Drapers digs into how the drop in the value of the pound is affecting pricing strategies across the industry.
The thorny issue of higher prices has been hanging over brands and retailers for the last eight months, as sterling has failed to recover from the battering it took after the Brexit vote last June.
Since the European Union referendum last June, the value of the pound has fallen by around 17% against the US dollar and 12% against the euro. As Drapers went to press, the pound was equivalent to $1.23 and €1.17.
For some UK businesses – those with strong international operations, for example – the drop in the value of the pound has been manageable. International sales at Asos, for example, have soared, offsetting the impact of the weakness of sterling on the UK business.
But for many, it has been a headache. High street bellwethers John Lewis and Next have warned of price increases this year. Primark is refusing to put up prices, but said the weakness of sterling against the dollar will dent its margins. Brands and agents, too, have been forced to rethink their pricing strategies for 2017 and beyond.
To get a clearer idea of how pricing is affecting the industry, we launched an online survey, and carried out more than 100 interviews with brands and agents at UK and international trade shows this season, as well as speaking to retailers.
I know of some brands who have brought out new products to mask higher prices
Director, accessories brand
Generally, those towards the premium end of the market were less concerned, arguing that if a customer is already splashing out, a slightly higher price is unlikely to deter them. But for those competing on price, the currency weakness has created problems.
“Our buyers have been working very hard to find better sourcing options, but we’ve still had to increase prices,” said Carl Barratt, head of sales for Alpha and Luke 1977 at London menswear show Jacket Required. At Milan footwear show Micam, Mark Husted, sales director at Base London, agreed: “We found that most brands went up by about £10 on the retail price and we’ve gone up by £2.99. We hammered our factories to get good prices and worked with them to make it happen.”
Respondents to Drapers’ pricing survey painted a similar picture. Most said they had upped prices by around 5%-7%, although some had decided to take the hit for the time being.
Speaking at premium womenswear show Scoop, Robin Yates, founder of outerwear brands Nobis, told Drapers: ”The drop in the value of the pound hasn’t been good for us, but we’ve held strong and haven’t raised our prices. We’ve swallowed the difference. The UK is a such a strong and dynamic economy that I’m sure the pound will recover.”
Nobody has trust in the volatile pound and are visibly covering themselves for any dips or losses
“Since the start of this year, we have seen further increases, which we are no longer able to absorb,” said the founder of one fast fashion womenswear brand. “To maintain our level of business, we can only really increase by prices by 5%-8%. Ideally the increases should be more like 10%.”
Another survey respondent from a high street retailer said there had been a strategic decision to increase prices across its seasonal collections by 5%-7% since the vote to leave the EU: “Margins are noticeably being squeezed by our suppliers and factories. On like-for-like products, prices are being hiked in some cases by 30% or more. Nobody has trust in the volatile pound and are visibly covering themselves for any dips or losses. Some suppliers have even requested to quote FOB [free on board import] pricing in euros or dollars rather than pounds.”
And the uncertainty looks set to continue. A poll of more than 60 banks by news agency Reuters earlier this month suggested the pound is unlikely to recover once prime minister Theresa May triggers article 50. Most predicted the pound would remain at about $1.23 for the next month and drop to $1.21 in the next three to six months.
Hedging their bets
Some of the bigger retailers, including John Lewis, Harrods and N Brown Group, hedged their currencies far enough in advance to offset the drop in sterling for the 2016/17 financial year and into 2017/18. However, not all businesses have done so. Sports Direct recently revealed its hedging is due to expire at the end of this financial year in April and it has no euro or dollar hedging in place for 2017/18. Smaller businesses have also been left more vulnerable.
The director of one competitively priced accessories brand told Drapers the business had forward bought enough currency to cover spring 17, but would be increasing some prices from the autumn: “Usually it takes me two days to price up new ranges. For autumn 17, it took me three weeks.
“We spoke to our key retailers and customers. Commercially, we felt we couldn’t increase prices by 15% across everything, so we’ve held the prices on carry-over product and taken the hit, which is obviously bad for profitability. We get a lot of repeat business, so customers tend to know how much products cost.”
Several brands told Drapers they had opted to increase prices on new products, whether it was new seasonal colours or an entirely new range. Many felt eye-catching new designs could better stand up to price hikes than the old favourites, and have the added benefit that customers had not bought the product before and so did not have any expectations around price.
Others have made small adjustments to existing products, such as adding new, improved soles to shoes, to justify higher prices to customers.
We’ve consolidated our buy in fewer factories, offering larger orders as an aid to price negotiation
High street retailer
This experience was echoed by the managing director of a contemporary womenswear brand: “We raised prices to protect margins in October last year. We made some subtle changes to the product catalogue, to increase the mix of lower-priced product and to diminish the immediate effects of a catalogue-wide shift. We avoided increases on the small subset of high volume year round staples, aided by a higher starting production on pieces with a greater production scale.”
On a more positive note, both businesses stressed that everyone is in the same boat: competitively priced brands feel they will still appear good value compared with more expensive brands that are also increasing their prices.
Faced with rapidly rising costs, businesses have also had to drive efficiency in other areas. Rethinking their relationship with suppliers, whether by negotiating on price or finding new partners, is one way of cutting costs.
“We’ve consolidated our buy in fewer factories, offering larger orders as an aid to price negotiation,” one high street retailer told Drapers. “We’ve also reduced the percentage of CMT (cut, make and trim) product and re-sourced through new suppliers.”
Others have slimmed down ranges in a bid to control costs.
One survey respondent said: “We’ve stripped back the range to offer only styles that are cheaper or are the bestselling core line.”
Upping prices is a difficult decision for most businesses, even in the best of circumstances. But price pressures in fashion come as the high street is in the grip of a discounting epidemic. A growing number of retailers have been vocal about reducing their promotional activity, but the fact remains that shoppers are now accustomed to buying at lower and lower prices.
As exchange rates look set to remain volatile, pricing will continue to present a conundrum for businesses big and small. Although the picture was mixed, several of the businesses Drapers spoke to said buyers had been understanding about price rises, recognising that many in the industry are within the same boat. However, brands will need to communite clearly with buyers about exactly why prices are rising. And fashion businesses will need to offer customers exciting, fashion-forward products and continue to carefully balance where – and how much – they increase prices.
What the survey respondents said:
“Buyers are very resistant to price increases and when prices are agreed, orders are smaller than they have been.”
“The dwindling number of independent retailers, who are our main business, is more of a concern. If we have no retailers, it doesn’t matter what we charge.”
“We are reviewing how necessary a product is to the range. Each product needs to warrant its space.”
“We’ve taken a blended approach to price rises, depending on brand, gender, age group and product category. We’ve held prices in some areas and also negotiated with vendors to help ‘share the pain’.”
*The survey ran on 1-17 February
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