11. Case Study Integrated Valuation: Inditex

In both its company profile and its 2020 Annual Report (AR 2020), Inditex spends several pages explaining its business model. Inditex claims to have a unique business model, ‘fully integrated, digital and sustainable’. But is it? And how can it be described in a more objective way? As discussed in Chap. 2, Johnson et al. (2008) argue that a successful business model has three components:

For Inditex, these three components can be described as shown in Fig. 11.2.

A chart represents three components of the business model. These are customer value proposition, profit formula, and key resources and processes. Each component enlists related elements.

Crucially, Inditex’s customer value proposition is driven by frequently issuing new collections. To minimise costs and maintain high levels of ROIC, the garments are produced in an outsourced supply chain over which the company exercises strong bargaining power but limited control. This means large negative external impacts can be created beyond the boundaries of Inditex’ legal entities⁴—and indeed they are, as we will see later on. Strengths from an F perspective can be weaknesses from an S and E perspective. Box 11.1 provides a critical perspective on Inditex’s marketing.

A company’s purpose is the reason for its existence, which is grounded in the way it creates value for its clients and other stakeholders. Hence, it should be closely related to its business model and competitive position. In the case of Inditex, it is hard to find a stated purpose.

The word purpose is mentioned 79 times in the 2020 Inditex Annual Report but only once in the meaning that we are looking for—and that instance is in a table on page 581 of the report, in reference to its annual corporate governance report. In the latter report, the word purpose is used 83 times, but again only once in the meaning we are looking for, in a section on board responsibilities (page 167): ‘Monitoring compliance with the company’s internal codes of conduct and corporate governance rules, also ensuring that the corporate culture is aligned with its purpose and values’. However, the purpose itself is not mentioned.

The closest we find is this excerpt from the company’s ‘About us’ section: ‘Our workforce never loses sight of the customer. We work to create value beyond profit, putting people and the environment at the centre of our decision-making, and always striving to do and be better. It is fundamental to how we do business that our fashion is Right to Wear’.⁶ And for the Zara brand, the website says: ‘Bringing attractive and responsible fashion, as well as improving the customer’s experience, are Zara’s priorities’.⁷

Hence, Inditex’ purpose is a question mark. And so is the fit of that purpose with what stakeholders want, and with what is needed for successfully navigating transitions.

Value is created for a multitude of stakeholders. But who are the company’s main stakeholders? And how do their interests relate to and conflict with each other? Like many companies, Inditex gives an overview of its stakeholders (as identified by Inditex itself) in Fig. 11.3.

A graphical representation of Inditex's stakeholders. Customers, employees, suppliers, the community, the environment, and shareholders are among them.

The company also gives an overview of the associated tools for dialogue. However, the friction between stakeholders is not given—and one might even disagree with the list of identified stakeholders. It is therefore useful to fill out a stakeholder impact map, as done in Table 11.4.

The boldly framed box in the stakeholder map shows the main frictions: those with nature, the company’s suppliers, and the employees of its suppliers. These are the result of the company’s business model. First, the outsourced supply chain means that costs are minimised at the expense of suppliers, who in turn minimise their costs at the expense of environmental costs and their employees. Second, the high frequency of new collections, transported over large distances, and whose leftovers are burned impose a very high environmental cost.

So far, the relation with customers seems to be fairly comfortable, but that is changing too: Neumann et al. (2020) find that perceptions of social responsibility directly affect consumers’ attitudes towards fast fashion brands, as well as trust (a direct predictor of purchase intention) and perceived consumer effectiveness. Apparently, consumers need to perceive sustainability efforts of these brands as altruistic.

The stakeholder impact map gives good clues about the company’s financially material sustainability issues: the issues that could or indeed already do affect the company’s financial value drivers. Figure 11.4 gives an overview of the issues that Inditex deems material.

A two-part table has three columns and seven rows. The column headings are number, material topic, and subtopics.

Some of these issues are purely on the E side (e.g., climate change; environmental footprint minimisation; protection of natural resources), some purely on the S side (e.g., diversity, equality and inclusion; quality of employment; human rights), while others are overarching or a mix of both (e.g., value chain transparency and traceability; value creation; ethical behaviour and governance).

It is hard to disagree with the above material issues, but that doesn’t mean that they take them seriously enough. Inditex could cherish minor improvements on these issues while shunning the elephant in the room. For example, the practice of cancelling already produced goods is at odds with both ethical behaviour and responsible purchasing. And there seems to be very little progress on topics such as circularity and value chain transparency & traceability.

What is missing from the analysis is a clear view on how these topics relate to each other. Unfortunately, the company doesn’t apply the concept of double materiality (i.e. clearly distinguishing how material issues affect Inditex—the inward perspective of Fig. 11.4) and how Inditex creates external impacts⁸ (the outward perspective). And hence the feedback loop between internal and external impacts is not discussed (see Chap. 2 on double materiality).

External impacts are typically not a company’s favourite topic (as it often has a negative public relations effect), but it is very important to society: what kind of positive and/or negative external impacts does the company generate? To what extent does the company report about these external impacts? Can they be quantified, or even be priced? Remember that for both SV and EV, the value calculation can be done in the three steps as presented in Chap. 5:

In this section we take step 1 for Inditex; steps 2 and 3 follow in Sect. 11.4.

Be mindful that we present ways for outsiders (i.e. those without access to the detailed information that people within the company have) to value EV and SV. The company itself can go much further and in much more detail. It can actually compile impact-weighted accounts, i.e. an impact-weighted P&L and an impact-weighted balance sheet. The Impact Economy Foundation (2022) gives guidance on how to do that in its Impact-Weight Accounts Framework (IWAF) and provides principles accordingly (see Chap. 5). It takes the perspective of a company or an auditor, that means it emphasises precision, whereas we take the perspective of an investor or stakeholder who wants to have rough understanding. Some organisations, such as Alliander and ABN AMRO in the Netherlands, have already published impact statements in the spirit of the IWAF statements (see Chap. 17).

As an investor or stakeholder, our first objective is the same as in the IWAF framework: identification of material impacts. As shown in Appendix A5.1 of Chap. 5, IEF (2022) provides a list of impact categories, which we map to the Inditex business model in Table 11.5. We also add planetary boundaries impacts that are not included in IWAF. This assessment is based on multiple sources, such as sustainability research articles by asset managers, sustainability ratings agencies, and NGOs; and academic literature on sustainability in textiles and fashion.

Most of these issues are recognised as problems by Inditex. And the company has some goals on these topics, such as 100% eco-efficient stores and removal of plastics bags. However, the issues are discussed without putting them in the proper context and without being clear about the size of these problems. As a result, it is impossible to tell how close or far off these targets are in reducing the company’s harm to (almost) zero. In fact, it turns out they do not even come close, as we will see later on, since these goals and all current efforts are mainly on the company’s own operations, and not the vastly larger operations in its supply chains.

Fortunately, some context is given. In its Annual Report, Inditex describes some initiatives, for example, on circularity: ‘Under the Make Fashion Circular initiative, Inditex has participated in developing a common circular economy framework for fashion, which has been integrated into our strategy’ (AR, 2020, p.280). And it says this on GHG emissions (AR, 2020, p.319): ‘Inditex has set ambitious emissions reduction targets approved by the Science Based Target Initiative (SBTi), which envisage a 90% reduction in Scope 1 and 2 emissions and a 20% reduction in Scope 3 (purchased goods) emissions, in both cases for the 2018-2030 period. These targets are the first milestone in Inditex’s ambitious emissions reduction strategy, whose purpose is to achieve decarbonisation by 2050’.

The trouble though is that Scope 3 is what matters most, since Scope 3 accounts for about 98% of the company’s total emissions.⁹ Hence, the company’s focus on the least significant part is misleading and taints the credibility of its sustainability ambitions.

Inditex’ negative external impacts are the main sources of the company’s transition risks and opportunities. The x-curve of transition in Fig. 11.5 illustrates them by showing the current regime (top left) of fast fashion at the lowest possible prices; the emerging niches (bottom left), such as responsible fashion, second hand, recycled, and rented clothing, which provide the ingredients for the desired future regime (top right) of responsible & circular fashion; the bottom right gives examples for practices that need to be phased out, such as the burning of unsold clothing.

A schematic of an x curve. The top left represents fast fashion at the lowest prices and the top right presents responsible and circular fashion at fair and real prices. The bottom left exhibits responsible fashion and the bottom right mentions the burning of unsold clothing and cancellation of orders.

The question is how Inditex is going to navigate this transition. How quick and broad-based is the transition of the fast fashion sector? Can it significantly reduce its negative impacts without perishing in the process? How well prepared is Inditex compared to others? To what extent can Inditex adapt? The answers to these questions can be expressed in an estimate for parameters b_j and a_i from Eq. 2.​1 in Chap. 2.

Given the major negative impacts that the fast fashion industry generates for society on both S and E and the availability of substitutes, we rate the industry’s transition exposure (b_j) quite high at 0.8. This means that a large part of the industry is likely to be transformed. On the adaptability of both the industry and the company (a_i), we take a more mixed view. On the one hand, there is plenty of scope to mitigate social issues in the supply chain; the company could stop burning clothes; and there are opportunities in adopting alternative business models based on better customer information, rental and recycling. On the other hand, the high frequency of new collections is such an integral part of the business model that one could question the company’s (and the industry’s) ability to really reduce its negative environmental impacts. And so far, this seems to remain out of scope. Thorisdottir and Johannsdottir (2020) find that CSR managers within the industry focus on supply chain innovation, eco-friendly products, and workers’ safety. There are some sustainable fashion brands, but they are mostly small or medium-sized (Triodos Investment Management, 2021).

The above considerations raise the question of management quality. Management has been very successful in growing the company in a profitable way. Operational excellence and customer centricity are major strengths. But the transition challenges demand a rethinking and redesigning of the business model. ‘What got you here, won’t get you there’. The key question is whether management is up to that challenge. The company’s reporting suggests that management is still partly in denial, but strategic thinking tends to be ahead of reporting. Next, the company does experiment with alternative business models in, for example, recycling. Will it dare to allocate more resources to such strategic options? Will it dare to cut value destructive activities that are currently cash flow positive? These are the questions that investors and other stakeholders should be asking.

Interestingly, there is a change in management, with Óscar García Maceiras being named the new CEO, and Marta Ortega Pérez, the founder’s daughter becoming the new chairwoman. A BBC news item is sceptical on her appointment:¹⁰ ‘She says she’s grown up around the company and learned a lot in her time formally working there. But others will see this more as a Spanish version of the hit HBO series “Succession”, where family members are given preference for top jobs over better qualified members of the team. Indeed shares in Inditex have fallen on news of the appointment’. The item also refers to a number of challenges that management faces: ‘At a time when consumers are becoming more aware of the environmental costs of fast fashion, Zara particularly is in an awkward spot—its reputation is built on bringing style trends to High Street stores quickly and cheaply. There are also supply chain concerns. In November 2021, authorities in the French city of Bordeaux rejected plans by a Zara store to double its floor space, over allegations the fashion label may have profited from the forced labour of Uighurs in China. But the new chief executive and chairwoman are unlikely to be steering the Inditex ship without the help of founder Amancio. When he resigned as chairman in 2011, he didn’t put his feet up. Instead the man known as “The Boss” has remained very much involved in the company. Though now aged in his 80s, it’s a fair bet he’ll remain so, even with the appointment of the new executive team’.

As argued in Chaps. 6 and 9, the best method for valuing F is a DCF analysis. One can build a DCF from scratch in Excel or use a template in which the model is already prebuilt, including the formulas that relate the cells to each other. Table 11.6 shows such a template, filled out for Inditex per 1 January 2021. In the model, the grey cells represent historical data or assumed historical data that are filled in for the specific company; the black cells are assumptions; and the white cells give results from formulas. For example, the 2017 taxes on EBIT are the product of the 2017 EBIT (historical data) and the 2017 effective tax rate (assumed historical). The value driver assumptions are expressed in growth rates (such as sales growth) and ratios (such as the EBIT margin), where the historical ones (here 2017–2020) provide an indication for the value driver assumptions. For example, the 2017–2019 EBIT margins (and further back) give a good impression of what normal EBIT margins for Inditex look like, hence our 16.5% EBIT margin going forward..

Filling in the historical data is relatively straightforward, but making the assumptions requires making choices. One way to do that is to extrapolate the past into the future, i.e. take growth and margin assumptions that are simply the average of historical growth and margins. However, that’s a naïve approach, especially for companies that have been growing very fast in the past and/or had very high margins.

Our preferred approach is to reverse-engineer the DCF to the current stock price. I.e., what growth, margins, and cost of capital does the share price imply? This is effectively the market’s opinion, which one can contrast with one’s own assumptions. So, the 0% upside is not a coincidence, but by design: we made adjustments to the value driver assumptions in such a way that they resulted in a fair share price that equals the (then) current share price. This can deliver interesting information: sometimes the market prices in value drivers are much more aggressive than the historical ones, which could be a sign of overvaluation or of very good business prospects; other times, the forward-looking value drivers are much more modest than the historical ones, which could be a sign of undervaluation or of declining business. In the case of Inditex, the market seems to agree that its growth will slow down but that it can maintain its high margins.

Next to sales growth and margins, the cost of capital is the third value driver (see Chap. 9). We use the weighted average cost of capital (WACC) provided by Eq. 13.​4 (see Chap. 13):

whereby r_E is the cost of equity and r_D the cost of debt. Chap. 12 explains in more detail how to calculate the cost of equity and debt. The basic idea is that the cost of equity is a combination of a risk-free rate r_f and a premium for market risk (E[r_MKT] − r_f). The exact cost of equity depends on a company’s sensitivity to market risk, which is called the β_i. So, we only need to calculate the beta from market data (see Chap. 12 how the beta can be derived from the correlation of a company’s stock returns with the stock market). We find a beta β_i of 1.21, based on 5-year monthly stock returns. The risk-free rate r_f of 1.5% and the market risk premium (E[r_MKT] − r_f) of 5% are generally applicable parameters. Using Eq. 12.​15, we get r_E = r_f + β_i ∙ (E[r_MKT] − r_f) = 1.5 %  + 1.21 ∗ 5 %  = 7.6%.

For the cost of debt, we can add the credit risk premium to the risk-free rate. Inditex has an AA credit rating, which is equivalent to a credit risk premium of 1% (see Chap. 12). So, the cost of debt is r_D = r_f + AA spread = 1.5 %  + 1.0 %  = 2.5%.

Table 11.6 shows that equity E is €82.2 billion and net debt D is −€3.1 billion (as Inditex’s cash position is higher than its debt load). Using Eq. 9.​1, we can calculate the enterprise value of the company V = E + D = €82.2 − €3.1 = €79.1 billion. Using Eq. 11.1, Inditex’s cost of capital is \( WACC=\frac{E}{V}\bullet {r}_E+\frac{D}{V}\bullet {r}_D=1.04\ast 7.6\%-0.04\ast 2.5\%=7.8\% \)

The company’s net debt is negative. With such low and negative leverage, the company’s share price has relatively low sensitivity to the value driver assumptions, which tends to make the model more reliable. Nevertheless, one should do several checks to the model to avoid mistakes. For example, one could check sensitivities of the DCF value to value driver changes; do a multiples analysis; and check for behavioural biases such as extrapolation and overoptimism.

One way to link sustainability to valuation is by means of value driver adjustments (VDAs, see Chap. 9). In that method, the financially material issues are assessed in terms of their impact on value drivers in three steps:

For example, in the case of Inditex one could argue that the company grows faster (i.e. higher share value) because of customer relations and innovation and that the cost of capital should be higher (i.e. lower share value) because of environmental issues. These views can be summarised in a table (like in Box 9.3 in Chap. 9) that gives the adjustments per value driver (sales growth, margins, and capital) per material issue, and how much they affect the fair value of the DCF. In this way, the analyst can argue why they value the company more or less due to sustainability issues. This is a powerful way to link sustainability to valuation. It is also very useful for comparing competing companies. The limitation of the VDA approach, however, is that it is still quite static, in that it does not explicitly take transitions into account. This is particularly important for companies, like Inditex, whose business models have so far been a strength, but are turning into a liability, which they already are in social and environmental terms.

Qualitative transition scenarios can be deep and multifaceted, allowing management to identify new pathways for navigating transitions. Valuation scenarios, however, need to be simple to allow for quantification that makes intuitive sense. Table 11.7 describes such simple scenarios, along two dimensions: whether or not effective global climate mitigation occurs by 2030; and whether the company is well prepared for it.

To get to a scenario weighted valuation, we need to make models for each scenario and assign probabilities to them. We assign a 40% probability to effective global climate mitigation by 2030, and a 60% probability that Inditex is well prepared for it. Note however that this is not necessarily a good thing, since in scenario 2a the company prepares for a transition that does not happen. Hence, the probability of scenario 1a is then 40%*60% = 24%. The probabilities of the other scenarios can be calculated through the same method. Table 11.8 shows how the valuation model differs per scenario, and what (probability-weighted) fair value results from all four scenarios together.

The most unfavourable scenario is 1b, in which the Inditex fair value is only €10.4 per share, versus €31.9 in the most advantageous scenario (2b). The weighted average fair value of all four scenarios is €24.2, which is below the January 2021 Inditex share price, suggesting that the company is overvalued. The overvaluation may be caused by not (sufficiently) considering the effect of E and S issues on financial value by most market analysts (see the adaptive markets hypothesis in Chap. 14).

Of course, all this is debatable, and people might differ in their opinions about the scenarios and their probabilities. In that sense, valuations are just opinions, and the market price is the aggregate of those opinions. Those who think that scenario 1b has a higher probability than the above 16% will likely arrive at a lower overall value for Inditex than our €24.2. And this is just the value of the Inditex share, i.e. an expression of the value of F. It does not say anything yet about the company’s value in terms of E and S.

When expressing E and S in its own units, we ideally obtain an overview like the one in Table 11.9, that is having yearly amounts for various types of E and S, both historically and projections for the coming years. The list is based on the issues identified in the External impacts part in Sect. 11.2.

Actually filling out a table like Table 11.9 is quite difficult: in practice, most companies only give historical data for some types of E; and then only for their own operations, not for their value chain. And for forward-looking data, they might give guidance or targets on, for example, GHG emissions. Indeed, for Inditex we find some historical numbers for 2019 and 2020 in the annual report, as well as some targets. For the 2021–2030 projections, we aim to make estimates based on relations with other company KPIs and company targets. The projections need to be linked to the company’s activity levels. This link is imprecise: we can use sales as a proxy, and then ideally only the volume component of sales, so excluding price; but even then, there might be a mismatch between production volumes (which tend to drive emissions and other impacts) and sales volumes. In fact, Inditex discloses the amount of garments it places on the market, which is a proxy for sales volume.

In Table 11.10, we try to quantify the impacts that Inditex makes and start out with the activity levels, which help to put E and S into perspective. Unfortunately, this is a very sobering exercise: we only find usable data for GHG emissions. And even there the picture is clouded by the company’s focus on Scope 1 and 2 (which is in direct control of Inditex), as it effectively hides its much larger Scope 3 emissions in its supply chain (98 to 99% of its total emissions) at the back of its AR 2020.¹¹ Its ‘main decarbonisation commitments’ involve reducing Scope 1 and 2 by 90% by 2030, but the more important Scope 3 only by 20% by 2050—the company focuses on the former, while the latter is what matters.

Our assumptions are set accordingly, with a 2.5% annual reduction in Scope 3 emissions. This still results in 9.5 million tonnes of Scope 3 emissions by 2050. The other issues remain a series of question marks, for which we can look for proxies in external sources, which we will do in the next sub-section on monetisation.

The question marks mean that these impacts are not reported in the company’s disclosure, which raises the question to which extent the company considers them. After all, the company’s clothing products require cotton plantations, which use large amounts of water and nitrogen. There are emissions in transport and storage. And there is the waste generated across its supply chain, of which the company does report Scope 1 and 2, but not Scope 3; and does not split by waste type, which makes the data useless for our purposes. This also makes it impossible to determine the attribution of E and S: to what extent are they attributable to this company, and to what extent to other parts of the value chain?

Hence, the question of the user of an annual report should not just be: what’s in the company’s annual report? It should very much also be: what should be in their annual report that is currently not there? And how to communicate to the company that it should include it? As a rule, this amounts to timeseries data on the company’s contributions to planetary and social boundaries, ideally in a way that is relatable to its operations volumes. The guiding principle is double materiality: inwardly and outwardly material social and environmental factors should be included.

The third step to arrive at calculating EV and SV is monetisation, which is the expression of impacts in monetary units. To do so is challenging, especially if the non-monetary units are missing. But even then it can be done. The Impact-Weighted Accounts Framework (IWAF) (IEF, 2022) provides monetisation factors or shadow prices, which can be multiplied by the original units to arrive at monetary values. Table 11.11 lists some of IWAF’s shadow prices—see Appendix A5.1 for a full list of shadow prices with explanations.

From Table 11.11, we can directly apply the shadow price for contribution to climate change, which is €204 (=$224/1.1) per tonne of CO₂ equivalent in 2021. The carbon price is projected to increase with 3.5% per year (see Chap. 5). Total emissions (the top line in Table 11.12) are taken from Table 11.10. Following IEF (2022), we assume that Scope 3 carbon emissions are 50% attributable to Inditex, as primary company in the supply chain (see Chap. 5). Table 11.12 shows how the resulting flows are calculated and discounted at the social discount rate of 2.2% (see Chaps. 4 and 12) to arrive at the present value of Inditex’s contribution to climate change, which amounts to −€101.3 billion.

Of course, that large negative number is a result of the assumptions we made (still resulting in 9.5 million tonnes of CO₂ equivalent, as stated in Sect. 11.4.1), which are in turn driven by Inditex’s targets. For the other environmental and social issues, we lack the required data and cannot make such specific calculations. The rest of E is not there or hard to attribute (e.g., waste), and so is all of S. Hence, we don’t have the volumes of units to multiply with the monetisation factors. This applies not just to Inditex but is also typical for most companies. So, for the remaining issues we need to take shortcuts, such as using data of comparable companies or industry averages. In this case, we look for apparel data elsewhere. A publication by Impact Institute (2019) on the true price of jeans is quite helpful. Table 11.13 lists the components of the true price of jeans.

The data from Table 11.13 allow us to calculate the proportions of negative S and E impacts in the true price of jeans, which we can extrapolate to apparel in general and Inditex in particular. We admit that this is a stretch, but it is the best we can do now given our current information.

Table 11.14 provides the proportions of E and S in the true price. The top panel expresses the amounts as percentage of E, which is €10.9 (see E total in Table 11.13). The first line shows the GHG emissions (climate change) from Table 11.13 as a percentage of E: 15% (=€1.61/€10.9). The second line shows the S total for each stage of the production process in Table 11.13 as a percentage of E: 202%. So, total S is twice as high as total E.

The bottom panel expresses E and S as a percentage of the sales price, which is €80 per jeans. The GHG emissions are 2% (=€1.61/€80) of sales. Other E are 12% of sales. To prevent overestimation, we include only 50% of bonded labour in the S calculation, which is 20% of sales.

The above can be projected on Inditex in several ways. For example, we could assume that the other E impacts (i.e. E excluding GHG emissions) are 12% of sales of €29.6 bn in 2021 (Table 11.6): €3.5 bn per year. Or that the other E impacts are 6× larger than GHG emission impacts of €2.0 bn in 2021 (Table 11.12): €12.0 bn per year. However, we also observe that GHG emission impacts as a percentage of sales are much higher at Inditex (7% of sales, calculated as € 2.03 bn from Table 11.12 divided by €29.6 bn from Table 11.6) than in jeans (only 2% of sales in Table 11.14). This is partly due to much higher carbon prices, but does not fully explain the difference. We therefore feel that it’s better to stay on the lower side and go with the 12% of sales assumption for the other E impacts.

Next, we give Inditex the benefit of the doubt that it will materially bring down that number over time, with a 4% annual improvement. In addition, we assume that they are only 50% attributable to Inditex (as we do in Table 11.12). After all, not all these emissions are directly due to Inditex’ activities; a part is at suppliers—although then too, Inditex shares part of the responsibility. Chapter 5 explains that 50% of the E and S effects should be attributed to the integrated valuation of Inditex, as primary company in the supply chain, and the other 50% to the integrated valuation of other companies in the supply chain. Based on these assumptions, we calculate total E flows in Table 11.15. They amount to circa −€3.7 bn per year and a total EV of −€182.5 bn.

For calculating S flows, we take a similar approach. The results are shown in Table 11.16. In the true price of jeans, S accounts for 28% of sales. However, that number is inflated by a very high number for bonded labour, which accounts for over half (€11.95 out of €22.20) of the negative S in the true price of jeans. To be on the conservative side, we take only half of that amount for the negative impacts of apparel. We arrive at negative S impacts of 20.3% of sales attributable to Inditex, which we apply in Table 11.16. Again, we give Inditex the benefit of the doubt that it will materially bring down that number over time, with a 4% annual improvement. We also attribute 50% of the negative S impacts to Inditex, because part of the negative S impacts occur at suppliers for which Inditex bears some responsibility as primary company in the supply chain. Based on these assumptions, we calculate total S flows in Table 11.16. They amount to circa −€2.9 bn per year and total negative SV of −€137.2 bn.

The above numbers only include the negative S impacts of Inditex. However, the company also creates positive S impacts, such as the client value of its products (on top of what people pay for them), taxes, and the well-being of employment. The calculation of positive SV is shown in Table 11.17.

Paid taxes of €0.5 billion were 2.2% of sales in 2020,¹² but that number is not representative due to the Covid-19 pandemic. The corporate tax expense amounted to about €1.0 billion in the preceding years, or 3.7% of sales. The property and environmental taxes were 0.6% of sales. Combining the taxes, we arrive at a tax rate of 4.3% of sales.

The consumer surplus is a measure of consumer welfare and is defined as the social valuation of a product in excess of the price actually paid. As explained in Chap. 5, the consumer surplus is calculated as \( \left(\frac{Sales}{Price\ elasticity\ of\ demand}x\frac{1}{2}\right) \). Khaled and Lattimore (2006) find an average price elasticity of men’s and women’s clothing of 3.452. In the case of Inditex, the consumer surplus amounts to €2.955 billion (=€20.4 billion/3.452*0.5). This value has been created together by Inditex and its supply chain partners. We assume that the consumer surplus is 50% attributable to Inditex (and can be included in its integrated valuation), i.e. €1.478 billion, or 7.2% of sales.

The well-being of employment refers to additional well-being experienced by employees resulting from their employment at the company. We assume two life satisfaction points of €4813 (=2*$2647/1.1) (see Table 11.11). If we apply this to Inditex’ workforce of 144,116, we arrive at €694 million, or 3.4% of sales. However, since 2020 was a year with dramatically lower sales (i.e. inflating employees/sales), we have to correct this number for the lower sales of 31% in 2020 (which is a combination of a 28% drop in sales combined with an average sales growth of 3%) and use 2.3% (=3.4%*[100%–31%]) from 2021 onwards.

Adding up these numbers gives positive S flows of 13.9% of sales, which is over €4 billion per year—and growing; and a positive SV of €282.9 billion. Admittedly, positive SV benefits from growth, whereas negative SV (and negative EV) are based on more or less stable flows, since the reductions are already partly factored in.

Again, the above numbers are based on very rough assumptions, and hence very imprecise. However, they are the best estimate we have at this stage. And they point the way forward towards better data. For example, having academic evidence on the social value of apparel could help us make better assumptions. This applies even more strongly to data disclosed by the company on E and S in their own units.