Zara owner Inditex (ITX.MC), the world's biggest listed fast fashion company by sales, is expanding its low-priced Gen Z-focused brand Lefties to counter Chinese-founded rival Shein.
The rapid growth of Shein, an online marketplace with no physical stores, is putting pressure on retailers like Inditex and Sweden's H&M (HMb.ST) to find ways to respond to its budget prices.
Zara has become less competitive on price since Inditex started hiking prices at its core brand to protect profit margins from inflation and as part of a shift towards more upmarket customers. But the Spanish company is also quietly growing its budget ranges.
The expansion of Lefties, which sells 17.99-euro jeans, dresses for as little as 7.99 euros ($8.64), and 5.99-euro handbags, is a key part of that strategy.
Lefties, which started life as an outlet for Zara leftovers, now has stores in 17 countries, including Egypt, Mexico, Romania, Saudi Arabia, Turkey, and United Arab Emirates.
Its growth shows that Inditex wants a foothold in the value end of the market, even as it has successfully boosted profits at Zara, which is much bigger than Lefties in terms of sales and store numbers.
Lefties is growing in its home market of Spain, as well as in Portugal at a time when many consumers are trading down and Shein's rock-bottom prices are putting pressure on rivals.
In Spain, where Lefties has 25 stores according to its website, it has grown from around 3.5 million customers in 2019 to 5 million customers in 2023, putting it just behind Shein with 5.2 million, based on estimates from market research firm Kantar.
Lefties' presence in several emerging markets suggests it is a way for Inditex to serve shoppers who may be less willing to splash out at Zara, said Swetha Ramachandran, a portfolio manager at Artemis Fund Managers in London whose fund invests in Inditex.
Shein's impact on the fast fashion market, and how Inditex can best compete against it, are themes that keep coming up in meetings with Inditex management, Ramachandran added.
Unlisted Shein is the world's biggest fast-fashion retailer with an estimated 18% market share, according to Coresight Research.
On Instagram and TikTok, Lefties employs similar strategies to Shein, featuring micro-influencers in most of its posts - in contrast with the high fashion aesthetic of Zara's social media marketing.
'FORMIDABLE' COMPETITION
Lefties is still bundled under Zara in Inditex's financial reports, meaning its results are not public.
Inditex did not reply to Reuters' questions about Lefties' sales and strategy. The company said the brand has been offering its own collections for women, men, and children for more than two decades.
"We don't have much visibility on it but I think it is working wonders because it is the only one in the low-cost segment with a good online service," said Patricia Cifuentes, senior analyst at Bestinver Securities.
"It typically takes time for a retailer to reach the critical mass and, therefore, the right profitability. Moreover, there is an advantage in keeping the results hidden from the competitors for the time being," she said.
Shein's shopper numbers in Spain rose to 5.2 million in 2023 from 421,000 five years ago, but the Chinese group is still well behind Zara and Primark, according to Kantar estimates on the market.
Asked about Lefties, Shein said it does not comment on other companies. The retailer said it will open "several" pop-up stores across Europe this year after doing pop-ups in cities including Berlin, London, Paris, and Rome last year.
Primark said it does not comment on competitors.
In Portugal, Lefties attracted even more shoppers than Zara last year according to Kantar estimates that have not been previously published.
"The competitor set is still quite formidable for the very low price point," said Grace Su, San Francisco-based portfolio manager at Clearbridge Investments, whose fund holds shares in Inditex.
"If they [Lefties] can drive a business with adequate returns, it's all accretive as long as it's not cannibalising the rest of the brands."
Last year, Lefties opened its first stores in Romania and in Turkey, and added stores in United Arab Emirates, where it operates through franchise partners.
That's even as Zara and the other Inditex brands, including Bershka and Pull&Bear, are shrinking their global store count. Overall, Inditex had 585 fewer stores by October 31 2023 than a year previously.
In Spain, like Zara, Lefties focuses on large stores in major cities, with its biggest flagship store opening in Madrid at the end of 2022.
“This is the first time we have shopped here," said 47-year-old Diana Doina, waiting to pay at the Lefties store in Madrid with her 13-year-old daughter Carla. "I'll take some cargo trousers, and the trainers are really cheap."
($1 = 0.9246 euros)
