Mounting pressure on margins in womenswear will force retailers to revise their pricing and sourcing strategies this year, according to the latest Verdict Research womenswear report.
The decrease in average operating margin from 9.8% in 2010 to 9% in 2011 underlines the squeeze coming from rising raw materials and logistics costs, a slowdown in volumes and the prevalence of discounting to clear stock.
According to Verdict Research analyst Honor Westnedge, 2012 will be hallmarked by a striving against margin erosion. Maintaining margins – and profitability – will be vital to retail health as weakening consumer demand means that volumes can no longer be counted on.
She said: “Volumes are really struggling because people are simply buying less and looking for value for money. They will trade up to better quality, for intricate design details. Operating margin is really vital now but many retailers have found themselves in a viscous circle of discounting to get people to through the door and get volumes, but discounting leads to impacted margins.”
Of the retailers Verdict assessed, Next came out with the highest operating margin at 17% for 2011, while Debenhams had a 6.9% operating margin.
Next was able to achieve such a high operating margin by holding its own and not discounting beyond its two sales periods annually, as well as being able to negotiate hard with suppliers because of its large scale buying operation.
The squeeze on margins looks set to force retailers to increase prices.
Pricing has already shown signs of inflation, according to Westnedge. Retailers including Marks & Spencer and Debenhams, while maintaining entry prices, have been increasing exit price points through the introduction of more premium sub brands.
Westnedge said: “It’s through sub brands that retailers are trying to push up prices without customers noticing.”
Inflation in womenswear is forecast to grow 2.6% throughout 2012, though Verdict expects this to ease in 2013.
The squeeze on margins will also spark a review of production and sourcing to help strip out costs. The UK looks set to grow in importance as a base for fast fashion and short order, said Westnedge.
“For specific retailers, it’s good for getting fast fashion lines on shorter lead times. For Primark or Arcadia getting trends from catwalk on to shop floor, it’s a good option. The manufacturing costs are more expensive, but getting product on to the shop floor quicker means increasing sales opportunities,” said Westnedge.
Vietnam and Bangladesh are also emerging as pivotal manufacturing centres. Production sources further from home will be used for longer lead time and core product.
“Bangladesh and Vietnam are growing in attractiveness with the skills needed. We’ll be seeing a review of production bases, where you have fewer suppliers and are better able to negotiate with,” she added.
- 2.6% inflation forecast in 2012 as cotton and freight costs drive up cost prices
- Low volume growth of just 0.4% in 2012 leads to unsustainable discounting
- Fast fashion players explore UK manufacturing opportunities
Forecast 2012 womenswear market shares:
|Marks & Spencer||11.6|