UK clothing retailers could find it hard to pass on post-Brexit cost increases

UK clothing retailers could find it hard to pass on post-Brexit cost increases

Britain's vote to leave the European Union (EU) will weigh more heavily on UK clothing retailers than their European counterparts, new research suggests, as they could find it hard to pass on cost increases resulting from the post-Brexit fall in the pound.

An update from ratings agency Moody's has warned the vote adds to existing pressures, and that clothing retailers in particular will struggle to achieve like-for-like sales and profit growth.

"Following the Brexit vote, UK clothes retailers could find it tough to fully pass on cost increases incurred as a result of sterling's weakness," says David Beadle, a Moody's vice president and senior credit officer, and author of the report 'Retail – Europe: Moderate Overall Sales and Continued Earnings Growth Support Stable Outlook.'

"This is because we expect the market to remain highly promotional, with plenty of discounting, as volumes so far this year have been hit by unseasonal weather, shifting consumer spending and weak consumer sentiment around the time of the vote," he adds.

The value of sterling has tumbled to a 31-year low against the US dollar following the EU Referendum, and the analysts warn that Next, Marks & Spencer, New Look and Matalan are most exposed to rising costs as the majority of their purchases are dollar-denominated.

Last month Next, the UK's second-biggest clothing retailer, said the pound's weakness since the Brexit vote is likely to increase sourcing costs by up to 5% next year for the first time in six years.

Next mulls price rises as weak pound hurts sourcing costs

And a recent survey found three-quarter (76%) of UK retailers are looking to build more efficient supply chains as a result of the vote to leave the EU. 

The research, published by Barclays, also suggests around one-third (30%) are considering changing suppliers and sourcing from different countries (28%). But in a potentially positive sign for the British economy, one-third of retailers (32%) predict that they will source more from the United Kingdom, with only 12% expecting a reduction.

Retailers rethinking supply chains following Brexit

The Moody's report also notes that sustained economic recovery and rising consumer confidence will drive steady overall revenue and earnings growth for European retailers into 2018, underpinning the sector's stable outlook.

It forecasts that overall annual European revenue growth will remain within a range of 2.0% to 3.0% during the next 12-18 months.

On a country-by-country basis, large Russian retailers will continue to report double-digit revenue growth. Spanish revenues will grow 3.0% as the country continues to recover from recession. Annual revenue growth in Germany, France and the Netherlands will be 1.5%-2.0% as their economies recover. And Italian annual revenue growth will remain subdued at around 1.0%.