After a decade of deflation, the clothing sector looks set to come under pressure to raise prices in 2010. Will retailers be able to avoid passing the increase on to customers?
For more than a decade, the clothing sector has experienced deflation. However, the new year has signalled the beginning of an inflationary period in the non-food retail sector as a whole, and clothing deflation has started to ease.
As 2010 is set to be characterised by a slow, protracted economic recovery, with political uncertainty hitting the headlines, what will the impact be on pricing for fashion retailers?
Last week, trade body British Retail Consortium (BRC) and market research company Nielsen said annual deflation in the clothing and footwear category slowed in December to 3.3%, from 5.5% in November, and forecast slower rates of deflation over this month.
BRC director general Stephen Robertson says retailers are doing “all they can to hold prices down and avoid passing higher costs on to customers”, but cites numerous external factors affecting pricing, including the return of VAT to 17.5% this month.
“Increases in the costs of oil, food commodities such as wheat and sugar and the continued weakness of the pound are also filtering through,” he says.
“Retailers said weak consumer demand and rising unemployment were their biggest worries for 2010,” he adds. “Shop price inflation is bound to be higher in January because of the return of the higher VAT rate.”
In autumn 09, data collated by specialist retail research agency Retailmap indicated relatively low to medium levels of price inflation in clothing compared with the year before, despite broad forecasts for significant price increases based on the weak sterling to dollar exchange rate and zero headline inflation in the UK economy.
Based on average full prices before any discounting, Retailmap found that inflation at multiple retailers rose 5% in womenswear, with casual jackets and coats up 18% and knitwear up 15% - including a 6% hike in menswear and 9% in kidswear.
Average price inflation remained broadly similar to the previous year at Marks & Spencer and Debenhams, while Next introduced lower price architecture in womenswear as the chain altered its supply base and negotiated harder. At M&S, there was considerable entry-price inflation - for example, for a basket of womenswear, opening price-point categories increased about 15%.
Range repositioning at House of Fraser drove prices up 25% in the department store’s own label and exclusive brand categories.
Retailmap managing director Richard Fitzpatrick says: “Unsurprisingly, some of the highest levels of inflation were seen at value retailers, where price increases are more visible, given their low price points. Primark had 13% inflation in women’s clothing and 14% inflation in children’s clothing. Matalan had 14% inflation in women’s clothing.”
The year ahead
Last week, amid a flurry of bullish Christmas trading updates, retail chiefs reassured that they would maintain prices in the coming year, but remained cautious about the factors at play that could affect pricing.
Next chief executive Simon Wolfson says: “Last year we kept pricing about the same, with better sourcing and negotiations. We have not changed the quality of the product. In the year ahead, exchange rates will be less problematic but working against us is VAT. On the whole, we will be able to keep prices about the same.”
M&S executive chairman Sir Stuart Rose said as he updated the City on third quarter trading: “We’re always looking at what we can do with average prices in terms of our good, better, best structure, so we will be looking at how we can improve on that next year.”
He added: “We’re not going to slash prices… our clothing values are outstanding… but we have to be prepared to meet the market.”
Vicente Castellano, managing director of menswear brand Hackett, says pricing doesn’t necessarily have to rise in 2010. “Hackett will aim to maintain the same prices. I think we have to buy smarter, be better on sourcing and design, but it doesn’t mean that we have to change prices at all,” he says.
Interestingly, value chain Peacocks this week announced it would not pass on the cost of the VAT rise to shoppers.
Taxation was also at the forefront of retailers’ minds as uncertainty reigns about which political party will be in power by the second half of the year and the inevitable implementation of tax increases and subsequent impact on consumer confidence. These concerns, coupled with recent increases in oil and gas prices, are adding to inflation concern, fuelling speculation that the Bank of England could hike interest rates later this year, limiting disposable income.
However, inflation could benefit the strength of the pound versus the dollar. “No one will be surprised if interest rates rise in quarter two,” says Rob Bollé corporate client dealer at foreign exchange company Moneycorp. “It could be an aggressive stance, which would be positive for sterling.”
However, he adds: “The US is pulling out of recession ahead of the rest of the world. If interest rates in the US move higher, the dollar strengthens.” He cites political uncertainty as the key short-term risk to the strength of the pound.
But Gifi Fields, founder of high street supplier Coppernob, says currency
fluctuations are “the least of the problems” facing pricing this year. An increase in demand from China - ahead of the Chinese New Year on February 14 and as the country experiences rapid increases in wealth - has led to global demand outstripping capacity.
Higher supply costs
He adds that the price of raw cotton has risen 60% over the past few months as the severe winter affects the ability to get product to market. He says customers “have no choice but to swallow” price increases, but adds that they won’t mind if the product meets their needs.
“Because we make new products all the time, we can review pricing as it is different on a product-by-product basis,” he says. “I don’t think it matters if a product is £20 or £30. If the shopper likes it, they will have it. We are producing something of joy and comfort. Providing we produce product that delivers those values, pricing won’t matter.”
Better sourcing and stronger supply chain negotiations will only get you so far, according to Grant Liddell, retail development director at logistics firm Uniserve. He says the supply chain sector has been pared back far enough.
“Retailers can’t put pressure further down the supply chain,” he says. “A lot of price cutting was driven last year by smart negotiation. It is physically impossible to return to the lowest costs of last year, whether on freight or product.”
So while 2010 began with a big freeze, it seems unlikely that pricing will go the same way. However, retailers are working to offset any pricing changes they encounter to ensure that nervy shoppers are not left out in the cold. l