Rising costs and pressure on margins will force women's wear retailers to rethink their pricing and sourcing strategies this year, according to new research, with British manufacturing poised to make a comeback.

In its latest report on 'Womenswear retailing in the UK,' retail analyst Verdict Research says a combination of inflation, a fall in sales volume and discounting to clear stocks will continue to pressure women's wear players in the year ahead.

 The average operating margin of Arcadia, Debenhams, M&S, Matalan, New Look, Next, Primark, Tesco and TK Maxx fell from 9.8% in 2010 to 9.0% in 2011, it says, highlighting the margin pressures retailers are facing.

Inflation in women's wear is forecast at 2.6% in 2012 as cotton and freight prices drive up garment costs and retailers raise their retail prices to limit the hit on margin.

However, higher prices and restricted disposable income also mean that shoppers are more cautious with their clothing expenditure - limiting volume growth to just 0.4% in 2012. This weak demand has meant most retailers have resorted to discounting to drive footfall and spend.

"High levels of markdown and discounting in 2012 will lead to increased margin pressure, impacting overall profitability and forcing retailers to rethink cost saving strategies," says Honor Westnedge, analyst at Verdict.

Fast fashion players, in particular, are set to explore UK manufacturing opportunities to offset rising international sourcing costs. The higher cost of labour in China and India, along with high freight charges and import duties have put increased pressure on retailers to raise retail prices or take a hit on margins.

"While labour and production costs may still be more expensive in the UK, freight and import charges are eliminated and it allows for shorter lead times and provides retailers with greater flexibility in repeat runs and short orders - especially retail brands that need to translate styles from the catwalk to the shopfloor quickly," adds Westnedge.

If retailers don't rethink their discounting and sourcing strategies in 2012, the report warns, they risk diminishing profitability, since "the level of discounting currently seen at retailers is not sustainable in the long term."

"Margins cannot continue to be eroded and consumers will be ever more reluctant to pay full price for garments."

The report also forecasts that  Marks & Spencer will hold the biggest share of the UK women's wear market in 2012 with 11.6%, followed by Arcadia/Bhs (8.1%), Next (6.9%), Primark (6.2%), New Look (3.5%), Asda (3.2%), Debenhams (2.9%), TK Maxx (2.8%), Matalan (2.7%), H&M (2.5%), and Tesco (2.1%).