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When a German wholesaler suddenly canceled a big lingerie order in 1975, Amancio Ortega thought his fledgling clothing company might go bankrupt. All his capital was tied up in the order. There were no other buyers. In desperation, he opened a shop near his factory in La Coruña, in the far northwest corner of Spain, and sold the goods himself. He called the shop Zara.
Today, over 650 Zara stores in some 50 countries attract well-heeled customers in luxury shopping districts around the world, and Senor Ortega is arguably the richest man in Spain. The clothing company he founded, called Inditex, has been growing ever since he opened that first Zara shop. From 1991 to 2003, Inditex’s sales—70% of which spring from Zara—grew more than 12-fold from €367 million to €4.6 billion, and net profits ballooned 14-fold from €31 million to €447 million. In May 2001, a particularly tough period for initial public offerings, Inditex sold 25% of its shares to the public for €2.3 billion. While many of its competitors have exhibited poor financial results over the last three years, Zara’s sales and net income have continued to grow at an annual rate of over 20%.
The lesson Ortega learned from his early scare was this: To be successful, “you need to have five fingers touching the factory and five touching the customer.” Translation: Control what happens to your product until the customer buys it. In adhering to this philosophy, Zara has developed a superresponsive supply chain. The company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheard-of in the fashion business, where designers typically spend months planning for the next season. Because Zara can offer a large variety of the latest designs quickly and in limited quantities, it collects 85% of the full ticket price on its retail clothing, while the industry average is 60% to 70%. As a result, it achieves a higher net margin on sales than its...