Inditex has sold its Russian business; what are the implications?

Russia's Ministry of Industry and Trade announced on Wednesday that the government commission in charge of overseeing foreign investment gave the green light to a deal under which Spain's Inditex could sell 100 percent of the shares of Novaya Moda (formerly Zara CIS), Inditex's Russian unit, to Fashion and More Management DMCC, a buyer from the United Arab Emirates, one of Russia's so-called "friendly countries".

The price of the transaction has not been disclosed by the Ministry.

As a result of this decision, some of its former shops are expected to reopen soon under new names - such as MAAG, DUB, ECRU or VILET - between April and May 2023.

This was confirmed by several videos that have been circulating on social networks and Russian media since the beginning of April, of Zara shop windows converted into MAAG in Moscow, as reported by the national media RBC, which also reported that the collections for the new brands have already arrived in Russia.

MAAG, DUB, ECRU or VILET, the new face of Inditex

After Russia's invasion of Ukraine, an armed conflict that began on 24 February 2022, Inditex temporarily closed its more than 500 shops in the country. It was not until just over a week later that the Spanish multinational announced its exit from the country.

It is not easy for any company to cease all its operations in a given market, as it entails paralysing part of its structure.

In the specific case of Inditex in Russia, the decision has meant closing the door to its second largest market after Spain, where it had been operating until now through an omnichannel structure made up of online retail platforms of its different fashion chains, as well as a network of physical shops consisting of more than 500 points of sale.

When a door closes, a window always opens

In March, the company was backed by the sanctions imposed by the different Western governments against the Russian Federation, which tried to show their opposition to such a conflict. But Moscow did not hesitate to respond with sanctions, safeguards and new agreements with new partners that would allow Western companies to reopen their shops in Russia under new names.

At the end of October 2022, Inditex announced that it had agreed to sell Novaya Moda JSC to the Middle Eastern investment company Daher Group.

Although the Spanish company assured that the terms of the agreement would disassociate the Inditex Group from the openings carried out by the investor, they detailed that they also leave some margin for Inditex to resume its business, in the event that the international context would make it possible in the future to resume the activity, studying the possibility of franchising its brands to the Daher Group.

An agreement that has been awaiting confirmation since October

Inditex would then point out that with this agreement they would be trying to preserve "a substantial part" of the group's jobs in Russia.

This decision had been up in the air since then, awaiting approval by the governmental commission in charge of agreements involving firms from the so-called ‘unfriendly’ countries - those that imposed sanctions against Russia - which since the outbreak of the conflict have complicated the exit of Western companies from the country with obstacles and sanctions.

Based on this series of background information and given the various implications of the matter, it is understandable why, despite the fact that many analysts have been expecting the return of the Spanish fast fashion giant to the Middle Eastern country for months, the final resolution has taken so long.

The fact is that it involves a large number of risks in terms of profits and profitability, as well as the obligations and responsibilities that the companies themselves have towards the workers who make up their own teams in the country.

Who are the actors in this agreement?

The investment company Daher Group is the owner of one of the largest shopping centres in the world, Dubai Mall, and is responsible for franchising the brands of the Inditex Group in Algeria, Bahrain, Qatar and Oman through one of its subsidiaries, the Lebanese group Azadea, which is responsible for franchising other international brands such as Adidas, Calzedonia, Mango or Urban Outfitters to a total of more than 37 brands between the Middle East and Africa, according to its own figures, which would make a total of more than 700 shops in 13 countries.

For its part, Fashion and More Management DMCC was registered with the DMCC (Dubai Multi Commodities Center) on 25 January. Its licensing director is Hassan Ghaleb Daher, one of the shareholders of Azadea which was founded in 1978 by his brother Wassim Daher.

In terms of its structures, as at 31 October 2021, Inditex had a total of 527 shops in the Russian Federation of its Bershka (106 shops), Pull&Bear (87 shops), Zara (86 shops), Stradivarius (76 shops), Oysho (63 shops), Massimo Dutti (53 shops), Zara Home (44 shops) and Uterqüe (12 shops) formats. However, by the end of 2021 the figure would fall to 515 shops.

This figure is lower than the 1,319 shops it had in Spain, but much higher than in other strategic markets, such as Mexico (409 shops), Italy (345 shops), Portugal (320 shops), China (307 shops), France (270 shops), Poland (233 shops), Saudi Arabia (173 shops), Germany (115 shops), the United Kingdom (104 shops) and the United States (99 shops).

In addition to standing out as its second largest global market in terms of number of shops, which is reflected in its business figures as 8.5 percent of its operating income, Inditex's presence in the Russian Federation is much greater than that of its competitors.

According to RBC data, Inditex spent 231 million euros to maintain the Russian business, including staff costs and rents. Small-scale imports and online retailers have helped to keep Inditex brands alive in Russia during this time.

This article originally appeared on FashionUnited.ES. Translation and edit by: Rachel Douglass.