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

Inditex’s strong first-half results show its strategy of raising prices since early 2022, but it and other fashion retailers have to be careful not to scare away shoppers with more hikes.

They said that it would be better to test customers’ willingness to pay more by increasing the price.

After spring and summer increases, the world’s biggest fashion retailer said it would raise prices again in the second half of the year. It reported a 41% profit jump for the six months to July, and sales rose by around a quarter.

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The Spanish group’s shares jumped as much as 6%, with its success in passing on higher costs helping the stock to surpass European rivals such as H&M.

Fashion manufacturers in Europe and North America are feeling the pressure from rising energy, labour, transport and raw material costs and so are likely to have to raise prices more. Finn Hansen, CEO of market research firm PriceBeam, said that companies should take a “more nuanced approach” to the future in the years to come.

“The last price increases were mainly driven by rising input costs, whereas the upcoming price increases will still look at input costs but also increasingly look at consumer affordability, willingness-to-pay and expected consumer responses, so not as automatic as last time.”

About two-thirds of manufacturers are expected to raise their prices.

THE BIG SQUEEZE

In Europe, clothing sales increased in the first half of the year after the lifting of COVID-19 restrictions. The prospect that a squeeze on household budgets is taking a toll is raised by the fact that demand has slowed slightly since August.

H&M’s starting prices were 5.6% higher in July than they were a year ago, according to a research report. The firm monitors the prices on the websites.

The first price increases in Europe were accepted in the first half of the year. Consumers are likely to trade down because of the cumulative price increases of 15-20% in Europe.

European clothing sales are expected to decline from November as inflation continues to squeeze consumer demand.

Inditex should increase prices gradually to avoid a negative consumer reaction, according to the analysts atDeutsche Bank.

Despite the tougher market conditions in August, this does not appear to be impacting demand yet.

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Reporting by Corina Pons
Editing by Mark Potter

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