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Spain and Portugal Reboot the Iberian Fashion Market

As Spain and Portugal return to pre-crisis growth and tourism levels, who will be the winners and losers as new global players enter the market?
Casa de Loewe, the Loewe flagship in Madrid, Spain | Source: Courtesy
By
  • Victoria Berezhna,
  • Graciela Martin

LISBON, Portugal — For fashionable Portuguese youth and the hordes of tourists, concept store Fashion Clinic is the first pit stop in the pilgrimage to Portugal-cool. Founded in 1990, with outposts in Lisbon and Porto, it's the country's answer to Parisian boutique Colette, a curated space where luxury brands from Gucci to JW Anderson mix with niche perfume labels like Linari, Leica cameras and tomes from publisher Assouline.

Meanwhile in Barcelona's Passeig de Gràcia, where upmarket mono-brand flagships pervade — Loro Piana opened a flagship in January 2018, while a Christian Louboutin store is in the works — old-school luxury reigns at Santa Eulalia, a store in champagne and golden hues, known for its made-to-measure service and for catering to clients looking for traditional opulence.

Both stores are microcosms of the modern Spanish and Portuguese fashion markets. Situated side-by-side on the Iberian Peninsula, they are perfect foils for one another. The former is a well-established, secondary luxury-shopping destination dominated by fast-fashion retail giants like Inditex. The latter serves as its younger, trendy sister market, drawing increasingly adventurous shoppers to its fashion districts after a speedy economic recovery.

Portugal’s road to recovery

As one of the European economies most deeply affected by the great financial crisis of 2009, Portugal slipped into a recession a few years later. Its GDP growth shrunk by 4 percent in 2012 and unemployment stood at 17.5 percent in January 2013. But in recent years, Portugal has enjoyed a rapid recovery, thanks to a decade-high GDP growth of 2.8 percent in 2017, expanded private investment and increased consumer spending.

GDP growth rate in Spain and Portugal, 2005-2015 | Source: World Bank

Tourism was a key driver. Visitors have flocked by the millions — 7.1 million in July 2017 alone, according to The National Statistics Institute — to the capital, as well as smaller cities like Porto and regions like the Algarve. While Spanish luxury is dominated by consumers from China, Russia and the US — who come to purchase pieces at a lower cost than their home countries — the high net-worth clients in Portugal are often Angolans, a former colony.

The fashion industry has been following suit, with a flurry of new concept store openings and designer labels that stand out. Take, for example, menswear store Slou in Lisbon, which stocks edgy and streetwear brands such as Gosha Rubchinskiy and Stone Island, while online platform Les Filles specialises in supporting young Spanish and Portuguese designers like Moisés Nieto and Alexandra Moura.

“We started a very strong recovery, and are probably going to beat records in terms of exports, but the difference is important because we are no longer order-takers, but are offering 360-degree solutions to our customers,” said Paulo Vaz, general director of the Portuguese Textile and Apparel Association. Exports in the sector amounted to €3.17 billion last year, a 4.3 percent year-on-year increase, according to the association.

Reduced margins post-crisis meant survival of the fittest for Portuguese textile and apparel firms, forcing “each cent to count,” to achieve results and stay afloat. But upon recovery, streamlined structures and highly skilled workers meant international private labels could turn to the country’s manufacturers for more than raw materials.

Reduced margins post-crisis meant survival of the fittest for Portuguese textile and apparel firms.

But while the reputation of “Made in Portugal” leather, footwear and textile manufacturing is well-established — having long produced for European luxury houses including Prada and Gucci — much of the 4.4 percent year-on-year growth of the country’s apparel market (which grew to $4.6 billion in 2016) is owed to fast-fashion brands attracting low-income consumers. It shouldn’t come as a surprise considering Portugal’s per capita income remains significantly lower than that of half of its Eurozone counterparts.

According to Euromonitor, Inditex holds the overwhelming majority of the market, at 18.3 percent. Associated British Foods, owner of Primark, follows at 7.8 percent, while Portuguese Sonae SGPS — which owns popular brands MO and Salsa Jeans, and 23 malls around Portugal — only makes up 2.7 percent of the market.

Given such a small domestic market, international expansion is often the only way of scaling a Portuguese brand. Alexandra Moura, who decided to focus on the brand’s international strategy post-crisis, shows an off-schedule collection in London and has a showroom in Paris, and is now stocked worldwide from Beams in Tokyo to The Backroom in Shanghai .

But according to Cláudia Barros, fashion editor at Vogue Portugal, the Portuguese fashion design scene lags behind its more well-established textile industry. “We are very well-known among international buyers by techniques and expertise, but I can tell no one understands our design, still,” she said.

While Portugal has been boosted by its growing reputation as an attractive tech start-up and creative hub, local fashion consumers can sometimes be risk-averse.

Fashion Clinic in Lisbon, Portugal | Source: Courtesy

“We feel that the Portuguese consumer values a good, safe investment in a luxury brand over a new independent name,” said Maria Pimentel, marketing and communications manager at Fashion Clinic, whose four stores in Porto and Lisbon have shown strong growth figures over the years.

In Spain, domestic labels thrive

At 79, Calle Raimundo Fernández Villaverde in Madrid — the flagship of El Corte Ingles, the largest chain of department stores in Spain, and fourth in the world — it’s a different story altogether. According to a store spokesperson, Spanish brands perform as well as international luxury labels. “Gloria Ortiz and Emidio Tucci perform extremely well,” she said.

Francesc Maristany, who served as president of the Catalan Cluster of Fashion (MODACC) until December, agreed: “Some people come for the luxury tourism and realise there are smaller brands with great products and excellent branding, and become drawn to them.”

While the department store chain limped through the crisis — revenue dropped from €17.3 billion to €14.2 billion in 2013 — it partly recovered to €15.5 billion in 2016, reflecting the performance of the market as a whole. Tourism was the main driver, to which the group’s president Dimas Gimeno attributed an increase in sales by 7.5 percent in the fourth quarter of 2017.

But while the overall apparel market size grew year-on-year to €20.85 billion in 2016, a 0.8 percent increase, Spanish barometer Acotex — which records monthly sales in apparel — reported a 2017 growth of only 0.1 percent, compared to 3.39 percent in 2016, citing increased domestic consumer spending on non-fashion categories like entertainment and an uptick in the fashion sales period, lowering margins. Barcelona's terrorist attack and political uncertainty following the October independence referendum in Catalonia were also factors.

Overseas investor sentiment towards Spanish companies and assets have generally turned more positive.

Nevertheless, Spain is a market still in recovery mode; real GDP growth is forecast at 2.5 percent in 2018, down slightly from robust 3.1 percent estimated in 2017, predicts BMI Research.

Since retailer El Ganso sold 49 percent of shares to LVMH’s L Capital in 2015, a total of eight domestic fashion brands were partially or wholly acquired by private equity and venture capital firms. Among them was bridal brand Pronovias and retailer Cortefiel, while owners of Bimba y Lola, with outposts across Europe, plan to sell up to 70 percent of shares for €300 million to either CVC Capital or Pai Partners, according to newspaper El País.

“Overseas investor sentiment towards Spanish companies and assets have generally turned more positive… in line with the wider economy,” said Josh Holmes, senior consumer analyst at BMI Research. Private equity firms have been able to acquire Spanish brands “that have been seeking buyers to help pay down debt and/or fund expansion plans,” he explained.

Alexandra Moura Autumn/Winter 2017 lookbook | Source: Courtesy

Still, only labels that can secure investment will be able to boast a location in the coveted Salamanca district of Madrid or Barcelona’s Portal del Angel, where one square metre costs €3,360. “Spanish brands such as Purificación García and Roberto Verino are co-existing well with European stalwarts of luxury,” said Pepa Bueno, executive manager of the Spanish Association of Creators (ACME), but it may be a tough sell for independent labels.

Patricia Olazar Bilbao, co-founder Mondolirondo, a creative agency that has worked with the likes of Chanel, Givenchy and Hermès, among others, cited mid-market brands Masscob and Edmmond — which have received injections of private capital — as examples of brands investing in brick-and-mortar locations as "part of their communication strategy." Having opened stores in prime spots in Barcelona and Madrid, respectively, they aim to compete with some of the affordable luxury giants.

With luxury players rekindling interest in Spanish cities — Christian Louboutin is setting up shop in Madrid, while 2017 saw brands including Sonia Rykiel, Fendi and Isabel Marant open stores — conflict is generated with "brands already working in Calle Serrano, or an independent designer who would like to open a space in such a prime area," said Mondolirondo's general manager Cayetano Lopez-Llobet.

Still, “luxury is the best-standing category within the fashion sector,” says MODACC’s Maristany. While luxury growth rates may be high, this follows a spending slump from 2009 to 2014 amid austerity measures. The luxury goods industry reached €5 billion in sales in 2016, according to the Spanish Luxury Association, but it still falls behind markets like the France, where sales of luxury goods reached €18 billion in the same year.

Domination of fast-fashion

In a market where industry leaders proudly take credit for inventing fast fashion, the cheap and cheerful sector continues to thrive. In the Madrid district of Salamanca, a Zara store sits on the same block as the Armani boutique, and Uniqlo plans to take over the first two floors of luxury shopping mall El Jardín de Serrano.

“The appropriation of the main shopping districts by the Inditex Group began before the crisis,” said Joaquim Bretcha, director at Netquest International, a market research company in Spain, of the expulsion of smaller independent stores from prime retail locations. “It’s been a while since Inditex took the throne from El Corte Ingles, which had to revolutionise its offering and distribution. Inditex now owns 25 percent of the market in Spain.”

Inditex took the throne from El Corte Ingles, which had to revolutionise its offering and distribution.

While the country was one of the worst hit by the crisis, the penchant for low-cost clothing continues today, with chains Inditex and Mango reporting €23.3 billion and €2.2 billion in sales for fiscal year 2016, respectively. Chain Desigual reported poor performance in the first half of 2017 — year-on-year revenue was down 9.6 percent to €377.9 million — but retains popularity among Spanish consumers, with over 85 owned stores across the country.

In fact, all 15 top retailers in Spain are fast-fashion brands, according to Euromonitor International, with Zara taking the first spot and Primark and H&M occupying second and third place. When Interbrand released its annual ranking of the best Spanish brands, Zara featured prominently at the top spot, while five other low-cost brands were dispersed alongside Santander bank and football team Real Madrid.

Why does fast-fashion remain such a dominant feature of the market, even as the country undergoes economic recovery to pre-crisis levels?

“Spain [still] has a considerably larger proportion of its population in the bottom bracket of disposable income,” said Hannah Symons, research manager at Euromonitor International. While the unemployment rate decreased to just over 17 percent as of August 2017, it is still a staggering figure with youth unemployment at an even higher number.

Designer Moisés Nieto at his SS18 show | Source: Courtesy

Nevertheless, the “Spanish appetite for keeping up appearances was maintained,” she continued. With the boom-to-bust period still fresh in the consumers’ mind, this means conservative shopping habits prevail regardless of price point.

“In Spain, if a brand is known, people will pay for it,” said Mondolirondo’s Olazar Bilbao, explaining how Loewe remains at the apex and why brands like Gloria Ortiz may have more success than those less well-known.

For more adventurous brands or those without a big marketing budget to compete, global niche markets are often the only way to grow. “Companies are increasingly taking a chance on internationalisation as a way of market diversification,” said Lucia Soriano, the head of internationalisation at Fedecon, the Spanish Federation of Clothing Companies.

Spanish designer Moisés Nieto, for example, chooses not to cater to the traditional Spanish consumer anymore, but rather to what he calls “Generation Next,” who have become familiar with the brand over the years. “The Spanish consumer has always gone for recognised brands. The client of Balenciaga or Versace will rarely buy pieces from a young designer,” he said, adding that while multi-brand stores in the country are hesitant to take on young designers, the same isn’t the case elsewhere. His brand is stocked as far away as Opening Ceremony in Japan.

While the road for independent labels on the Iberian Peninsula remains a challenge, global brands would be wise to revisit their strategies or consider reigniting some of their business activities there. In markets like Portugal and Spain, while cautious consumers still bet on well-known luxury labels and fast fashion does dominate the collective wardrobe, there are certainly more opportunities now than there once were.

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