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Following Britain’s referendum shocker, uncertainty is endemic and will remain so for the foreseeable future. The value of the pound immediately deteriorated, causing major problems for all British fashion brands that outsource their production in the Eurozone and the Far East, where orders are typically placed in US dollars. However, where there is market correction, there is always an opportunity. The industry managed to weather the unprecedented global financial crisis back in 2008, and there is hope that the Brexit turmoil, while causing short-term damage, will ultimately reward the fashion companies that can adapt quickly to these new market conditions.
The low price/high volume retailers such as Primark or New Look are likely to be hit hardest. Their margins are already thin and justifying price increases may be more difficult than for mid-range or premium brands as their whole brand positioning is based mainly around rock-bottom pricing. And although value chains will continue to attract price-conscious consumers in the coming months, the trading conditions for this kind of format will be much tougher than during the previous recession. US brand Tory Burch is already looking into adjusting its pricing in sterling and other retailers are likely to follow, subject to their hedging arrangements.
That said, wider exposure to international markets and more, local supply chains also ensures a natural hedge between euro/dollar and sterling earnings. Primark’s aggressive expansion into continental Europe over the past few years means that the company is somewhat protected from currency volatility, as close to 40% of its apparel and footwear sales come from the Eurozone. In fact, accelerating expansion into Europe could be an astute move, strengthening Primark’s competitive advantage.
Luxury brands that trade on their British heritage could also benefit from currency fluctuations, as the weak pound will attract European and American tourists to England, and London in particular, which is likely to translate into higher domestic sales.
Even prior to the referendum, increasing transport and labour costs in China led many British fashion brands to consider bringing production back home. In February 2016, Burberry announced plans to invest over £50 million to expand its production in the North of England. The benefits of reshoring are evident. In the era of fast-fashion, shorter lead-times result in better sell-throughs. Lower inventory levels mean lower cost of warehousing and shipping. In this respect, Brexit could provide an incentive for more fashion brands to bring production back to the UK to support long-term growth from both financial and brand image perspective. The unique selling point of “Made in Britain” label is the quality, credibility and style and there will always be customers willing to pay for the provenance.
Beyond the current allure of the weak pound for foreign tourists, in the long-term, cutting the UK off from Europe is not in the interests of the fashion retail industry. Any potential new barriers will only add to complexity and the cost of doing business in the UK. International companies with an EU presence limited to Britain will now consider opening stores in other European countries in a bid to boost their profile in Europe. This in turn is likely to benefit the European cities: Paris, Amsterdam, Berlin or Dublin. Victoria’s Secret for example, whose European flagship store in New Bond Street, London is attracting a flurry of European tourists, is currently in talks to open a three-storey flagship in Dublin’s Grafton Street.
If Britain indeed leaves the European Union, trade negotiations will take at least two years to work through and the biggest challenges the industry will face in the short term will be currency volatility and consumer spending worries. In the longer term, the prospect of customs duties and stricter controls between the UK and European countries will undoubtedly create a lot of concern for fashion retailers and so will limited access to the emerging European digital single market.
In the meantime however, while Brexit will continue to dominate the news, the UK is still very much open for business and the business of fashion does not live by the political turmoil in Europe alone. Consumers will keep buying clothes and there is a myriad of opportunities to tap into: the mobile revolution, dynamic growth in sports-inspired and performance apparel and footwear and smart fabrics and the integration of fashion and technology to name a few.