Analysis: Price hike tests Inditex’s ability to stay trendy

MADRID (Reuters) – Zara owner Inditex’s strong first half results show that its strategy to raise prices from early 2022 is paying off so far. Shoppers away, analysts said.

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

The world’s largest fashion retailer said Wednesday it will raise prices again in the second half of this year after raising prices in the spring and summer. increased and exceeded investor expectations.read more

The Spanish group’s share price soared by 6%, and its success in passing on higher costs has allowed it to outperform European competitors such as H&M this year.

European and North American fashion makers continue to feel pressure from rising energy, labor, transportation and raw material costs, and will likely need to raise prices even further. But while six months ago it was an almost automatic response, companies should take a “more granular approach” to 2023, says Finn Hansen, CEO of market research firm PriceBeam. .

“Previous price increases were primarily driven by higher input costs, future price increases will still take input costs into account, but will also depend on consumer affordability, willingness to pay and expected consumer response. It’s not as automatic as it was last time because it gets more attention,” Hansen said.

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

big squeeze

Clothing sales increased in most European markets in the first half of the year as shoppers flew away for holidays and events after the lifting of COVID-19 restrictions. However, demand has slowed slightly since August, making it more likely that pressure on household budgets is taking its toll.

Zara’s opening price in July was 12.2% higher than a year ago, higher than H&M’s 5.6% rise in the same period, according to a UBS survey. is monitoring.

“While the first price increases were accepted in the first half of the year, Inditex and most of its peers expect double-digit price increases in Europe in the second quarter. It could be 20%, leading to consumer trade-downs,” Credit Suisse said in a research note.

Analysts expect overall clothing sales in Europe to decline from November as inflation continues to weigh on consumer demand.

Analysts at Deutsche Bank believe Inditex will need to gradually change prices towards a 10% price increase this year to avoid a negative consumer reaction.

“The good news is that despite the tough market conditions in August, this still doesn’t seem to have impacted demand,” they wrote.

Reported by Corina Pons Edited by Mark Potter

Our standards: Thomson Reuters Trust Principles.