INDITEX: FROM “LOOK GOOD” TO “DO GOOD”
Inditex, the leading player of the second most polluting industry in the world, has the responsibility to demonstrate to the fashion world that the challenges posed by climate change can become opportunities that encourage innovation, costs reduction, and consumers engagement.
THE APPAREL INDUSTRY
The apparel industry is the second most polluting industry globally, exceeded only by oil, and it accounts for 10% of global carbon emissions, with more than 150 billion garments produced every year[i]. Consumption of clothing has grown fast, accelerated by lowering price and changing consumer behaviors. CO2 emissions are expected to grow by 77% by 2025, mostly driven by higher penetration of “fast-fashion” brands in emerging markets[ii].
CHALLENGES AND OPPORTUNITIES
To capture the impact of climate change on the fashion industry, I will focus on the world’s largest fashion retailer, Inditex, the owner of Zara. I expect climate change to affect Inditex through 4 types of forces:
- First, global warming is affecting the way fashion operates and in specific impacting the launch calendar (longer summers are postponing start of winter season) and composition of its fashion collections (introduction of transitional collections with lighter materials[iii]); as well as forecasting and margin results (2015 record high temperatures led to excessive inventory in winter-related apparel, and subsequent heavily discounted promotions[iv]). Inditex is very well positioned to react to these rapid changes, thanks to its ability to design, manufacture and deliver product to stores in three weeks[v], significantly faster than its competitors.
- Second, climate change is affecting the availability and price of key raw materials used for the production of garments (for example, cashmere[vi] and cotton), which poses additional pressure on retailers` margins. Due to lower availability of water from depleting aquifers and increases in temperatures the industry has seen cotton prices increase by 5-6% over the past 2 years[vii].
- Third, consumer demand is shifting towards brands known for their sustainability attributes, driven by millennials` increased awareness of environmental issues[viii]. This trend has pushed Inditex to launch in September 2016 a new line (“Join Life collection”) made using environmentally friendly materials[ix], which presents an opportunity for Zara to better engage with a growing market segment.
- Last, Inditex will increasingly face regulatory risks, given its prominence in a highly polluting industry, and its HQ base out of Spain. Even if the COP21 Climate Agreement signed in December 2015 will only come into effect in 2020[x], Inditex may be affected more than its competitor by local (EU and Spanish) environment regulations, known to be more stringent than elsewhere[xi].
INDITEX ENVIRONMENTAL GOALS
Inditex has reacted to the climate change challenges by introducing goals across 2 dimensions. The first initiative of Inditex’s Global Sustainability Strategy commits to eliminate toxic chemicals from its supply chain by 2020[xii]. The second commitment is to reduce by 2020 (vs. 2012) by 15% the energetic intensity per garment of own operations, and to decrease the use of energy in stores by 10% per garment[xiii]. Inditex will pressure its broad network of manufacturing partners, most of which are based in developing markets where environment law are lax, to comply with Inditex’s own standards[xiv], thereby positively influencing key suppliers that feed the global fashion industry.
The sustainability policies that Zara has put in place in the past have been offset by the impact on resources consumption generated by rapid growth (see exhibit 1[xv]). Inditex should take its Global Sustainability Strategy one step forward and match some of the innovation that other companies in fashion have introduced:
- Kering, a luxury conglomerate, publishes yearly its own Environmental Profit and Loss account to identify where are most carbon emissions coming from; for Kering in specific, they occur in raw material production and initial processing stages[xvi]; H&M, Zara`s main competitors, estimated that 25% of energy footprint is generated by customers, after the product has been sold[xvii]. Based on this insight, Inditex could educate consumers to take care of their clothes with “low-impact” solutions, or invest in the development of new fibers that will require minimal care.
- As the number of clothing that consumers keep decreases significantly[xviii] , H&M has introduced a program that encourages customers to drop off old clothes across its stores, which the company then recycles.[xix]. Alternatively, Inditex could tackle the waste issues by engineering apparel that can be recycled more easily.
- Inditex should minimize the environment and financial cost of transporting goods around the world, thereby reaping savings. For instance, opening a DC in China, a fast growing market where the number of Zara`s stores has doubled in 4 years, could end the current costly move of garments from Asian factories, to Spain, back to Asian stores.
As industry leader, Zara has the responsibility of demonstrating to the fashion industry that climate change challenges can become opportunities to innovate, reduce costs and engage with consumers.
(796 words)
[i] http://www.reuters.com/article/climatechange-summit-fashion-idUSL8N13S2EN20151203
[ii] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/style-thats-sustainable-a-new-fast-fashion-formula
[iii] http://wwd.com/business-news/business-features/climate-change-impact-fashion-apparel-10525390/
[iv] http://wwd.com/business-news/business-features/climate-change-impact-fashion-apparel-10525390/
[v] https://www.businessoffashion.com/articles/intelligence/inditex-agile-fashion-force
[vi]http://www.kering.com/sites/default/files/document/bsr_kering_report_climate_change_implications_and_strategies_for_the_luxury_fashion_sector.pdf
[vii] http://wwd.com/business-news/business-features/climate-change-impact-fashion-apparel-10525390/
[viii] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/style-thats-sustainable-a-new-fast-fashion-formula
[ix] http://www.glossy.co/rise-of-streetwear/zara-launches-first-sustainable-fashion-line
[x] https://www.businessoffashion.com/articles/intelligence/what-the-cop21-climate-agreement-means-for-fashion
[xi] http://www.economist.com/news/finance-and-economics/21637411-environmental-regulations-may-not-cost-much-governments-and-businesses
[xii] https://www.businessoffashion.com/community/voices/discussions/can-fashion-industry-become-sustainable/inditex-agile-fashion-force
[xiii] https://www.inditex.com/en/sustainability/environment
[xiv] https://www.businessoffashion.com/community/voices/discussions/can-fashion-industry-become-sustainable/inditex-agile-fashion-force
[xv] https://www.businessoffashion.com/community/voices/discussions/can-fashion-industry-become-sustainable/inditex-agile-fashion-force
[xvi] http://www.kering.com/en/sustainability/epl
[xvii] https://www.businessoffashion.com/articles/intelligence/what-the-cop21-climate-agreement-means-for-fashion
[xviii] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/style-thats-sustainable-a-new-fast-fashion-formula
[xix] https://www.businessoffashion.com/articles/intelligence/what-the-cop21-climate-agreement-means-for-fashion
This is a great post and very informative. In considering the impact of climate change on the apparel industry, I had only ever thought of the direct link to raw materials. It was very interesting to also consider the CO2 emissions and impact after the actual point of sale. I know that I have never actually considered the possibility that my used or worn clothing would be detrimental to the environment. Since Inditex is such a leading player in the apparel industry, owning brands like Zara’s and Massimo Dutti, it could be a wise move for them to expand their R&D function in order to explore new textiles with minimal environmental impact. While smaller and established companies may not be able to take this step as easily, Inditex has the resources to invest in increased R&D and to transfer this across their portfolio of brands.
Great post on a very interesting topic with broad impact across the planet. Apparel is a fascinating topic because it touches so many different consumers, businesses and countries throughout the supply chain process. Further, the high volume nature of the apparel business creates a massive opportunity for apparel companies to shape the impact they are going to have in the future. It is easy to identify opportunities for cost savings with rising commodity prices (such as cotton) as an opportunity for these companies to reduce their footprint, but the difficulty will come from identifying key operational changes that might have a negative impact on some parts of the business such as using building into their stores a recycling program for their customers.
Thanks for this incredibly helpful post. I wrote my blog post on H&M so it’s very interesting to read how Inditex / Zara is approaching this topic. You suggest that Inditex / Zara works on improving transportation efficiency. I agree with this evaluation given the carbon footprint from transporting products around the globe from global manufacturers. I would suggest changes from trucks to rail. H&M has done some work in this space and even partners with agencies like the US Environmental Protection agency. I would think for these measures to take place, there needs to be a coordinated effort amongst apparel manufacturers / retailers, and without an economic incentive or governmental regulation, very difficult to do
Great job in how structured, analytic and well-researched this post is. One challenge I really had not thought about before is how climate change’s impact on weather leads to necessary adaptations of the launch calendar and not forecastable swings in consumer demand – it totally makes sense.
I would, however, challenge your and McKinsey’s claim that millennials are increasingly considering sustainability as a factor in their purchasing decisions. In my blog post about Stella McCartney, I actually argued that shoppers will continue to buy products because of their aesthetic, quality, functional and aspirational aspects, rather than because of a product’s eco-friendliness. So far commenters have agreed with this hypothesis.
It could be that this is a difference between fast-fashion and luxury product purchases? Maybe individuals consider sustainability aspects more in fast-fashion purchases because the polluting practices of those companies are already more salient to them? Interested to hear your perspective!