Israelis Are Growing Tired of International Fashion Chains Like Forever 21 and H&M

Sales are down at brands like H&M and Zara as Israelis comparison shop on trips abroad

A shopper enters an H&M store at the Third Street Promenade in Santa Monica, California, March 22, 2016.
Patrick Fallon, Bloomberg

The Israeli shopper’s love affair with leading international fashion chains is over. Well, not quite over: As Israelis take advantage of plunging airfares, they are doing their clothes shopping at the same stores – but overseas where prices are lower.

Mall executives who spoke to TheMarker on condition of anonymity said international chains, led by H&M and Zara, have seen sales declining in the last several months. That marks a sea change after years of nonstop growth, much of it at the expense of local chains.

Sales declines have been so steep that they have caused overall turnover at shopping malls around the country to fall 1.3% since the start of the year, even as the population has grown about 2%.

Sources said that H&M, the Swedish multinational clothing retailer, has suffered sales decreases of between 7% to 10% so far this year. When the chain first opened in Israel in 2010, its sales rose steadily as it rapidly spread outlets across the country and forced competitors to try to match its low prices.

“They have had three poor seasons, and in our malls sales have been down an average of 10%,” said one mall manager. “Castro [a local chain] is selling more than them in some of our shopping centers.”

Although the decline has been steep, he said H&M enjoyed preferred rental terms at the malls. “In my opinion, if sales continue to decline they will have a problem. They have to reverse the trend.”

Other multinational chains share the same difficulties. The U.S. apparel chain Forever 21, which targets younger shoppers, was a huge success when it entered the Israeli market five years ago, but it will now be closing several mall shops over the next several months, leaving it with just four in Israel. Sources said Forever 21’s problem was that it didn’t have a local franchisee and was managed by remote control from abroad.

Even Zara, the international chain most popular with Israeli shoppers, has seen a sales slowdown, say some mall managers.

“By us, Zara experienced a 7% decline in sales in recent months. That’s the first time the chain has suffered a decline since it came to Israel,” said one mall manager. “What’s interesting is that the strongest local apparel chains haven’t been hurt – Castro, Fox, Renuar and Crazy Line have held steady and some have even shown sales increases.”

Cheaper air fares drive trend

The reason international chains are getting hit while locals aren’t is that the Open Skies aviation agreement that went into force four years ago has led to cheaper airfares and more routes between Israel and Europe. In the first seven months of this year, the number of overseas trips by Israel climbed 12% from the same time in 2016 to 4.1 million.

“What’s happened is that Israelis travel abroad, they go into the malls and discover that the prices at international chains are lower,” said the mall manager.

“They also get the value-added tax of up to 15% back. Here apparel and shoes are taxed like nowhere else in the world. In addition, the international chains don’t work through franchisees, so there is one less middleman. All that adds up to a difference of 30% in the price,” he said.

Israelis buy tour packages costing them several hundred dollars, says to Warsaw, including airfare and hotel “They go to Zara, H&M, Primark and the like and buy like crazy.”

By comparison, publicly traded Castro said in the first half of the year that its sales were up 5%. Not counting new and expanded stores, turnover was unchanged. At Fox, which also releases its results, sales rose 6.2% year on year.

Oddly enough, Castro is keen on competing with the overseas chains head-on by closing its smaller outlets and opening bigger ones of 1,000 and 1,200 square meters so they can offer a wider selection of apparel, said one mall manager. Castro declined to comment.

The senior mall executive speculated that shoppers favoring Israeli chains travel less or can’t find the same merchandise when they go abroad. He noted the Pull&Bear, a Zara sub-brand, had held up well compared to other international chains and suggested it was because it caters to younger shoppers who travel less