The sharp drop in the value of the pound has already had a real impact

The sharp drop in the value of the pound has already had a real impact

One month after the UK's Brexit referendum vote to leave the European Union (EU), the British clothing industry has been weighing up the immediate impact and trying to assess what might happen in advance of any longer-term trade solution.

The uncertainty caused by the vote, together with a sharp drop in sterling against both the euro and the dollar and Britain's new credit rating of AA negative instead of AAA have already had a real impact.

Emma Wilson, director of UK-based Smartway Consulting, a product development and sourcing consultancy that specialises in clothing and accessories, says she has already heard of suppliers wanting to "re-price" goods before a purchase order could be sent. "Just days after the vote, Turkish companies were raising prices by 10-12% because of the currency issue," she says.

The knock-on effects on UK retail prices will impact before the end of the summer.

Companies sourcing goods from EU countries such as Portugal, where small batches are produced for small businesses in the UK, are also finding that costs are increasing.

Larger and more experienced corporations that are used to hedging have been able to ameliorate the effects of falling sterling, but smaller ones had no real way of knowing that the pound would fall so sharply as a result of the Brexit vote. In addition, the actual result took them by surprise. "I didn't meet anyone during the campaign who was a Leave voter," says Wilson. "It was a huge shock."

Rising prices

With the major drop in sterling happening immediately – even while the vote was being counted – it is too late to reverse the effects of that by hedging. The only solid alternative is to raise consumer prices.

Another consultant, London-based knitwear studio owner Sophie Steller, says: "The impact will be felt late autumn [and] early spring in consumers' pockets as orders are just being finalised now – and if the products are now more expensive the companies will be reviewing whether they absorb the costs or hand them on.

"I think suppliers will inevitably be squeezed in the middle as large retailers will have fixed price points they cannot waver from as the buying plans are set – they cannot restructure pricing plans at this point.

"So the retailer then either has to absorb a smaller margin or the supplier takes the hit that they make less margin.

"This in turn may be handed on to the spinner or fabric source to adjust their cost, but for the most part the materials and yarns for next season are booked and committed so I imagine the supplier will not be able to negotiate the raw materials down so will have to work on lower cut, make and trim [CMT] prices to meet the buyers' targets."

She adds: "This will depend on the size of the organisation. Smaller companies with less buying power will feel the increases as they will be handed straight on."

Inventory glut

A more immediate impact would be felt in terms of stock levels and consumer confidence, Steller says. "As people feel either nervous or have less money to spend and can borrow less, it will drive down consumer confidence.

"This means there will be an overstocking of product so we will probably see more markdowns and sales to try to get rid of stocks, but then the buying plans may get reduced for the next season in line with that, which will have a longer term financial effect on suppliers."

A possible upside is that UK manufacturing exports may benefit and that "potentially companies [may be] looking to source within the UK to avoid exchange rate difference issues".

Sourcing costs

Hal Watts, CEO of Unmade, a mail-order business from which customers can order customised clothing, produced with yarn from Italy, also has concerns. "Brexit will make Italian yarn more expensive and that will of course affect the business, though it is too soon to say just exactly how. We believe we are ready to meet what challenges there may be."

Larger companies are better protected, though. Next chief executive Lord Wolfson, for example, has said the retailer had covered 60% of its requirements for US dollars and that price increases in large stores were unlikely at least until spring 2017.

Luca Solca, head of luxury goods at Exane BNP Paribas, said: "Brexit, and the turmoil in financial markets, is likely to have negative repercussions," he said, reflecting the bank's revising down of 2016-17 growth estimates. "Consumers may pause before spending, and businesses may pause before committing to capital investments."

But smaller companies are often forced to have their products manufactured abroad – and doing so will become more expensive.

And not every company agrees that a weak pound is good for UK exports. "That is very over-simplistic," said Patrick Grant, owner of the E Tautz label, whose products are made in Blackburn, Lancashire.

"Most of our goods have at least one component sourced from outside the UK." The company imports cotton and zips from Italy and buttons from Germany.

Skilled labour

The free movement of labour – immigration – was a key issue in the referendum campaign and one that will weigh heavily on the minds of trade negotiators. Grant says that a shortage of skilled labour in Britain means that almost two-thirds of the workers in the Blackburn factory are from Eastern Europe.

If they are all forced to leave, along with three million other EU citizens living in the UK, the impact not just on E Tautz but on the rest of the clothing industry will be immense. In the meantime, the uncertainty they face is a problem for them – and their employers.

Meanwhile, British fashion graduates looking to study and work in European fashion houses will also find it more difficult to get jobs because of potential visa problems and other post-Brexit losses of EU rights, such as free healthcare – and are already having doubts as to the longer-term wisdom of such a career-move, according to Steller.

She adds that some overseas contacts are looking on Britain with disdain for voting for what they regard as such a self-damaging outcome, and that this in itself "does not help" UK firms trading with suppliers or customers in other countries.

Even the future of trade organisations is in doubt. The British Fashion Council says it has been assured that this year's grant from the European Regional Development Fund is guaranteed – but the ERDF has not been able to say what would happen once the UK actually does leave the EU.

A new survey carried out by just-style found it is likely to be at least two years before the global apparel industry fully understands the implications of last month's vote by the UK to sever ties with the European Union (EU).

Brexit blow to global apparel industry confidence