P&L: How Zara Is Dominating The Fast Fashion World

on iTunes, SoundCloud and at Bloomberg dot com. You know, Lisa Zara said to be part of the fast fashioned part of the retail market that's kind of really figured out how to give consumers exactly what they want with a deep dive at what Zara is doing and why they don't like that fast fashion description to what they're doing. Stephanie Baker is senior writer at Bloomberg Markets and she

joins us from our London bureau. Stephanie Um the story in Bloomberg Business Week, which is online and on newsstands. Love the story, just say, I really love it. I do too, because I think we all know about Zara and we often hear about when we look at the retail sector. Stephanie, this is one of the retailers fashion retailers that seems to have figured out how to do it.

Talk to us about Um internally how it works. Yes, I was really fascinated by Zara how they managed to get it right time and time again UM in terms of coming up with designs that people want UM And I was curious when I started this, who is their chief designer? And I asked around and apparently they don't have one, which makes them quite unique in the retail space. You know, the likes of Gap, Um, Prime, Mark H

and M they all have chief designers. Zara doesn't have one, partly because they are pushing out new designs so quickly that there's no way they could channel them up through a hierarchy like that and turn around new fashions as quickly as they do. Fashion democracy isn't it? It is? And I saw it in action when I was there, and I found it really impressive because it's kind of designed by consensus. If if everyone likes it, and you know, perhaps the top men's wear buyer women's wear buyer doesn't,

well he's outvoted. He or she is outvoted. And I thought that was a really clever way of doing it. They have a very flat management structure and they're very much focused on process, on looking at data from the stores, talking to store managers trying to figure out what is the feedback, what are people wanting? And they don't just churn out, you know, big sellers and just make more of them, because they know we all don't want that. We don't want to rock up to a party with

the same dress that someone else is wearing. There. They then tweak the design, make it different, but you know, kind of channel the same types of themes that are working well well. Um. One thing that I thought was so compelling in your story was that Zara's parent company has virtually no ad budget apart from social media marketing. Can you talk about how they make their social media

presence so effective? That's another surprise I had. I assumed that they did, and then I looked at it and I realized, No, they don't advertise in the fashion magazines or in newspapers, or they don't do billboards any of that. Um.

They have they decided it's not worth the money that. Um. What they're doing is, you know, pulling ideas from consumers and as opposed to what traditional fashion retailers do is they dream up a design, they dream up a fashion campaign three months in advance, and then market it heavily through um lots of advertising dollars to consumers. Um. You know, they are clever about how they use social media, but they don't spend on advertising. And it's interesting too that

you know, they don't have to write. I feel like what an interesting error were living at. Donald Trump right has been very smart using social media. He hasn't He didn't really have to spend a lot on traditional ad dollars with networks and so on and so forth. And similarly, Czar, like some of the customers you know, create Twitter accounts on on various items. You've got you writing your story about. Is it a blue coat that got its own Twitter

account and everybody started just posting pictures of the coat? Well, this isn't Why doesn't everyone copy them? Well, this is the other question I had, which was they're not so easily copied. Uh. This is a culture and a vertical supply chain that has been built up over four decades UM. Six of their production is at factories that are close to their headquarters, so Spain, Portugal, Morocco, um. And you know it's that's not an easy model to copy. If

you're an H and M or a GAP. I think it's that that's probably why they have broken ahead of the pack. Stephanie Baker, senior writer for Bloomberg Markets, talking to us from the London bureau of Bloomberg LP. Fascinating look at Zara and it's incredible democratic strategy for are getting fashions out quickly and distributing them through social media. At least a brown boys here with Carol Masser. This is Blueberg. Chris Whalen, I'm so glad that you could

be with us today. Chris Whalen, Senior Managing Director at the Kroll Bond Rating Agency. I hope you had a wonderful Thanksgiving. Oh my gosh, congratulations. UM. I want you to talk a little bit about your view on financials, which is a little bit of a contrarian take to the pretty tremendous rally that we've seen over the past few weeks. Well, financials much neglected sector. You know, you can recall back in the mid two thousand's when it

was the biggest sector in the SMP. I think it's number three now and a lot of managers have been dying to own these names for years. So as soon as there's a hint of change in term, so as you guys were just discussing that interest marchin things of that nature, maybe different regulatory environment. Everybody cheered and they rushed in, But you know, it takes a long time to fix uh, seven eight years of very very low interest rates, because your typical bank rolls anywhere from fifteen

of its balance sheet each year. So it's going to take a long time to get the benefit of higher rates. And I think we are going to see higher rates over the next few years. How much higher? Like what's the trajectory Chris, that you may be are you know, kind of factoring into your models. Well, it's interesting. I'm doing a mortgage piece for Monday. Um in this nice quiet black Friday, and um, you know, the mortgage bankers are looking at a five handle for a thirty year

mortgage two years out. Wow, that's that's up from what three in a couple that's right. And just between the end of October and kind of now, in the mortgage market, we went from a three percent coupon for Fannie and Freddie's that's kind of a reference point for where the mortgage market is to a three and a half. So that's a big move. You know, most mortgage bankers try and hedge, you know, three quarters of a point maybe a point in market move for a year, and we

saw that in three weeks. So rate risk is now back on the table. And as I've been saying, you know for the past couple of days, we put a piece out about the banks last week. That's up on our website. But you know, there could be some surprises in the fourth quarter that are different from the surprises

we had back in the first quarter. You remember that when the market was very quiet, but everybody was assuing bound rates, and in fact, even with the Fed maybe raising some of their benchmarks, we were still assuming market rates would stay down with a flat yield curve. Now we have a steepening curve. You know, things have changed

rather dramatically. Well, and one point in your note was that you know, banks maybe more exposed duration or longer term treasuries and mortgages that sell off in this period of rising rates and could actually end up being a liability for the banks in the short term. I mean, isn't this sort of what the banks have gotten out of the business of doing, is owning big piles of risk your securities. And I understand the treasuries and agency

back mortgages aren't considered risky, but certainly the duration is. Well, this is the thing. Yeah, you're right under the vocal rule, which is kind of a halfway step back the glass eagle if you think about it. They're not supposed to trade for their own account, so all of their portfolio is supposed to be hedged in terms of price, but

they still have a big investment books. They also have a mortgage lending where you have to manage the incoming cash each month versus the number of mortgages you have to fund, and that rate lot desk is a very

important position, both for banks and non banks. So you know, if you were sitting near mid October and you thought you had a pretty good handle on your overall risk and then the yield curve moves half a point, you know you have a lot of people who may have gotten hit really hard in terms of just managing their risk. And remember, when you look at the projections from the mortgage bankers for next year, they're assuming the prepayments of

mortgages are going to plummet. They're talking about refinancing volumes, which are about half of the market this year. We're going to do two trillion and mortgages this year. Half of that was refinancings. They're talking about cutting that in half next year. You know, you you talk about kind of these tremendous moves that we've seen in the fixed

income market. Chris um And I think in your note you include something about, like watch the fourth quarter that how many financial firms, banks in particularly the Wall Street banks, you know, got caught off guard by the volatility and the moves up that we saw in treasuries following the election,

and that could have a financial impact on them. A lot of these people are younger than I am, and they may not remember the name nineties when we have things like Kidderpabuddy and long term capital management, and that whole notion of a mortgage bond because of changes in refinancings and pre payments going from a two year average life to an eat year average life, and when that happens, the volatility of that bond increases dramatically, and also the

pricing because you're suddenly pricing it off the ten year or the thirty year instead of off the two year treasury note. And that duration risk, what we call option adjusted duration is a big deal which people haven't had to think about in a decade. Well, but so, Chris, do you think that the financial stocks are poised for some sort of correction. I think that we could have some short term surprises before we see the medium term benefits a higher race. How do we do that? How

serious would the surprises be? We don't know, because you know, ultimately it comes down to how well the bank or the non bank is managing their rate risk and how well. And let put to you this way, if in the middle of October you were assuming a flat curve and stable market rates regardless of what the f O m

C did right, and suddenly you get the reverse. If you were a little light on your hedge, if you were kind of trying to get your margins up a bit by not being fully hedged on your investment book, you could have gotten hurt. Or to put it another way, you know, a lot of mortgage shops got annihilated in the first quarter in the second quarter because the value of their mortgage business kept getting marked down by the accountants, but they were making money on the hedge. Now you

have the opposite. Things like mortgage servicing rights are going to go up in value this quarter because the duration of these portfolios is going to extend. People are going to be slower to prepay their mortgages, so those cash flows are worth more, but you could lose it on the hatch. So it's a dramatic reversal of what we were dealing with in the first half of the year. So Chris got about thirty seconds or forty seconds left here.

Your advice to investors at this point sit tight or what? Look? I we we love the smaller banks. You know, we're a credit shop. We don't do equities, but we have been working with a lot of smaller institutions and they generally have really attractive yields both on their debt and their equity. So I would be patient, but I would just you know, caution people who have been focused on the equity markets. Don't underestimate the potential for surprises as

we go in the fourth quarter earnings. Chris Whale, and thank you so much for being with us as you marinate and the smells if you're wonderful home cooking for this Thanksgiving Chris left over? Yeah good. Left Over is Chris Whale and senior managing director at the Kroll Vond Rating Agency. They'll throw a little bit of cold water on the latest rally in financial smart thoughtful, right, because we're just watching the big moves and I just thought

it was really thoughtful. I would agree. I think it's an important thing to remember. Duration this is Blooper. We're gonna turn our sights overseas because it's turning out to be an interesting super election cycle if you look at what's going on around the globe. Next up France on Sunday, Francis Republican Party will choose its candidate for the presidential election next spring. Let's find out what we need to know. Joining us right now, government reported Greg Vescuzzi of Bloomberg News,

joining us on the phone from Paris. Greg, nice to have you here with us. What do we need to know right now about what's happening in France. Well that there's the second round of the primary on Sunday. The French Showays do elections in two rounds. The first round, anyone runs. Anyone who can get on the ballot runs. They were seven of them running last Sunday. The top two people now face off on still on this Sunday, and one was expected On Lingupe of the mayor, former

prime minister mayor of Bordeaux. Um, he'd been the front runner most of the time, but everyone thought that he would run off against Nicholas Sarkozy, who the former president is said he got eliminated in the first round. Then it's for another former prime minister of Francois Fillon will be running, who were running against pay Um So Um, it's Sunday, and it's it's fifth Sunday, and it's two thousand and sixteen. So I won't make any predictions because

every other breation not very good. How much has the the election of President Trump in the US on November eighth, how much of that is trickling into the discourse in France right now? Well interestingly and it's it has and it's hard to say what the effect has been. M Marine Lapin, A Marine Lapin, who's the leader of the far right National Front. Um. You know, she's the one that's most most compared to Trump in there not exactly the same, but um, you know, populist, anti immigration, anti

free trade, the European Union, anti European Union exactly. Um, she thought this is great news. I mean she she she's been going on and on. This just shows that the you know, the people are taking back control and you know, what happened in America can happen here. It happened in Britain. Um. On the other hand, something was never very popular in France. It was a real shock

for most of for most of the population. I mean, the polls show that when they pull people on it, like people say that day they wish he hadn't won. So you could almost say that it's caused sort of a reaction amongst some centrists or center right voters who maybe might have been tempted to to vote for Lapin. So I mean, again, it's really hard to say. The election is not till April, next April, the real election is not till next April, so it's very hard to

say how it will turn out. We also don't know how Donald Trump's going to turn out between now in April. UM. So there's not it's it's it's it's gone both ways. She certainly marine Lapin certainly sees it as a plus. Um. I think the other parties would sort of see it as a warning and that it works in their favor. So we'll have to see how that turns out, Greg you said what you initially said about you know, I don't want to have to predict because we certainly feel

your pain about predicting anything at this point. Um, how engaged is the French voter? Well, well, for general elections quite a lot. I mean only about vote so, um, you know it's it's a much higher rate in the US. This is a primary and it's the first time that the center right party, the Republicans, have held a primary, and the big question has turned out. Many more people voted last Sunday. They were expected. They were people thought that maybe two to three million people would show up

and vote. In the end it was little over four million. Um, there's not much. You only have to pay two euros, which is equivalent about two dollars and sign a paper saying that you share the values of the party, and that was it in order to vote in it. So it was open to anyone, which meant but there actually

was some tactical voting. There were some leftists who there were some people who normally vote for the socialists, vote for leftist parties who voted last Saturday, and they just they they wanted to make sure that that Sarkozy did not um was not the non there was not the candidate because they were they were afraid of next April or next May having to make a choice between Sarkoz and le Pen, which is the choice that that anyone on the center of the left did not want to

have to make, to have to sort of fairly right wingers running ast each other. So we don't know if those people are gonna go back this Sunday since Sarcuase has now been eliminated, We really just don't know. I mean, there were people who voted for fill last time because they thought that that would be maybe the best way to eliminate Sarquas. They may now vote for as you Pay, I mean, you know, as you pay people since he did rather badly in the first round, may be discouraged

and not come back to Sunday. We really don't know. It all comes down to turn out, and that that's one other reason why making predictions for this to this Sunday is kind of fool Hardy, well, can you talk a little bit about the breakdown in the French population with respect to the right leaning Republicans and the other party?

I mean, is it pretty much no no, not at all, because you've left the whole, You've left the whole left wing to the problem is that is that is that President Holland has been in office for five years now and whether fairly or not, his his term in office has generally been considered a failure. And he's at very very low approval ratings. Is depending on how the depending on the poster, his approval ratings are, they're they're they're

down in the teams and in some cases low teams. So, as I said, in France, it's a two round elections. Of two rounds. You always have a first round where a bunch of candidates run and then the up to run off. And did they run off in the second round? Um? I mean generally Frances split sort of kind of fifty fifty between left and right. But the problem is is that a far right, the National Front, has suddenly emerged and taken a lot of votes out of the more

traditional center right, let's say. Um. Meanwhile, support for the left has tumbled um because of Halland and it's also led to some some some renegade left is saying they're gonna run against him. Um on the far left. So I mean it's it's very very fragmented right now. I mean, on the whole, I would say that the spectrum is much wider than the US. It goes from much further to the left and much further to the right. But there's many more parties. It's not just two parties, you know,

playing Also parties come and go in this country. So it's very hard to you know, it's not like the U S. It's had to to two same parties that that have been in there for over a hundred years. And you know, I have sort of switched sides over those hundred years. Um, in France, parties they're born, they die, they they're reborn, new parties emerged, Greg, just real quickly five seconds. Is there a number one issue? Is it immigration?

Is it's economy? Economy, It's economy. It's definitely the conny unemployment, that's number one. All right, we gotta run. We'll be watching though as really, as I mentioned, a super election cycle around the world and certainly unpredictable on many levels. Greg the Scoozy government reporter at Bloomberg News, joining us on the phone from Paris on this Friday. If you're listening to Bloomberg Markets Carol Masser, along with Lisa Bramwitz

and Mrs Bloomberg. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio