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Smaller brands a drag on Inditex UK sales

Inditex UK sales growth slowed in the 2015-16 year, dragged down by underperforming smaller brands.

The Spanish-headquartered retailer’s flagship brand Zara breached £500 million in sales for the first time and recorded growth on par with 2014/15 – an impressive feat given its maturity, though boosted by two new stores.

Group-wide sales in the UK reached £622 million, dragged down by smaller brands Bershka, Massimo Dutti and Zara Home, which all recorded sales declines. Inditex’s focus on profitability has paid off, with operating profit rising £4.6 million, and margin growing to 9.1 per cent, up 0.2pp on the year. Bershka, however, remains unprofitable, posting a £4.5 million loss, though this was exacerbated by a £2.2 million impairment charge on the value of its fixed assets. It is, however, more worrying that Pull & Bear is now in the red as well, with an operating loss of £225,000.

Zara accounts for 86 per cent of Inditex group sales, up from 85.2 per cent last year, heaping pressure on the brand to maintain its trend-led offer and meet customer demand for fashionability.

While Inditex previously lagged behind online, its eCommerce proposition has been well invested in, and Zara’s mobile app in particular is a real asset, aided by good design, functionality and purchase inspiration. Unlike H&M, Inditex offers click & collect, though halting its service during sale periods is detrimental and the retailer must find a way to meet increased demand.

By extending its price architecture at Zara, Inditex is well positioned to take advantage of consumers trading up as disposable incomes rise, however, justifying price points is essential via investment in quality and customer service – which is sometimes lacking despite the premium store environment. As the market becomes ever more crowded, there is no room for undifferentiated brands and the overlap between Pull & Bear and Bershka is yet to be addressed, limiting their chances in the UK.

  • Kate Ormrod is a senior analyst at Verdict Retail.

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