Retailers are reluctant to pass on rising cost pressures to consumers in the form of price rises, but suppliers say they are already working at the tightest possible margins. Drapers explores the impact this is having on relationships in the sector.
Last year was not one many retailers will look back on fondly. A perfect storm of challenges, including a sluggish economy and the fallout from the decision to leave the European Union, left the fashion industry at crisis point. But what was a difficult year for retailers quickly became nightmarish for suppliers. Squeezed to recover lost sales, faced with discount demands and rocked by the plummeting value of the pound, many say their relationship with retailers has hit rock bottom.
A Channel 4 Dispatches documentary, Undercover: Britain’s Cheap Clothes, last week exposed the lengths to which some suppliers are cutting corners – by paying below the minimum wage, for example – to try to compete with overseas manufacturers.
“The way we are treated by big retailers is appalling,” says one high street supplier, who prefers to remain anonymous (as do most Drapers spoke to for this feature, scared they would never work again if they were named).
“I’ve been in the business for over 30 years, but it’s been particularly bad for the past couple. Retailers are not choosing product properly and have a different strategy every six months.”
Poor sales have dented the relationship, agrees the director of another supplier: “We’ve had issues where retailers have asked for audits of product quality up to five months after they received the order, which isn’t acceptable. It’s because product isn’t selling, which is not our fault.”
As the cycle of blame escalates, Drapers investigates the flash points and considers how both sides can alleviate them to ensure supply chain relationships are not broken for good.
Taking a pounding
Accusations of unfair practice are nothing new. Arcadia is among the retailers to face criticism over the past two years for “moving the goalposts” by asking suppliers for retrospective discounts of up to 2%. Stretched payment terms are another well-worn issue – one business told Drapers it has been owed a six-figure sum from a particular fashion chain for many months over the agreed payment term.
However, the drop in value of the pound – down 20% since the Brexit vote – has compounded cracks in a relationship that is, in many cases, already strained. Retailers are understandably reluctant to raise prices in what is an increasingly tough economic environment, but suppliers argue that they cannot bear the brunt of currency fluctuations.
“As early as July or August last year, we were seeing retailers going back out to the Far East to renegotiate on orders,” explains Laura Morroll, managing consultant at supply chain consultancy LCP. “They were aiming for 5%-10% [less] and that’s obviously a very difficult chat to have, although retailers were also talking about partnerships with their suppliers and being in it for the long game.”
The retailers who get the best out of us are the ones who communicate frequently and try to solve problems jointly
High street supplier
The pressure not to raise shelf prices to compensate for the lower value of the pound comes as many suppliers are already struggling to stay afloat.
“Where retailers think there is squeezable margin in suppliers, I have no idea,” says one industry expert. “They’re already working at the tightest possible margins. Prices may well go up and god help us if tariffs are introduced [following Brexit].”
Several suppliers argue that consumers will have to pay more for clothing in 2017. John Lewis, Next and Fat Face have already warned they may raise prices by as much as 5% in an attempt to mitigate the impact of the drop in the value of sterling.
“Autumn 17 is where the dollar is going to be a massive issue – we’re facing 15% price increases,” says one menswear supplier. “When we were going to retailers and quoting them for autumn 17, they were saying the prices weren’t acceptable. But the fact is, we can’t dictate the currency and the consumer is going to have to start paying what product costs, even if it means they’re buying less. Most suits need to go up by £20 to cover costs. Some retailers are just looking at who’s cheapest and aren’t comparing apples with apples.”
Retailers push back but we really are at the end game with regards to price
A few retailers have been making the case for buying less, but better. Warehouse stretched its exit price for coats from £195 to £250 when it relaunched for autumn 16 and John Lewis has billed “affordable luxury” brand Modern Rarity as the antidote to fast fashion. The range, which retails from £50 for knitwear to £900 for a shearling coat, is designed to last for more than one season. However, as another supplier to large multiples puts it, for most retailers “there is very limited scope” for higher prices.
Fast fashion is ever more competitive and consumers’ desire for the latest trends at cut-rate prices means retailers, particularly those in the value sector, are determined to stick to their price points.
The supplier to large multiples also points to the added complexity of rising operating costs in producing countries such as China, Vietnam and Romania. Although suppliers can look to produce in different markets, such as Myanmar, Morocco or Cambodia, the infrastructure in these countries is still developing. Shifting production to a new country can also bring other risks, such as compliance.
He continues: “If the conversation is about how we reduce prices, there are things we can do to collaborate with retailers. We can have discussions: do we use cheaper fabrics, take the pockets out, have this kind of seam or shorten the sleeves? When you’re designing to price, these decisions have to be made, but there is limited scope. It’s fine for some retailers in the value sector, but for others it’s a slippery slope. The customer is no fool and will realise the product has been cheapened, which may accelerate the shift to cheaper retailers.”
One denim supplier agrees, adding that the homogeneity of the high street is being exacerbated by escalating price wars: “Of course, retailers push back but we really are at the end game with regards to price. It can’t always be absorbed by manufacturing. Decreases have to come from somewhere, and it comes out of product, which starts to affect sales and the image of the retailer.
“The base fabrics start to suffer. The nicer handle and tighter-constructed fabrics just aren’t affordable at current margin targets. Often, they get used for the buying sample but invariably will be changed because of margins.” However, he is hopeful for a different approach during 2017: “I do detect a slight change in the air. We’ll see what this year brings – hopefully a change from deflation, and back to sensible prices and innovative products.”
Nevertheless, there are steps retailers and suppliers can take to repair relationships (see box, below).
Preppy fashion chain Jack Wills has opened the doors to its supply chain through its “Fabric of Jack” initiative, which details how it works with suppliers and creates its hero products.
Founder and chief executive Peter Williams explains: “There’s been something of a race to the bottom in terms of price deflation in fashion generally over the past five to 10 years. On the face of it, if a customer looks at a simple product like a T-shirt and sees one for £5 and one for £30, they might think that they’re just paying for ‘the brand’.
“Actually, our stuff is good quality and made in some really great factories around the world, so it’s relatively inexpensive for what we’re selling. But if you don’t tell that story to a customer, they see it as one is £5 and the other is £30.”
Suppliers could be more transparent, to help retailers understand the cost breakdown
Laura Morroll, managing consultant at supply chain consultancy LCP
There is also more suppliers could do to improve the relationship with retailers, believes LCP’s Morroll: “When a fashion retailer is working with a supplier instead of going direct [to the factory], there is a benefit because the middle man has the capacity to deal with things the retailer can’t or doesn’t have time for. But suppliers could be more transparent, to help retailers understand the cost breakdown in a competitive way – so if something costs $10 (£8.13), how much is the shell material, how much is the trim? That is particularly important because of the downward pressures on the pound.”
Communication is key
A lack of communication and inexperienced buyers emerged as additional factors putting strain on the relationship between retailers and suppliers. Several suppliers told Drapers they need to be able to sit down with retailers to thrash out issues face to face, instead of relying on phone calls – or, worse, emails – to address the problems.
“When times get difficult we need a relationship and communication,” says one menswear supplier. “We need to sit down together to work out solutions.”
Others are more damning.
Buyers “completely lack an understanding of how the industry works,” claims the industry expert: “There’s a complete misunderstanding from retailers about how to work with suppliers, especially smaller ones. They chop and change their minds, and say ‘Now we want it in blue, or with a frilly bit,’ when that’s not what was agreed. There’s no understanding from the retail side about the impact that would have in terms of costs and timescale.”
One director of a high street supplier agrees: “We advised one retailer not to make a piece in the fabric they had chosen, because it was a light fabric for a formal-style garment. They went ahead anyway and there were quality issues.”
It’s a tough commercial relationship, but it is absolutely a partnership
Peter Williams, founder and chief executive, Jack Wills
Another supplier says they have had problems with Marks & Spencer. The high street stalwart has been moving towards direct sourcing since 2014 in a bid to streamline its processes. Chief executive Steve Rowe has said the impact of the reduced value of the devaluation of the pound will be largely mitigated by its approach to sourcing.
“M&S has an issue with communication,” the supplier says. “It’s been difficult to get a response or it’s been very curt or rude. If they want to have a balance between direct and indirect [suppliers] they need to come and see us. You don’t see people properly and it’s all very rushed. We still see lots of buyers at Next and the supermarkets, which is much better.”
A spokeswoman from M&S said: “Working closely with our suppliers is hugely important to us and being a fair partner is central to how we do business. We work collaboratively on every step of a product’s journey to ensure that we have healthy, efficient and mutually beneficial relationships, and our buying teams regularly visit and meet with suppliers in both the UK, and in our key sourcing regions.”
Jack Wills founder Peter Williams
Suppliers also point to last-minute changes to the size of orders. One told Drapers that an order from one high street giant for 9,000 units at the start of the week had been cut to 3,000 by the weekend.
“It is frustrating,” agrees the chief executive of a large UK supplier. “In one year you can go from producing orders worth millions to orders of £30,000. Big retailers can be heavy-handed.”
Other suppliers complain that inexperienced buyers are being handed responsibilities earlier in their careers and promoted more quickly than they would have been in the past.
“There are a lot of young people who are not as experienced as they should be and a lot of senior buyers have gone out of the business,” says one supplier. “There are a lot more jobs out there and the growth of online has sucked people out of the older retailers. In the old days, it would be years before you had a sniff at a buying job at Topshop or Topman, and if you got a job at Arcadia you didn’t leave.”
Another adds: “When I was a buyer, there was a senior selector who knew what they were doing. People had proper training, and promoting didn’t happen as quickly, whereas now you have people in their early twenties in charge of whole departments.”
Forging new bonds
Retailers are predicting even choppier waters ahead in 2017. The pressure to cut costs and work as efficiently as possible shows no signs of letting up and several of the suppliers Drapers spoke to recognise that tricky conversations around price are the result of intense external pressures.
Nevertheless, there are ways to move forward. Those, like Jack Wills, who focus on a “collaborative” approach are praised by suppliers.
“The retailers who get the best out of us are the ones who communicate frequently and try to solve problems jointly,” explains one supplier. “On cost conversations, they ask how we can solve the issue together – such as moving to a cheaper country but accelerating compliance, so we’re producing at an ethical level, but it doesn’t take years.”
Now that the dust has settled after the initial shock of Brexit, we believe there are opportunities
High street supplier
Williams says: “The left hand washes the right – suppliers have tough times and retailers have tough times, and you have to help each other out. It’s a tough commercial relationship, but it is absolutely a partnership. If you keep driving it too hard, it will break down. There’s a lot of currency pressure because of the value of the pound and absolutely we would expect our supply base to help us, but it can’t go on forever. It’s a two-way relationship.”
As much havoc as Brexit and the drop in the value of sterling has created for suppliers, some are finding solace in the growing number of retailers bringing production to the UK, including multichannel retailer N Brown Group and young fashion brand Glamorous.
“Now that the dust has settled after the initial shock of Brexit, we believe there are opportunities,” says the director of one supplier to high street retailers. “A very large retail group recently approached us about sourcing more from the UK. It is testament to the fact some retailers are acting on what they are saying publicly. Interest in UK manufacturing tends to fluctuate around significant economic shifts in the market, and we’re predicting positive trading conditions for UK manufacturers.”
He adds: “We’re hoping to offset some of the reduced margin caused by the weak pound and rising cost of raw materials with increased volumes and commitment to UK production.”
Tensions between retailers and suppliers may not be new, but the difficult market they both face has done nothing to help. The commitment from some big retailers to sourcing more from the UK is also an opportunity for some suppliers, although a return to Britain’s manufacturing heyday is still a long way off.
There are difficulties on both sides. Suppliers argue they have been squeezed for long enough and there is no fat left to trim, especially given the weakness of sterling. That almost all the suppliers Drapers interviewed asked to remain anonymous speaks volumes about their fear of repercussions from retailers.
However, consumers are increasingly used to finding a bargain and retailers are understandably reluctant to raise their prices. And many retailers are working fairly with their supply base. Genuine partnerships, where retailers and suppliers come together to create great products at a fair price, have never been more important.
How retailers and suppliers can mend their relationships
- Trust each other “Show us a bit more trust,” says one supplier to the high street. “A lot of good suppliers are still here. We’re invested in making sure the product sells and are often experts in a particular area. Suppliers aren’t just for Christmas and what everyone wants is a partnership.”
- Be clear about needs Suppliers need to make sure they are transparent. As managing consultant at supply chain consultancy LCP Laura Morroll puts it, retailers need to be able to understand cost breakdowns so they can compare across the market and see that prices are competitive.
- Simplify relationships Morroll also points to poor internal systems used by some retailers: “Several buyers from one retailer using the same supplier will have multiple points of contact, making it harder for the supplier. This is made worse by some internal systems, like retailers trying to track all their critical paths on one spreadsheet.”
- Work together to solve compliance issues Bad practices exposed by Channel 4’s Dispatches programme are not representative of the entire industry but show there is still work to be done on both sides to stamp out non-contractual subcontracting, unfair wages and poor working conditions.