a variety of different channels.

“For example, for Inditex, more than one third of our customers would make online purchases and pick up their items in stores, and two-thirds of them would cancel the orders on site,” Fernández said. “Customers also visit our stores if they can’t find the right size online.”

For Zara, it is probably a smart move to reduce the size of their store network, and the resulting lower fixed costs can help maintain the long-term profits of its parent company. This echoes a claim made by Simon Bowler, an analyst at BNP Paribas, that “future sales growth should come from lower capital intensity”.