Inditex Absorbs VAT Increase in Spain

Inditex, the owner of brands such as Zara and Zara Home has announced it will absorb the recently announced VAT increase in its home market of Spain. As part of a raft of austerity measures, the Spanish government decided to increase VAT on most products, a measure that came into force on 1 September. Goods sold by Inditex, mainly clothing, footwear, accessories, home textiles and homewares, will move from 18% to 21% VAT rate.

In 2011, Spain accounted for 25% of total Inditex sales, a percentage that has fallen over the last decade as the company keeps on expanding worldwide. According to Inditex, with this decision it “maintains its stable pricing policy”. This could be seen as a sensible measure in a country with a 25% unemployment rate where the home furnishings is expected to see a CAGR fall of -7% over the next five years.

Source: Euromonitor International

This makes commercial sense in the context of a struggling domestic economy, though there is a PR consideration at play here also. In 2011, there was public outrage when it was published that the company’s internet operations are based in Ireland and not Spain, therefore not paying any tax in the country. This tarnished Inditex image which had always been seen as an example of a local company that managed to become global while keeping its manufacturing operations in Spain.

At the same time, this shows the company’s relative contrasting positions in apparel and home furnishings.

Absorbing the VAT increase is unlikely to increase demand for its clothing range, though its dominant position in the Spanish apparel market is made clear by the fact that the Inditex move saw several other big retailing companies in Spain follow suit, from apparel competitors Mango and H&M to leading supermarket chain Mercadona.

While imitation may be the sincerest form of flattery, the decision by other retailers to absorb theincrease has softened any small element of pricing advantage to be gained from the move, or any real PR positives.

If we look for analogous situations to assess the impact of a similar VAT increase, the move by the UK Government in 2011 to increase VAT from 17.5% to 20%, brought a fall in consumer spending of almost 1% that year with the greatest impact felt by big-ticket items sales which fell more than seven times faster than overall spending that year.

On that basis, absorbing the VAT increase may have a marginally stronger impact in the home furnishings where average price points are higher than apparel. That said, IKEA felt no pressure to follow Inditex’s lead, revealing strengths of both players in the industry.