Brexit won the vote and the UK now finds itself in a state of flux. Quantifying its impact is difficult, and speculation is inevitable, given the volatile, unpredictable and unprecedented political scenario. Consumer confidence, expenditure, price pressure and sterling depreciation are just a few of the immediate concerns.
At a time defined by unknown unknowns, Euromonitor International’s analyst for apparel and footwear, Bernadette Kissane, seeks to understand the potential challenges and opportunities presented to fashion retailers and brands.
Globally, the apparel and footwear industry managed to record value growth of 1% at the height of the recession during 2009, bouncing back to pre-crisis levels in 2010, with 6% growth; this impressive performance illustrates the industry’s resilience during tough economic times.
More specifically, in the UK, a similar pattern occurred; although growth flat lined, the industry did not experience the substantial losses of other consumer goods areas such as home and garden. Interestingly, women’s underwear proved to be one of the most robust product categories in the UK during the financial crisis. After a drop in growth during 2009, the category picked up pace quickly, peaking in 2012 with 6% growth.
According to Euromonitor International’s Macro Model, GDP growth in the UK is expected to fall to 1.5% in 2016, with the biggest impact felt during 2017, with an estimated 1.0% GDP rise, a modest figure in comparison to the decline of 4.2% experienced in 2009.
However, as uncertainty lingers, the potential for a disorderly exit, in which the UK leaves the EU in 2019 without having reached an agreement, has the potential to knock the country back into a recession.
In contrast, the more promising economic outlook would involve no Brexit with all trade agreements remaining in place providing a significant boost to the economy. It is likely the reality will be somewhere in the middle, with the referendum result causing a considerable economic slowdown, nonetheless, given the UK has entered uncharted territory, anything could happen.
Brexit intensifies an already challenging environment
Growth of apparel and footwear in the UK has been slowing over the last few years, reflecting a similar trend occurring throughout Europe. In 2015, France, Italy, Greece and the Netherlands all contracted in terms of market size, while the UK’s growth fell to 1%, with both women’s and men’s underwear already experiencing slight declines. In contrast, emerging markets such as Turkey and Romania flourished as the middle class expanded and international brands such as H&M rapidly expanded.
Europe’s continued love affair with fast fashion, the discounting addiction of retailers and the growing importance of online retailing have all had an adverse impact on pricing, dampening value growth and intensifying the increasingly competitive nature of the industry.
In the UK, companies are faced with having to implement the National Living Wage, while managing multiple sales channels, keeping up with emerging trends and adapting to changing consumer behaviour. Brexit may pose challenges for business, but it is certainly not the only factor requiring a flexible and reactive business model.
Currency headwinds paint a mixed picture
Typically, a rocky economic climate results in lower consumer confidence and a surge in demand for low-priced products as consumers trade down in a bid to harvest the remains of their disposable income. However, low-price/high-volume retailers such as Primark and New Look are likely to be hit hardest given the currency volatility.
With significant proportions of stock sourced from the Far East, where orders are typically placed in US dollars, the increase in costs places further pressure on pricing.
Margins are already thin and justifying higher price points may prove more difficult for value brands than for premium labels, given their brand positioning is based on rock-bottom pricing.
Although fast fashion and private label brands are expected to continue to attract price-conscious consumers in the coming months, trading conditions for this kind of format will be much tougher than during the 2008 recession.
Brands that are able to absorb the impact of currency headwinds through hedging arrangements will find themselves in a beneficial position in the short term; however, 2017 could prove more challenging as uncertainty deepens and markets react to the ongoing negotiations between the UK and the EU.
Above all, Brexit poses considerable operational and logistical challenges for businesses. As the first country to leave the EU (aside from Greenland), there are no reference books to take notes from; instead businesses are faced with a multitude of potential scenarios. Sourcing strategies will need reviewing, whether production takes place inside or outside the EU.
Companies that have a large cost base in the EU, but depend on customers in the UK, or vice versa, will be most affected. For example, the lingerie specialist that relies on lace from France, produces in Poland and generates the majority of sales in the UK is likely to encounter more issues than those that source from Turkey or Cambodia. Another option for British fashion brands may be to bring production back home. In the era of fast fashion, shorter lead times result in better sell-throughs, while the “Made in Britain” label enhances brand image and portrays quality, credibility and style, and there will always be customers willing to pay for the provenance.
Time to stop lamenting
It has been confirmed that EU negotiations will take at least two years and this begins only when Article 50 has been submitted, which in itself could take some time. In the meantime, while Brexit continues to dominate the news, the UK remains very much open for business, and the business of fashion does not live by the political turmoil in Europe alone.
Consumers will continue to buy clothes, albeit they may be more selective in the process, but there is a myriad of opportunities to tap into: the mobile revolution, smart fabrics and the integration of fashion and technology to name but a few. Dedicating this time in limbo to building innovative products and providing additional value will secure market positioning and equip brands with the tools needed to efficiently handle what is to come. In other words, prepare for the worst, hope for the best and expect something in between.