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From value to luxury, there’s no escaping Osborne’s axe

Every sector of the industry will feel the knock-on effects of the Chancellor’s Spending Review.

Last week saw the end of months of speculation about precisely what pain the £81bn of public spending cuts will bring. After months of leaks and hints, we know the worst. The headline figures include the likely axing of 490,000 public sector jobs, £7bn of cuts to benefits and a rise in the retirement age.

Government departments will have their budgets cut by an average 19%, while local councils will have 25% less to spend over the next four years. And 24 quangos, including the London Development Agency, are facing the axe, which threatens important funding for London Fashion Week organiser the British Fashion Council.

And those are just the direct cuts. The British Retail Consortium was also quick to condemn changes to the Carbon Reduction Commitment energy efficiency scheme, a move it called a “stealth tax” on green businesses. The changes, hidden away in the Spending Review document and ignored by the Chancellor in his speech, involve redirecting an estimated £1bn a year previously intended to reward green businesses back into the Treasury’s coffers.

The full implications for fashion businesses will become clearer as more details of the cuts - and their impact on consumer confidence - become apparent. However, with such extensive trimming planned, there is no shopper demographic, geographical area or industry sector that will not feel some impact.

Premium and luxury

Premium and luxury fashion businesses are considered more resilient to economic turmoil than mid-market firms but the global luxury market has already shown some vulnerability. According to management consultancy Bain & Company, it declined 8% in 2009 and, while it started to bounce back at the start of this year, the cuts could slow progress.

Higher-earning parents - who fall squarely into luxury and premium retailers’ target demographic - will collectively lose £2.5bn a year as the Government axes their child benefits, equivalent to £20.30 a month for the first child. However, Ed Burstell, managing director of premium London department store Liberty, believes premium and value retailers could well benefit at the expense of the middle market as shoppers opt for investment pieces.

“If you are caught in the middle you are going to lose,” he says. “If you don’t have that quick-fix item that is reasonably well-priced and you don’t have that investment coat or shoe, you are going to find things difficult.

Middle market

“Higher earners will still be fine and lower-income earners will still be supported by welfare. It’s Middle England that is most likely to suffer,” says Nick Brown, managing director of independent department store Browns of York.

Press reports estimate that middle-class families will be about £10,000 worse off over the next four years, taking into account the value of the public services they will lose, and belt-tightening is already evident. Senior retail figures predict those consumer cutbacks will be particularly severe for middle-market brands and retailers, as shoppers opt to ‘save’ by spending on value items or to invest in more premium pieces.


Middle-class shoppers may increase their spend with value retailers but this will not be enough to offset the squeeze on disposable income among lower earners. Cuts in welfare payments amount­ing to £7bn were announced in last week’s Spending Review, including a reduction in housing benefits for the under-35s. Value retailers typically attract a higher proportion of shoppers with less-than-average incomes, so will feel the knock-on effect of a drop in those shoppers’ disposable spend.

Meanwhile, rising cotton prices and manufacturing costs are pushing up prices on the high street - which implies bigger hikes in percentage terms for this end of the market. Suddenly value retailers might no longer seem to be offering such cheap prices, which could push more shoppers to switch their spending to better-quality pieces.

Womenswear vs menswear

Women seem to be hit harder than men in the Spending Review - they account for about 65% of public sector workers and so will take the brunt of the job cuts - whereas spend on menswear has historically been much more discretionary than that on womenswear or kidswear.

Brian Brick, chief executive of menswear retailer Moss Bros, thinks the menswear market will be worst hit. He says: “If the family purse is being tightened, historically it has been easier for men to say ‘no’ to themselves than to their wives and children, although no one is overly optimistic about next year.”

But men’s formalwear will benefit from a tendency among office workers to smarten up in tough times. “I don’t think it will affect formalwear or hire. People will want to sharpen up at work and people are still going to get married and wear a morning suit,” says Brick.

Consumer confidence

The impact of the cuts is two-fold: they deliver a direct hit to shoppers’ disposable incomes and they will also have a negative psychological effect on consumer confidence.

High street sales growth slowed from 7.4% in the week ending October 3, to 2.2% in the week to October 17, and some commentators suggested shoppers were holding off spending until they found out how bad the cuts would be. Some heavyweight retailers predict a temporary uplift now the cuts are confirmed - claiming consumers will feel more confident now they at least know where they stand - but are fearful of a longer-term crisis of confidence.

Fashion businesses will be using every trick in the book to get things moving in the run-up to Christmas. Says Brown: “Everyone will be using the VAT increase as a marketing tool to get shoppers spending.”

Double dip?

The jury is still out on the danger of the UK economy falling back into recession. While the international money markets and ratings agencies have so far reacted positively to the UK’s commitment to reducing its deficit, there are fears that relying on the private sector to take up the slack might be asking too much.

Peter Lucas, chairman of menswear supplier Baird Group and the UK Fashion & Textile Association, says: “I am nervous about the real risk to the economy of a second recessionary period. Such large potential job losses will have a knock-on effect on the private sector, especially in those regions such as Teesside, where nearly 50% of jobs are within the public sector.”

But John Lewis buying and brand director Peter Ruis doesn’t foresee a return to the trading climate of last year. “It’s tough, but we don’t think there will be a double dip,” he says. “We may be better positioned than other retailers. I think our customers have been aware of what is coming and they have been managing their spending for some time.”

At a glance

How the cuts will impact


public sector jobs likely to be cut over four years


Increased unemployment to be felt most in the North, in areas like Merseyside and Tyne and Wear, which have a higher concentration of public sector jobs. Knock-on effect on disposable income will hit retailers


cut in housing benefits and other payments to those on lower incomes


Blow to value sector as cash comes out of poorer shoppers’ pockets


cut in child benefits for parents with higher salaries


Drop in sales for premium fashion businesses as 1.2 million higher-income households lose what for some was disposable cash. Boon for value retailers as shoppers trade down


estimated annual revenue from the Carbon Reduction Commitment to be diverted from retailers to government


Businesses will have to pay for their pollution without direct rewards for energy efficiency


predicted hike in rail transport costs by 2012, as price cap is axed


Drop in footfall for London retailers as suburban and rural shoppers are put off travelling. Possible boon for suburban shopping centres, as customers stay closer to home.


number of quangos to be axed as part of the 7.1% budget cut at the Department for Business, Innovation and Skills


The London Development Agency, which funds London Fashion Week organiser the British Fashion Council, faces the axe, throwing the BFC’s future revenue into doubt


to be generated annually from a levy on UK banks’ balance sheets, starting in 2012


Banks may be less likely to lend to businesses


the new state pension age for men and women to be introduced in 2020, rising from 65 for men and 60 for women


Older shoppers will be working longer and will therefore have more disposable income, bringing increased opportunity to exploit the ‘grey pound’

The view from the boardrooms

Sir Stuart Rose executive chairman, Marks & Spencer

“I believe consumers want clarity and what the Chancellor did last week was give consumers absolute clarity about what to expect.

“With clarity comes, I think, more confidence. Ten or 15 years ago, if the world went into recession, we all waited for America to start up again. That is not the case this time. We are in a much better place than we were 24 months ago. We are in a better place than we were 12 months ago. We are not out into clear blue water yet, but we will be, providing all these measures take place.”

Richard Lowe head of retail and wholesale, Barclays Corporate

“Retailers proved fairly resilient in the recession as other sectors took the brunt of the downturn in consumer spending.

“Nevertheless, retail sales volumes have slowed in recent months and a period of uncertainty lies ahead as households and businesses digest the details of the Spending Review.

“Retailers will be hoping to benefit from the traditional seasonal uplift and the anticipation that consumers will bring purchases forward ahead of the VAT increase - although there is little evidence to support this theory yet.”

Michael Sharp deputy chief executive, Debenhams

“I have no control over the economic backdrop, I just try to understand the implications for our customers.

“[The cuts] probably won’t help consumer sentiment. The markets we’re in are still big enough for me to grow market share by, for instance, delivering great products and developing our own-bought range. You’ve got to stay connected to your customers and understand how they’re feeling. Only by doing that can you work on the product, value and the overall proposition.

“The retailers that will struggle will be those that don’t stay close to their customers.”

Julian Dunkerton chief executive, SuperGroup

“I don’t think it will have a massive impact on us. The 490,000 jobs that are going will be cut over four years, and most of them will probably be natural wastage, with people leaving jobs and not being replaced. It’s not as if they are all immediate mass redundancies.

“We have a strong brand and we’re still taking market share, so I’m not worried about it.”

Ashley Cumming UK brand manager, Fly London

“Pricing-wise, a lot is out of our hands, with things like the increasing cost of leather. So we will have to focus more on getting the product right and increasing the value for money.

“Some retailers will stick with the winners when times are difficult and others will think out of the box and do something different and fresh.

“But if the product is right, it will sell whatever.”

Ed Burstell managing director, Liberty

“My big fear is that, if there are these big middle-ground inventories at other retailers, there will be this downward spiral of discounting, which will be bad for everyone. That’s what’s happened in America. A customer in uncertain times will probably go back to something more tried and tested.”

Peter Taylor managing director, Hunter Boot

“No one knows how it’s going to pan out. We’ve taken action to ensure we aren’t reliant on one market or one single product. If the UK starts struggling, our international markets will take up the slack.

“People do need wellington boots, so I’m optimistic.”

Peter Lucas chairman, UK Fashion & Textile Association and Baird Group

“A very forward step was made by appointing Sir Philip Green to look at wastage within the procurement process. The coalition Government should look for a similar leader or leaders from business who can help them through this change process.

“The hope that the private sector will ‘pick up the slack’ can only be realised if there is positive encouragement to this sector.

I can see no signs yet of the Government encouraging banks to increase their lending or credit facilities, which are too scarce and too costly currently, as they continue to focus more on repairing their balance sheets.

“Real action has to happen here to enable the private sector to rise to the challenge.”

Nick Brown, managing director, Browns of York

“The run-up to the review has had a dampening effect on retail. Now that it’s happened, there’s more clarity. It’s going to be painful but I think it wasn’t quite as bad as people thought and the cuts are going to happen over four years.

“The private sector has had pay freezes for the past couple of years, so they’ve already started getting in control of their costs; now the public sector is playing catch-up.

“As a department store, we have to continue to focus on quality of service. The UK private sector has a history of being innovative, so hopefully it can take up the slack.”

Peter Ruis buying and brand director, John Lewis

“Trading has been really good and our sales have continued to be up on last year. We are not seeing a North-South divide at the moment. In fact, sales in the North have been better than in the South. However, we are aware that our customers will not be unaffected and that they will continue to be careful.

“Christmas is on a Saturday this year, which is good, as people tend to have to work right up to Christmas and not go away, so they are more likely to shop. As far as the overall John Lewis strategy is concerned, there are no changes - it’s full steam ahead.”

Charles Lamplugh lead relationship director, Lloyds TSB Corporate Markets

“Conditions on the high street in September were not helped by a very warm start to the month as autumn stock started to arrive. However, trading appeared to pick up towards the end of the month.

“Consumers are being more discerning, as they are looking for good quality and value for their purchases.

“It remains to be seen what impact the coalition cuts have on consumer restraint, but the retailers who are fully engaged with customers should fare well.”

Ric Ramswell managing director, No Added Sugar

“Kidswear is less vulnerable. Menswear goes first, followed by womenswear, but kids are the last to go. The bigger shops I speak to, like Bentalls and Harrods, are on fire in terms of kidswear sales.”

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