Analysis: Price hike tests Inditex’s ability to stay in fashion

Madrid September 15, 2011 Zara owner Inditex posted strong first half results in 2011. He plans to raise prices as early as 2022, but he and other fashion retailers should be careful not to overdo it with further hikes that could scare them. Analysts say consumers will stay away.

Instead, it should consider targeted increases to test customers’ willingness to pay more, rather than automatic and blanket price increases, he said.

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

Shares in the Spanish group jumped as much as 6 percent, as its success in bypassing higher costs allowed the stock to outperform European rivals such as H&M this year.

Fashion manufacturers in Europe and North America will have to raise prices as energy, labor, transportation and raw material costs continue to weigh on them. But while this was an almost automatic response six months ago, companies will need to take a “more holistic approach” to 2023, said Finn Hansen, chief executive of market research firm Price Beam.

“Recent price increases were primarily driven by increasing input costs, but future price increases will still look at input costs, but also at consumer affordability, willingness to pay and expected user responses,” Hansen said.

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

The big squeeze

Clothing sales rose in most European markets in the first half of the year as shoppers splurged on holidays and events after the lifting of Covid-19 restrictions. But demand has eased slightly since August, with the squeeze on household budgets taking its toll.

Zara’s starting price rose 12.2% in July from a year earlier, outpacing H&M’s 5.6% rise in the same period, according to UBS research. The firm tracks prices on Zara’s websites in 12 key markets.

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

Analysts expect overall European apparel sales to soften from November as inflation continues to dampen consumer demand.

Deutsche Bank analysts believe Inditex will need to reverse price hikes to a 10% increase this year to avoid any negative consumer backlash.

“The good news is that despite the difficult market conditions in August, this does not seem to have affected demand,” they wrote.

Reporting by Corina Pons Editing by Mark Potter

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