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

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  • Initial prices at Zara rise 12.2% in the year to July: UBS
  • Inditex says it will raise prices again in the second half
  • Analysts urge caution amid signs of slowing apparel demand

MADRID, Sept 15 (Reuters) – Zara owner Inditex’s strong first half results show its strategy of raising prices from early 2022 has paid off so far, but it and other fashion retailers need to be careful. Be careful not to exaggerate with new increases that can scare you. away from buyers, analysts said.

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

The world’s largest fashion retailer said on Wednesday it would raise prices again in the second half of the year after spring and summer increases. He reported a 41% profit increase for the six months to July and sales were up about a quarter, beating investor expectations. read more

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Shares of the Spanish group rose as much as 6%, and its success in passing on higher costs helped the shares outperform European rivals such as H&M this year.

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

“Recent price increases were primarily driven by rising input costs, while upcoming price increases will continue to factor in input costs, but will also increasingly consider consumer affordability, willingness to pay and expected responses from consumers, so they won’t be as automatic as last time,” Hansen said.

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

THE BIG SQUEEZE

Clothing sales in most European markets rose in the first half of the year as shoppers splurged on holidays and events after COVID-19 restrictions were lifted. But demand has slowed slightly since August, raising the possibility that shrinking household budgets are taking their toll.

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

“While early price increases were accepted in the first half of the year…we expect Inditex and most of its peers to post double-digit price increases in Europe in the second half. Cumulative price increases are likely 15-20% in Europe to drive consumers to trade lower,” Credit Suisse said in a research note.

His analysts expect overall European clothing sales to decline from November as inflation continues to dampen consumer demand.

Analysts at Deutsche Bank believe that Inditex should change prices incrementally to reach a 10% increase this year, to avoid any negative reaction from consumers.

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

Inditex shares outperform rivals

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Reporting by Corina Pons Editing by Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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