By Sarah Morris
ARROYOMOLINOS, Spain (Reuters) - At the Xanadu shopping mall in Madrid's suburbs, the indoor ski slope is busy with children but the designer stores are quiet. In this former mecca for high spenders, discount shop 'Lefties' looks like just another post-recession pop-up budget brand.
In fact the store belongs to the world's biggest fashion retailer Inditex - and may be its secret weapon to lure back austerity period shoppers who have turned away from its fashion brand Zara to the cheaper styles of H&M and Primark.
Since the 2008 financial crisis, mid-market retailers in developed markets have lost ground to both discounters and high-end brands as shoppers economize on basics, while treating themselves to the odd luxury.
Inditex does not break out sales figures for either Lefties or its Zara stores in Spain. But it has shrunk the number of its Zara stores in Spain from 514 in 2008 to 469 at the end of 2012 while adding five or six Lefties stores a year "in recent years", according to a spokesman. Lefties now has 86 stores in Spain and 16 in Portugal.
With consumers now wearing Primark fashions alongside luxury labels, Inditex may be changing the mix of its stores to test the waters of this new, evolved retail market, said one sector analyst.
Inditex's sales in Spain dropped 5.5 percent in 2012, to 3.5 billion euros, and accounted for only 21 percent of total sales against 37 percent in 2007 as the group has grown fast in emerging markets.
By contrast, Sweden's H&M and British Primark expanded fast in Spain during that time, as unemployment topped 26 percent and retail sales shrank steadily in the 2011-2013 period. Both brands have much lower average prices than Zara.
H&M's sales in Spain rose 5 percent to 6 billion Swedish crowns ($940.39 million) in 2013 compared with a year earlier, while its number of stores rose to 156 from 146 in the same period. Primark, owned by Associated British Foods, has grown to 39 stores since arriving in Spain in 2006.
Together their total outlets are still dwarfed by Inditex's total of 1,900 for all of its brands, but H&M and Primark's offering makes them well placed to capitalize on the latest shopping trend: Though Spain's economy is slowly healing, consumers remain frugal as companies freeze or cut salaries.
"No one has any money to spend," said Mercedes Granda, 38, having a coffee with her mother Laura in Xanadu mall. "At first I didn't fancy shopping in a cheap store like Primark. Then I got used to it. I think the quality is good."
John Bason, chief financial officer of Associated British Foods, insists Primark is not dependent on hard times for growth but acknowledges that Spain's low-cost niche was underdeveloped.
"What Primark has demonstrated is the potential for growth of the value segment in Spain," he said.
For now Inditex barely acknowledges the existence of Lefties. The 21-year-old brand, created to sell Zara's leftover last-season rejects, is not promoted on Inditex's corporate website. Two foreign investors in Inditex told Reuters they weren't aware of the brand.
And yet in recent months Lefties stores have been redesigned. Gone are the dim rooms with haphazardly laid out tops and trousers where shoppers rifled through odd sizes. Instead attractively bright units display new Lefties-branded clothing lines, surrounded by posters and TV screens on which models show off designs.
"Women's shorts from 9.99 euros. Kids' knitwear from 7," reads the tickertape display above the entrance to the Lefties store in the Xanadu mall.
Behind the scenes, Lefties is recruiting designers, pattern makers and buyers to report to its new head Xavier Ruz - formerly of Inditex's teenwear brand Bershka, who was appointed in January. The label has also just launched its own newly designed website.
Inditex declined to provide information on its Lefties strategy, investment or sales figures.
But with the boost to its stores it is clear that Lefties is taking a larger share of its parent's Spain strategy.
"I think it's only a matter of time before Inditex treats it as a separate brand and breaks out its figures," said Carlos Hernandez from retail consultancy Planet Retail.
MALL TO HIGH STREET
Two-thirds of the Spanish Lefties are in shopping centers, where sales have plummeted 25 percent since 2007.
It will be taking on a very confident Primark, which is seen now as a desirable tenant for such malls, said David Brown, associate director of retail capital markets for real estate company JJL.
"In some centers footfall has increased by up to 30 percent after Primark entered," he said.
Hernandez at Planet Retail noted that Inditex was replacing some of its Zara stores with Lefties - where the goods cost a third less - in poorer areas.
"You have a clearly impoverished society - people who can't afford to pay 30 euros a blouse in Zara and unfortunately we're talking about millions of people."
Already there are signs that the low-cost battle is moving from the malls to the streets. Madrid Mayor Ana Botella has announced that Primark will open a store on Madrid's Gran Via, a major shopping avenue in the heart of the capital.
Hernandez believes Inditex has every incentive to treat Lefties as a separate format - and roll it out abroad too.
"I think they could export the brand to other countries where Inditex has a large presence like the UK and Germany," he said. "Spain is not the only country where the crisis has taken its toll." ($1 = 6.3803 Swedish Crowns)
(With reporting by Emma Thomasson; Editing by Sophie Walker)