Spanish clothes price war fuels deflation fears

Spanish clothes price war fuels deflation fears

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Ongoing massive discounts offered by clothing retailers like Zara, Sfera and Cortofiel may spell disaster for Spanish economy.

MADRID - Faced with declining sales due to Spain's worst recession in a generation, Spanish clothing retailers like Zara have launched a fierce price war that has contributed to the risk of deflation.

The official summer sales period only gets underway at the end of June, but for the past few weeks signs announcing massive discounts have popped up in clothing store windows across the country.

At the flagship store belonging to Sfera, the clothing chain set up by Spanish department store El Corte Ingles to compete with Zara, colourful stickers advertise reductions of up to 30 percent.

Close by at a Springfield outlet, a chain belonging to number three
Spanish clothing retailer Cortofiel that sells contemporary clothes
aimed at young people, large signs announce a 50 percent discount on all
long-sleeved clothing items until the end of the month.

"These reductions are part of our strategy to face up to the economic
crisis. They are the sort of mid-season sales which are very effective,"
Ignacio Sierra, the corporate area director for Cortofiel, told AFP.
A woman stands by a store window displaying sales advertisements in Madrid on 23 April 2009.

Spain's clothing retailers have been feeling the pinch since the country
entered a recession at the end of 2008 as the global credit crunch
worsened a correction that was already underway in its property sector.

Each Spanish consumer spent an average of EUR 584 on clothing last year,
EUR 37 less than in 2007, according to a report issued last month by
Worldpanel Fashion, a division of market information group TNS.

Three in five Spaniards, or 59.2 percent, say they have cut spending on
clothing and accessories since the recession began, according to a
survey published in daily newspaper ABC earlier this month.

More people reported slashing spending in clothing than on any other
item, the study found.

"In a period of crisis, reductions, sales, are what work best to
stimulate demand. They attract the attention of clients, who feel they
are getting a deal," the president of trade lobby group Acotex, Borja
Oria, told AFP.

Prices for footwear and clothing fell 1.8 percent in March compared with
a year earlier, according to the National Statistics Institute (INE).

Transportation costs fell further, by 8.4 percent, due to the drop in
the price of oil while certain foods such as fish fell 6.2 percent.

The declines helped Spain to become the first of the 16 nations that use
the euro single currency to record a negative inflation rate in March
and April.

Consumer prices fell 0.1 percent in April compared with a year earlier
and follows a 0.1 percent decline in March, said the National Statistics
Institute (INE).

Prime Minister Jose Luis Rodriguez Zapatero's Socialist government
predicts prices will continue to fall for several more months.

The Bank of Spain forecasts the country will end the year with an annual
inflation rate of 0.2 percent.

AFP PHOTO / PHILIPPE DESMAZES But FUNCAS, a think-tank formed by Spain's saving banks, last week
predicted a decline in prices of 0.2 percent this year, meaning it will
have entered deflation, a sustained fall in prices than can lead
consumers and companies to hold back on spending as they wait for even
cheaper prices.

In an editorial published in its March monthly bulletin, leading Spanish
savings bank La Caixa warned that deflation was "not part of our central
scenario of projections" for Spain and other advanced economies "but the
risk is there".

"In 2009, the risk of deflation (in Spain) is low. If the recession
stretches out more than expected, deflationary pressures could increase
with the risk of our slipping into a stage of price decreases," it said.

Rebajas en el Corte Ingles by Roberto_GarciaDeflation would make Spain's economic downturn "longer and deeper" just
as it did in the United States during the Great Depression of the 1930s
and in Japan to a lesser extent during the so-called "lost decade" of
the 1990s, it added.

With the unemployment rate in Spain continuing to rise, the pressure on
retailers to cut prices is set to continue.

Spain's jobless rate rose to 17.36 percent in the first quarter of 2009
from 13.91 percent in the fourth quarter of last year, INE said Friday,
and the Bank of Spain predicts it will rise to 19.4 percent in 2010.

Oria said sales allowed Spanish retailers to face up to the double
whammy of falling consumption and the credit crisis which has caused
banks to stop lending them money.

"Thanks to the sales, retailers are able unload products which were
having difficulty in being sold, they don't accumulate stocks and they
obtain the liquidity they need to pay their rent and employee salaries,"
he said.

4 May 2009

text: AFP / Virginie Grognou / Expatica
photos credit: Roberto_Garcia

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