Global Observer

Spanish clothing emperor zips to third richest man in the world

Posting in Technology

LA CORUNA -- Amancio Ortega, the man behind Zara, knocks out Warren Buffett to land third slot on Bloomberg's Billionaires, by not advertising and rapidly expanding through recession.

LA CORUÑA -- Last week, Bloomberg business dubbed Amancio Ortega Gaona the third richest person in the world. Founder of the world's second-largest clothing company started hawking clothes in '63, but it wasn't until the noughts and especially these crisis years that Ortega really started to expand his international textiles empire.

At 76, Ortega has lived the modern Spanish life. Born in the final year of the Spanish civil war, he has lived through the entire General Franco regime, the start of democracy, and a few important economic cycles. Ortega started his first clothing shop in 1963, but it wasn't until the year of Franco's death in 1975 that the first Zara opened. In 1991, he opened other stores like Pull & Bear and Massimo Dutti. Finally, in 2001, just after the change from peseta to euro, Ortega created the IPO we know today as Inditex.

The textile giant has locations in at least 82 countries around the world and is made up of nine different clothing brands -- the ubiquitous Zara, along with ZaraHome and ZaraKids, Bershka, Pull & Bear, Stradivarius, Massimo Dutti, Oysho, and Uterqüe. Inditex employs 110,000 people worldwide, with 39,100 of them within Spain.

Inditex shows no signs of stopping. The stock went public right at the start of the crisis in 2008 and the price has nearly tripled since. There were 3,691 stores in 2007, just before the Spain-supporting housing bubble burst, and that number should grow to 6,000 by year's end. Mid-range retail has not been recession-proof, but certainly Inditex has proven to be a force beyond economic influence, having already opened 500 stores this year. With a 39-percent stock growth this year alone, it isn't just speculation that the stock will continue to climb. In fact, over the last 12 quarters, Inditex has remained continually in the black.

After the announcement of Ortega's jump from sixth to third richest, the Inditex stock saw a huge leap and investor confidence in La Bolsa, the Spanish stock market, in general, saw a climb. Both boosts are particularly impressive since, in Spain in August, the whole country basically shuts or at least slows down, including a visible lull at the stock exchange. This announcement also followed closely behind July 24, which marked the lowest IBEX -- the average of the top 35 Spanish stocks -- since 2003.

Besides the plan to open more stores with the subsequent job creation worldwide, their logistics growth is focused within the wilting Spanish borders, promising to create around 1,400 jobs. Inditex's current economic victories seem to be because they are focusing their growth outside of a stagnant Spain and into so-called emerging markets, like China and India.

While Ortega's new title seems to be a much-needed help to the struggling Spanish economy, not everyone is convinced it's a good sign. In a time of crisis, a concentration of wealth may be damaging in the long run. Whether it's of concern or a good forecast for Spain's economy, Ortega's business makes for an interesting study.

The Spanish media has grown fond of dropping the pun no se da puntada sin hilo, or that Ortega runs his empire where no stitch is without a thread, every detail premeditated and planned.

Inditex versus H&M

Inditex falls behind H&M and in front of Gap in the world's top retailer Olympics. Of course, the three companies that are probably in your closet are fighting for the same customers as they sells basics and trends to both men and women, but this is, in part, where the similarities stop.

H&M has the advantage in lower prices, but it puts all its eggs in one shopping basket, while Inditex has nine different storefronts. The small-by-American-standards, two-story Principe Pio mall -- the only major commercial center in the center of Madrid -- touts Bershka, Zara, Zara Home, Oysho, Stradivarius, Pull & Bear and both female and male Massimo Dutti stores -- that's eight out of about 50 stores and kiosks. While H&M has a key location at the end of the ground floor, the Inditex stores are scattered around the mall. Oysho is placed directly across from its competitor Women's Secret. Bershka, Stradivarius and Pull & Bear are among their teens- and twenty-somethings-targeted competitors Sfera and United Colors of Benetton. The more expensive Massimo Duttis are across from more direct competitor Mango, where, like most locations, they only sell women's ropa. Inditex headliner Zara is right under the H&M; they both mirror each other with one of the largest men's sections in their respective stores on the left and women's on the right, at the main entrances. While H&M dominates a corner, you can't take ten steps on the bottom floor without passing the windows of an Inditex brand, with a broad price range and target customer base.

While it's clear that the way of the retail world continues to spin toward e-commerce, Zara and company were a bit behind, as they only opened online stores about a year ago. They are still well ahead of the majority of their competitors here in Spain, where consumers are less trusting of ordering anything tangible on the Internet that they trust for tickets.

In addition, Inditex is notorious for spending next to nothing on advertising, while we have all seen David Beckham in the H&M undewear ads earlier this year. Both H&M and Gap, as well as Iberian challenger Mango, have used celebrities in their advertising on television, billboards and bus stops. Zara only really features major print models in their catalogs and on their website.

Plus, trends aside, if you are a female professional in Spain, there aren't many options for business wear. H&M has historically been, up until the last few seasons, a more casual and going-out line. On any given day, half the women at the office in Spain are sporting something from Zara.

More than 40 percent of Inditex clothing is made within Europe. H&M sees nearly 80 percent of its clothing produced in Asia. This means H&M has to plan much further in advance and maintain larger properties with larger stocks, while the Inditex brands have an ability to cycle in new clothing biweekly, giving it a greater reputation for being fashion forward.

Since H&M is Swedish and Inditex is Spanish, no matter where their factories are or who they buy from, they should both be following the EU norms along the entire production chain. Of course, like pretty much all non-luxury clothing, there are some questionable practices. Since, Inditex has a higher percentage produced in Europe, it could be assumed that it has better labor practices, though not by a mile. Each of the top three clothing companies, while having strict codes of conduct against it, have been reported to have had some connection to child labor at some point. In 2009, fingers pointed to both H&M and Zara using Bengali and Uzbek cotton suppliers that employ children as young as ten. Both responded kind of obscurely, not taking any specific action or making any commitment that it would never happen again.

It is basically accepted that, particularly in its home region of Galicia and in Brazil, Inditex pays less in its factories than average EU business practices, but, since both Spain and Brazil see salaries far below the EU average, it isn't met with too much criticism.

Only time will tell if these business practices will positively or negatively affect the future of fashion.

SP Note: Since it was announced on August 7 that Ortega went from sixth to third place, it seems that he and Warren Buffett have been fighting for Bloomberg's bronze spot, with positioning changing daily over a difference of about a million dollars. Therefore, by day's end, Ortega may or may not be the third richest in the world.

Photo: Inditex

Jennifer Riggins

Correspondent (Barcelona)

Jennifer Riggins is the content manager and community builder for two SaaS Quote Roller and PandaDoc, as well as she teaches sales, English, and public speaking for Spanish small business. She holds a degree from William Paterson University. She is based in Spain. Follow her on Twitter. Disclosure