Sunday April 26, 06:27 AM
Spanish clothes price war fuels deflation fears
By Virginie Grognou
MADRID, (AFP) - 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.
Spain's clothing retailers have been feeling the pinch since the country entered a recession at the end of last year as the global credit crunch worsened a correction that was already underway in its property sector.
Each Spanish consumer spent an average of 584 euros (757 dollars) on clothing last year, 37 euros less than in 2007, according to a report issued last month by Worldpanel Fashion, a division of market information group TNS (NYSE: TNS - news) .
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 on clothing than 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 that month the first of the 16 nations that use the euro single currency to record a negative inflation rate.
Consumer prices declined 0.1 percent in March compared with a year earlier, the first annual decline since INE started tracking inflation in 1961.
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.
But FUNCAS, a thinktank 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.
Deflation 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.
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