Analysis: Price hikes test Inditex’s ability to stay in fashion

MADRID, Sept 15 (Reuters) – Zara owner Inditex’s strong first-half results show its strategy of raising prices from early 2022 is paying off so far, but it and other fashion retailers they must be careful not to overdo it with further growth that may scare them. away from buyers, analysts said.

Instead, it should consider incremental increases intended to test customers’ willingness to pay more, rather than automatic and across-the-board price increases, they said.

The world’s biggest fashion retailer said on Wednesday it will raise prices again in the second half of the year after spring and summer hikes. It reported a 41% rise in profit for the six months to July and sales rose by around a quarter, beating investors’ expectations. Read more

Shares in the Spanish group jumped as much as 6%, with its success in passing higher costs helping the stock outperform European rivals such as H&M this year.

Fashion manufacturers in Europe and North America continue to feel pressure from rising energy, labor, transportation and raw material costs and are thus likely to have to raise prices further. But while six months ago that was an almost automatic reaction, companies need to take a “more granular approach” to 2023, said Finn Hansen, CEO of market research firm PriceBeam.

“Recent price increases were largely driven by rising input costs, while future price increases will still look at input costs, but will also increasingly look at consumer affordability, willingness to pay and consumer responses. expected customers, so not as automatic as last time,” said Hansen.

PriceBeam expects about two-thirds of manufacturers to raise their prices in the coming months.

THE GREAT POSTPONEMENT

Apparel sales in most European markets rose in the first half of the year as shoppers flocked to holidays and events following the lifting of COVID-19 restrictions. But demand has slowed slightly since August, raising the prospect that a squeeze on household budgets is hurting.

Zara’s opening prices were 12.2% higher in July than a year earlier, more than the 5.6% increase at H&M over the same period, according to UBS research. The firm monitors prices on Zara’s websites in 12 major markets.

“While the first price increases were received in the first half of the year … we expect Inditex and most peers to post double-digit price increases in Europe in the second half. Cumulative price increases of 15-20% in Europe have likely to lead to lower consumer trading,” Credit Suisse said in a research note.

Its analysts expect overall European clothing sales to soften from November as inflation continues to squeeze consumer demand.

Deutsche Bank analysts believe that Inditex should change prices gradually to move towards a 10% increase this year, to avoid any negative consumer reaction.

“The good news is that this does not appear to be impacting demand yet, despite tougher market conditions in August,” they wrote.

Reporting by Corina Pons Editing by Mark Potter

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