British clothing retailers face Brexit double whammy

26 Jul '16

5 min read

With online rivals already giving them a hard time, Britain's major clothing retailers now risk a hit to sales and profits from rising costs and plummeting consumer confidence that have followed the June 23 referendum to leave the European Union.

A month after that vote, clothing sellers are facing large price falls and contemplating the cost of the depreciation in the pound versus their most important currency, the U.S. dollar.

At the same time, consumer confidence has recorded one of the biggest drops in over two decades. As consumer spending accounts for three quarters of Britain's gross domestic product (GDP) any drop would have huge implications for the economy, reports Reuters.

"It was already a tough market," Andy Street, managing director of John Lewis, Britain's biggest department store chain, said earlier this month, while Steve Rowe, CEO of Marks & Spencer, the nation's biggest clothing retailer, described the confidence as "fragile".

While steps by clothing retailers to protect themselves from volatility in foreign exchange rates through hedging will provide some breathing space on the currency issue, the hit to confidence is the more immediate threat as Britons typically curtail clothes shopping in hard times.

Market researcher Nielsen polled shoppers after the Brexit vote and found 41 % had planned to change their spending habits to save on household expenses, with clothing and expensive grocery brands in their sights.

Like all British retailers, clothing sellers were already grappling with intense competition from online-only players and the cost inflation implications of the government-mandated minimum pay rate, the national living wage, as well as increased business rates.

Official data in mid–July showed that UK clothing sales were falling even before the referendum. Sales volumes in the three months to June were 5 % lower than a year earlier - the worst performance for any calendar quarter in 25 years, and in sharp contrast to a buoyant picture for most other categories of retail. Average pricing of clothing in the last decade has fallen by 15 %.

Now clothing retailers also have to deal with a sharply depreciated pound.

Sterling has taken the brunt of market concern since the Brexit vote on June 23, falling to a 31-year low and trading below $1.28 on July 6 against $1.50 the day before the referendum.

With the bulk of British clothing retailers' goods sourced from Asian suppliers and paid for in dollars, a weaker pound has a major impact on their buying costs.

However, Britain's biggest clothing retailers, including M&S, Next and John Lewis, are hedged or protected up to 18 months ahead, meaning that if sterling stays depressed the main impact will not start to be felt until the second half of their 2017-18 financial year.

Sportswear retailer Sports Direct is the notable exception, being unhedged for sterling-dollar for its 2016-17 year. Its share price is down 32 % since the vote.

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