Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Zara Keeps Prices Low While Luxury Brands Hike
Transcript
- Lucas: Luna, I want to talk about a company that has somehow kept its prices almost flat for two years while every other apparel brand has been raising them. And it's not a discount retailer — it's Zara. Luna: Zara? The fast-fashion giant that's owned by Inditex. I feel like we hear about their supply chain speed all the time, but less about how they price. So what's the angle? Lucas: The angle is that Zara has held its average unit price — what a customer pays per item — nearly flat since 2022. According to Inditex's annual report, their average selling price in 2025 was only about 2% higher than in 2022. Meanwhile, H&M's average unit price is up roughly 12% over the same period, and most specialty apparel brands are up 15 to 20 percent. Luna: That's a striking gap. How does a brand that's known for being affordable hold prices in an inflationary environment without crushing margins? Lucas: The answer is operational pricing power. Zara doesn't rely on brand prestige to command a premium. Instead, it competes on speed, scarcity, and cost control. Let me give you the key number: Inditex's gross margin in fiscal 2025 was 59.4 percent. That's up from 57.9 percent in 2022. So they've actually expanded margins while keeping prices steady. Luna: So they're making more per item despite not raising prices? That runs counter to everything we hear about margin pressure. How are they pulling it off? Lucas: Three mechanisms. First, their supply chain is radically efficient. Zara designs, manufactures, and delivers new products to stores in two to three weeks. The industry average is six to nine months. Because they're so fast, they produce in smaller batches and don't overproduce. Unsold inventory is a margin killer, and Zara has one of the lowest unsold rates in fashion — less than 10 percent, compared to an industry average of 25 to 30 percent. Luna: Right, so they avoid the big markdowns that eat into margins at the end of the season. I've read that Zara marks down only about 15 percent of its inventory, while most retailers mark down 40 percent or more. Lucas: Exactly. That's the second mechanism: full-price selling. Zara deliberately creates scarcity by limiting production runs. If you see a jacket you like, you buy it then, because it might not be there next week. That urgency lets them sell 85 percent of their inventory at full price. Compare that to a typical department store, which might sell only 60 percent at full price and then has to discount the rest. Luna: And the third mechanism? Lucas: Cost of goods sold. Because Zara manufactures about 60 percent of its products in Spain, Portugal, and Morocco — close to its headquarters in Arteixo — it can adjust production quickly based on real-time sales data. They're not locked into orders placed six months ago that now need to be discounted. That proximity also cuts shipping costs and lead times. Their cost of goods sold as a percentage of revenue has actually dropped from 43.2 percent in 2022 to 40.6 percent in 2025. Luna: So they're beating the inflation problem by becoming more efficient, not by passing costs to customers. That's unusual. Most companies have just raised prices and blamed inflation. Lucas: And Zara has the added advantage of being part of Inditex, which also owns Pull&Bear, Massimo Dutti, Bershka, and others. They share logistics and technology. Inditex's centralized distribution system — with those massive automated warehouses outside Arteixo — is incredibly efficient. They can deliver to any store in Europe within 24 hours and to stores in Asia or the Americas within 48 hours. Luna: That's insane speed. But let's talk about the demand side. Why do customers perceive Zara's prices as fair, even when they're not the cheapest in the market? Uniqlo and H&M are often cheaper. Lucas: It's the perception of value through newness. Zara introduces about 10,000 new SKUs per year. Every time you walk into a store, roughly 70 percent of the merchandise is different from what was there two weeks earlier. That constant rotation makes customers feel like they're getting something current — almost runway-inspired — at an accessible price. The scarcity of newness justifies the price point. Luna: So it's not about being the cheapest; it's about being the freshest at a reasonable price. That's a different competitive position. Lucas: And it's reinforced by a deliberate lack of discounting. Zara doesn't do big seasonal sales. They have two markdown periods a year — in January and July — but even then, the discounts are modest, usually 30 to 50 percent, not the 70 percent off you see at other retailers. By not training customers to wait for sales, they preserve the full-price buying behavior. Luna: That's a fascinating contrast to, say, JCPenney or Macy's, where customers have been conditioned to only buy on sale. Zara has essentially trained its customers to buy now or lose it. Lucas: Let me give you a specific data point. In 2025, Inditex reported that Zara's same-store sales grew 10 percent year-over-year, even as average prices were flat. That means volume growth drove revenue. And their revenue hit €38.6 billion for the group, up from €32.6 billion in 2022. That's 18 percent growth over three years without raising prices. Luna: So the strategy is working. But what about competition? H&M has tried to copy Zara's speed, but they still take four to five weeks. Uniqlo focuses on basics, not trend cycles. Are there any threats to Zara's model? Lucas: The biggest threat is probably Shein. Shein uses an even more extreme version of the Zara model — they test thousands of micro-batches online, produce only what's demanded, and can go from design to production in as little as 10 days. And their prices are significantly lower. But Shein has a different weakness: sustainability concerns and potential regulatory pressure. Zara has made a big push toward sustainability — they've committed to using 100 percent sustainable fabrics by 2025 and have installed in-store recycling systems. That gives them a reputational edge. Luna: And that reputation helps them avoid the need to be the lowest price. A quick thought: Zara's pricing strategy also shows up in their advertising spend. Inditex spends only about 0.3 percent of revenue on advertising, compared to 6 percent for H&M and 8 percent for most luxury brands. They rely on store windows and word of mouth, not paid media. Lucas: That's a great point. Their stores are their best ads. Prime locations on Fifth Avenue, Oxford Street, or the Champs-Élysées — these are massive flagship stores that function as marketing. And because they refresh the inventory every two weeks, there's always a reason to walk by and see what's new. The real estate costs are high, but it replaces the advertising budget. Luna: So operational efficiency allows them to hold prices, which drives volume, which funds prime real estate, which replaces ad spend, which further improves margins. It's a virtuous cycle. Lucas: Exactly. And it's a reminder that pricing power doesn't always mean raising prices. Sometimes it means having the operational discipline to keep prices steady while competitors inflate theirs, and then capturing market share from those competitors. Luna: That's a powerful insight. Quick honest thing — conversations like this take a lot of research to put together. A handful of listeners already chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes ad-free. If the show has added something to how you think about business, that's the way to keep it going. Lucas: Yeah, and we're grateful for that. It lets us spend the time to dig into specific numbers like Zara's 85 percent full-price sell-through rather than just rehashing headlines. So thank you to those who do. Luna: So back to Zara — what's the one takeaway you want listeners to remember? Lucas: That pricing power can be built on speed and scarcity, not just brand prestige. Zara proves that if you can control your supply chain tightly enough, you can keep prices attractive for customers while still growing margins. It's a different playbook, but it's one any business can learn from — especially in industries where price sensitivity is high. Luna: And next time you see a Zara store, you'll know a bit more about what's happening behind those rapidly changing windows. Lucas: Exactly. Until next time.