What does Brexit mean for the fashion industry?
21 December 2016
The past few months following the EU Referendum decision have signalled a period of political, economic and social change. As the dust settles and we look towards the future, uncertainty is still the buzzword of the morning news. This is the second in a series of blogs by PwC looking at how the Retail & FMCG industry has been affected by the vote to leave and how we can turn this uncertainty into opportunity.
In 2015 the fashion industry was worth £28 billion to the British economy and provided 880,000 jobs. It is alarming therefore that our retail big issues survey in April 2016 found 84% of CEOs were concerned about Brexit and a leave vote was viewed as the top negative impact on consumer confidence over the next 12 months. This was for a number of reasons. Firstly, currency volatility and a weaker pound could mean higher manufacturing costs in factories abroad. Secondly, uncertainty concerning the future could lower customer confidence and purchases in non-essential goods. Thirdly, the British fashion industry has many international connections and networks, and leaving the EU could affect the aspirations of promising designers and talent.
So how can the fashion industry respond and succeed throughout Brexit?
The strategy of the fashion industry will need to focus around maintaining and growing international reputation and presence, and reassessing supply chains. London Fashion week 2016 was seen as a huge success and a confirmation that post-Brexit Britain can still offer world leading talent and innovative fashion. Despite this, a weaker pound, a reliance on imports and foreign workers will mean the fashion industry may have to reassess their business models and pricing strategies.
The British fashion industry prides itself on attracting a wide pool of international talent. Hence questions must be asked about the impact on fashion schools and attracting top designers, especially if visa requirements reduce the appeal of studying and working in the U.K. However, there is still a lot of noise present in the market and a number of emerging collaborations. It is unlikely that the impact of Brexit would topple London as a global fashion capital.
In terms of financial impact - Brexit so far has not impacted massively on fashion sales, with October figures showing consumer confidence has remained strong. Some stores have gained from currency fluctuations, with Harrods and other luxury stores gaining from tourist income on designer goods which are now cheaper than anywhere else in the world and Burberry having a temporary reprieve from financial issues. Some of the biggest names in the fashion industry, especially in e-commerce, have headquarters in London, and Yoox Net a Porter Group plans to centralise its Britain based technology ops in BBC’s old headquarters demonstrate that many have no immediate plans to leave London.
However, in the long term, fashion companies will be exposed when hedges expire and they have to re-negotiate contracts with a depressed pound. Moodys have flagged Next, M&S, New Look and Matalan as being vulnerable to the fall in the pound as 70% plus of their stock is in dollars and Next have already responded by suggesting consumer prices must rise to compensate for this.
In addition, impact on the supply chain needs to be considered. It is expected that Brexit will in the short term raise manufacturing costs. Burberry has already postponed a new factory in the North and companies who rely on large numbers of immigrant workers may suffer from challenges if restrictions are put in place. Few fashion labels are manufactured solely in Britain and even where there is UK manufacturing, raw materials are generally imported and purchased in foreign currency. So if the exchange rate remains volatile, higher costs will result in British brands becoming more expensive for British consumers.
Our Retail industry big issues survey found 76% of top retail and consumer CEOs were concerned or very concerned about the impact of Brexit on imports from the EU and 62% were concerned or very concerned about the impact on staffing costs.
The main crux of the issue is therefore what the emerging policies on immigration and trade barriers will look like. If these encourage free movement of labour and trade, the industry is likely to continue to thrive with inflows of designers, flexible European labour and a stronger pound. If not, retailers will need to focus increasingly on their international presence and online reach in order to maintain their global reputation and market position.