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‘New era’ for sector as price hikes bite

Retailers have called time on deflation and are set to hike their prices by up to 8% for autumn as they contend with volatile currency rates, increased commodity costs and the likelihood that VAT will rise.

All of the major high street retailers including Marks & Spencer, Next, Debenhams and Primark are said to be desperately reviewing their pricing strategies for autumn, with most thought to be pencilling in average rises of somewhere between 4% and 8% in the wake of rising cotton prices and Chinese labour charges.

Retailers said autumn 10 would herald the end of a decade of retailers competing on price alone but warned they were nervous about the effect of higher prices on consumer spending, sales volumes and the knocking out of “sweet spot” price points. One director of a multiple said: “Prices are going up and that’s not just about VAT. It’s about ex factory costs and we are really uncomfortable with that given the consumer will have less money.”

He added: “We’re worried about moving out of those sweet spots. If you have to mark-up a £25 shirt to say £28 or £29 then it takes you out of that sweet price spot. There is a direct correlation between mark-ups and units falling.”

Sources told Drapers that further price hikes were likely to come through by spring 11, by which time many currency hedges will have expired, cotton shortages will be prevalent and a new VAT rate of 20% is likely to be in place.

Michael Wolff, managing director of high street supplier Fielding Group, said he expected the cost of clothing to increase by as much as 25% by the end of 2011. He said: “The 15-year decline in clothing prices is well and truly over and we’re talking about ever-increasing costs in manufacturing, so retailers are going to have to put prices up.

“The rate of inflation on textiles has gone up far faster than the national average and that will continue. The levels of cost increase far outweigh any potential VAT hike - a 2.5% rise in VAT is insignificant compared to escalating supply costs.”

Clothing has already contributed to higher inflation. Consumer price inflation rose to 3.7% in the year to April, with the largest upward effect coming from womenswear.

Maurice Helfgott, founder of Amery Capital, which owns Long Tall Sally, Kookaï UK and footwear brand Oliver Sweeney, said: “In the long term, margins cannot be elastic. There will be significant increases in six to 12 months.”

One multiple retail boss said: “There is going to be big change. Hopefully, we’ll be able to move to a situation where the customer is prepared to pay more for more desirable product with more longevity.”

New Look chief executive Carl McPhail said the fast-fashion chain would be mitigating the impact of a VAT rise with a price increase of “less than 4%” but that he would be absorbing commodity rises.

Maureen Hinton, lead analyst are retail research firm Verdict Research, said: “This is the beginning of a new era. It was unsustainable for prices to keep dropping and for shoppers to buy more and more product.”

Readers' comments (1)

  • This reading of the sector is spot on. Everyone is talking about it. Value retailers can longer rely on pricing everyone out of the market as trhey are going to have to pass some of these input costs on to the consumer.

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