| HONG KONG/MADRID
HONG KONG/MADRID Dec 2 Esprit Holdings'
chief is doubling down on a bet to fix the struggling
clothing retailer he took charge of a year ago by revamping its
existing business model and recreating it in the image of his
former employer-now-rival, Zara.
Jose Manuel Martinez Gutierrez, 44, has stacked his
management suite with veterans of Zara owner Inditex,
the world's biggest retailer whose model of rapidly changing
fashion analysts say is among the best in the industry.
He also unveiled upgrades to technology and distribution to
help his new hires get clothes designed, manufactured and on the
racks in three to four months from the current seven to eight
month time frame.
Now, all he has to do is get customers to buy the clothes.
The former McKinsey consultant and supply-chain whiz has
laid the foundations for Esprit's recovery over the next 12-18
months with his nuts and bolts overhaul - he cut 10 percent of
Esprit staff in the past year - but the real gauge of success
will be in growing sales.
And in today's increasingly crowded market for high-street
fashion, that means being able to adapt to the rapidly changing
and divergent tastes of price-sensitive shoppers.
"We are mostly focusing now on improving all of our
products' design and value for money, rather than on rethinking
our sales strategy," Martinez told Reuters.
To succeed, he will need buy-in from every part of the
business, ranging from Esprit's design and sourcing departments
to its marketing managers.
"Our business figures are extremely far from our goals and
expectations," he acknowledged in a letter to shareholders in
Esprit's most recent annual report in October.
While Esprit's plans may be similar to what worked for
Inditex, it faces at least one problem its rival didn't.
Inditex owns most of its stores. Nearly a fifth of Esprit's
stores and 60 percent of its sales area is franchised and not
directly owned and run by the Hong Kong-listed brand which also
has headquarters in Ratingen, Germany.
Feedback on which clothes are selling well takes longer.
Franchises tend to be quicker to cut their losses by putting
poorly selling items on sale - a potential problem for a company
such as Esprit, which has franchise-run stores and self-branded
stores in some of the same countries.
"It becomes more complex to manage inventory and pricing in
a situation where a certain amount of internal competition has
been created," said Jamie Merriman, a senior analyst financial
research firm Bernstein Research.
Martinez said that decisions to open or close stores would
be based on return on investment and profitability but that
Esprit plans to keep its multi-channel distribution model.
Even if Martinez succeeds in dramatically shortening
Esprit's production time, it's not clear whether speed alone
will be enough to revive the brand.
H&M, Gap Inc and Uniqlo, the flagship brand
of Japan's Fast Retailing Co Ltd, are faster than
Esprit at getting new products to market, and also cheaper. More
expensive brands like family owned Max Mara and Gucci, owned by
luxury conglomerate Kering SA, are also developing
quicker turnaround times, as are luxury brands such as Prada SpA
"Competition is very intense," said Aaron Fischer, head of
consumer research at brokerage CLSA. "Esprit has high brand
awareness but it needs to convert foot traffic into sales - and
that requires good products. Right now, their products are quite
poor compared with their peer group."
Esprit shares hit a record low of HK$6.95 ($0.90) on
September 26, 2011 as the company struggled with loss-making
stores and closing down its North American operations. The
shares now trade over HK$16 ($2.06), but have remained well
below historical highs for more than three years.
Yet only two of Esprit's 10 biggest shareholders have
trimmed their stakes in the most recent reporting period, and
those cuts were just 0.01 percent and 1.03 percent,
respectively, according to Thomson Reuters data. Six of the top
10 investors increased their stakes and newcomer Tiger Global
Management LLC bought a 5.09 percent stake.
"The company has been very transparent in communicating our
strategy to the market, which includes our shareholders, and so
far the overall response has been positive," Martinez said,
responding to Reuters' questions via email.
Since joining Esprit in September 2012, Martinez, who spent
nearly a decade running Inditex's supply chain, has hired at
least five former colleagues as his top lieutenants, news of
which propelled the company's shares each time.
His latest hire was at the end of October when Rafael Pastor
Espuch joined as chief product officer, sending the shares more
than seven percent higher.
One thing that stands out about the new hires is their many
years of service with Inditex, which ranges from six years to as
many as 18 years.
"All these people certainly have a fast-fashion DNA, but can
they change the culture of a company on their own?" said Joaquin
Villalba, who was former head of European logistics operations
at Inditex and worked with Martinez.
THE MIT CONNECTION
Much of Inditex's success can be attributed to its tightly
controlled distribution system that sends tens of thousands of
garments a day from distribution centres in Spain to more than
6,100 stores in some 86 countries.
The speed of the system, which uses sophisticated software
and robots to process and pack orders, helps it to respond to
catwalk trends as fast as within a fortnight.
It's a strategy that the company has fine-tuned over the
years in partnership with the Massachusetts Institute of
Technology's LGO MBA program in the United States and is a
strategy that Martinez worked to refine shortly before he left
"Instinct has been used to make many pertinent decisions,
from design to distribution. Design is difficult to measure, but
distribution is not; analytics lie behind many distribution
processes in the retail world," said Villalba, who founded
mStore Operations, a business application for smartphones that
supports fast-fashion processes like ordering and restocking.
Rachel Kelley, the author of an MIT thesis on transferring
clothes between stores, said Martinez mentored her during her
six-month internship at Zara and set her the task of creating a
mathematical model to make re-stocking more efficient.
"He had a very clear vision for the project," said Kelley,
who expects her new model to earn Inditex an additional $18
million per year in profit. "He knows where he wants Esprit to
go and how he wants to redesign the supply chain, and I think
that's why he'll achieve it."
Martinez has already moved to get clothes on racks more
"We have already invested in a state of the art, fully
automated distribution centre in Mönchengladbach, Germany," he
told Reuters. "Additional investment may likely be required in
warehousing space to implement a more ambitious stock