BARCELONA, Spain — Two years ago, Spanish retailer Mango could barely convince its employees to wear its dresses, skirts, and blouses, which many workers — and customers — thought were too formal.
Today, Mango has ditched the glitz in favor of more casual attire like that from Spanish rival Inditex SA, the world’s biggest seller of apparel and owner of the Zara brand. The change has helped Mango outpace Inditex in Spain’s 16.2 billion-euro ($21 billion) clothing market.
“We had gone way too far with our focus on clothes for parties and events,” said Enric Casi, general manager of the Barcelona-based retailer. “Not even our employees wore Mango.”
The casual push wasn’t the only lesson Mango took from Arteixo, Spain-based Inditex as it sought to address a decline in profit of almost 60 percent in the two years through 2011. That year, Isak Andic, the founder, chairman, and owner of almost 100 percent of the company, stepped back into a stronger day-to-day management role to help reformulate strategy.
Since then, Mango says, the chain has cut prices by about 20 percent across the board, bringing them closer to Zara’s. And the company has stepped up expansion outside of crisis-weary Spain and placed more emphasis on the fast-fashion model that has helped Inditex prosper.
“Mango is emulating Zara as much as it can,” said Luis Benguerel, an equity trader at Interbrokers in Barcelona. “It needs to follow a successful business in order to fix its mounting problems and achieve the type of growth Inditex has seen.”
Two years ago, about 70 percent of Mango’s revenue came from party and event clothing and 30 percent from casual wear. Now, it’s the other way round, Casi, 57, said in an interview.
Mango’s changes are bearing fruit just as the growth that made Inditex founder Amancio Ortega the world’s fourth-richest man shows signs of faltering. Inditex’s profit rose 12 percent in the three months through January, the slowest pace in five quarters and below analyst estimates.
Inditex shares closed at 101.05 euros in Madrid trading on Friday, down 6.8 percent since it announced annual earnings on March 13. Hennes & Mauritz AB, Europe’s No. 2 fashion chain, slid 0.9 percent in that time period, and have gained 2.4 percent since it released its first-quarter results on March 21. Mango isn’t publicly traded and doesn’t plan to sell shares in the short term, according to Casi.
While Inditex faces a “difficult situation” in its domestic market, according to Chief Executive Officer Pablo Isla, Mango is gaining traction in Spain even as retail sales plunge amid record 26 percent unemployment. Profit almost doubled last year after falling in 2011 to the lowest in almost a decade, Casi said.
Spanish sales for Inditex, a fifth of the company’s total, fell 5 percent last year. Mango’s home-country revenue gained about 20 percent, Casi said. H&M sales in Spain, including value-added tax, were flat in 2012. First-quarter revenue in the country fell 6 percent, the Stockholm-based company said last week.
Globally, Mango remains far behind Inditex, where revenue has gained every year for the past decade to 15.95 billion euros last fiscal year, making it the best performer in the Stoxx 50 since its May 2001 initial public offering. With a market capitalization of 63 billion euros, Inditex is Spain’s biggest company.
Mango’s revenue hit 1.41 billion euros in 2011. Last year, group sales grew about 22 percent, according to Casi –outpacing Inditex’s 16 percent growth. Still, that’s short of the 30 percent growth Mango forecast in its 2011 annual sustainability report. Mango predicts revenue will almost double from 2011 to 2015, to 2.75 billion euros. Inditex sales may rise 57 percent to 21.7 billion euros in the same period, according to the average estimate of 18 analysts compiled by Bloomberg.
H&M’s total revenue in 2012, excluding value-added tax, climbed 9.8 percent 120.8 billion kronor ($18.6 billion).
The Mango store on Calle de la Princesa in Madrid sells jeans for 29.99 euros, about the same as a similar pair at Zara next door. Mango’s 9.99-euro sleeveless cotton T-shirts, though, are double the price of Zara’s.
“Even if Zara still offers less-expensive garments, Mango has cut prices by a lot,” said Iratxe Lindosa, a 37-year-old social worker from Madrid shopping at the Mango in Calle de la Princesa. “A dress I liked but couldn’t afford in the past, I now buy it right away.”
Mango is cutting the time it takes for clothing to reach stores, keeping apparel fresh and appealing to younger customers, Casi said. That helps the company avoid constant discounting and restrict markdowns, he said.
Inditex’s gross margin, a measure of profitability, widened to 59.8 percent last year as H&M’s narrowed to 59.5 percent. Mango’s gross margin has shrunk for each of the last five years to 57.2 percent in 2011.
Mango now has more than 2,600 outlets in 109 countries. Inditex, which owns eight brands including Zara, Massimo Dutti and Bershka, has just over 6,000 in 86 countries. H&M says it has about 2,800 stores in 48 countries.
Mango is targeting 300 net store openings this year, or about the same as 2012. That compares with Inditex’s goal of about 450 new stores, a slower pace than the 482 net openings in the past fiscal year. H&M plans to add 350 new stores, up from the 325 previously planned.
Mango’s expansion in Spain will be “very limited,” Casi said. Inditex doesn’t plan to increase its Spanish store count this year, according to CEO Isla.
In another nod to Inditex’s strategy, Mango has diversified by opening brands for men and accessories, and it plans to introduce brands for kids, sports and underwear later this year. Next year, it’s planning new lines for teenagers and plus sizes.
Undertaking so much change so quickly will tax Mango’s management, said Jose Luis Nueno, a professor at IESE Business School and co-author of a Harvard Business School case study on Zara. In the process, profit margins may suffer as the company lowers prices and moves manufacturing from Asia to higher cost countries closer to Europe to make it easier to supply stores with the latest designs.
“We’ll still have to see results,” Nueno said. “Turning around the company in one year is too optimistic.”
At least, Casi says, employees are wearing Mango’s clothing again.
By: Manuel Baigorri; with assistance from Julie Cruz in Frankfurt; editors: Paul Jarvis, David Rocks