From culottes to âcold shoulderâ tops and woven loafers last seen in Miami Vice, many Britons have struggled with this summerâs fashions, but now there is an even more unpalatable trend on the horizon â in the shape of higher prices.
The devaluation of sterling following the June Brexit vote has had major ramifications for store chiefs who pay in dollars for large quantities of imported goods. The first indication of where prices could be heading came last week from Next, one of the UKâs biggest clothing retailers, which pencilled in increases of up to 5% in 2017.
âWe have always taken the view that if our costs go up, our selling prices will go up,â said Next chief executive Lord Wolfson.
But fashion retailers are already struggling to persuade shoppers to part with their cash as weak wage growth is compounded by a cyclical shift towards spending on eating out and other leisure activities. âFashion has been the worst-performing sector in retail this year by a clear margin,â says Richard Lim, chief executive of Retail Economics. âGrowth in earnings has not fed through into retail sales, and clothing has borne the brunt of that. Thereâs also an âage of abundanceâ thing going on …people have got to the point of near-saturation with a lot of things.â
According to Kantar Worldpanel, spending on clothes, shoes and accessories contracted slightly, by 0.1%, in the year to 5 June â the first time the Â£36bn fashion market has declined in almost seven years. Adding to the gloom, a poll in July by market researcher GfK recorded the biggest slide in consumer confidence for more than 26 years. Its confidence index was at -12, from -1 in its June survey, carried out before the referendum. That was the sharpest month-to-month drop since March 1990, shortly before the UK fell into recession.
Next said there had been no Brexit effect on sales as yet, but analysts point to the pattern seen in the last recession. Northern Rock collapsed in September 2007 but it was not until the following April that like-for-like retail sales started falling. UK consumers are also used to clothes becoming cheaper rather than more expensive: price deflation has been running at 6-7%.
Kantar analyst Glen Tooke says its most recent reading shows the decline deepening. âPeople are buying less,â he says. âWe are not seeing people buy in advance of a season any more. We didnât really have a winter last year. If it gets cold they buy winter clothes, but if it doesnât, they donât. Stores have become increasingly reliant on discounting, and power has shifted into the hands of consumers.â
Next said the sales picture was âextremely volatileâ, with big swings dictated by the weather. âThe market is being driven by need,â said Wolfson. âIf the sun comes out and people need summer clothes, theyâre buying them.â
Bernstein analyst Jamie Merriman is concerned that fragile consumer confidence will see spending on clothing âtake another leg downâ over the next 12-24 months. âAt current spot prices, sterling is down 10% versus the US dollar compared with last year,â she says. âThis is unlikely to be the only form of cost inflation, with increased wages coming through due to the national living wage and cotton prices spiking in recent weeks.â Taken together, she adds, these point to a significant level of inflation for retailers like Next to try to pass on to customers if they want to keep profit margins intact.
Sterlingâs plunge has actually increased Nextâs sourcing costs for next year by 9%, but that is mitigated by other currencies, such as the yuan, weakening against the dollar. It is also looking to get more goods from countries such as Bangladesh, Cambodia and Burma.
Lim says a geographic shift in sourcing was already in motion as rising wages in China sent retailers hunting for cheaper places: âTen years ago the majority would have been sourced in China but it has already started moving to other Asia-Pacific countries.â
Retailers have currency hedges, which offer short-term insurance against swings in sterling, in place for this year but, Lim says, UK clothing factory-gate prices â which are a good proxy for the global picture â are already up 1.2% in June, compared with an average decline of 1.2% last year. âIt is going to be a very challenging time for clothing retailers.â
Tooke says retailers now have two choices: âThey could raise opening prices, but run the risk of having to offer deeper discounts later because shoppers notice that something that cost Â£30 a year ago is now Â£35. Or they could keep opening prices the same, but offer fewer discounts: the challenge then is how to drive footfall.â