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Brexit – The impact for fashion retail

As a result of the UK referendum decision to leave the EU, many questions now arise for retail businesses and in particular the retail fashion industry. The initial impact of Brexit has seen a slide in the sterling currency which will likely benefit ROI shoppers both on a cross-border basis to Northern Ireland and on purchasing clothing and other retail fashion goods in the UK. Indeed, recent reports have indicated that overseas buyers are continuing to acquire luxury goods out of London based retailers due to the relevant weakness of the sterling currency.

Cross-border shoppers from the Republic of Ireland travelling to Northern Ireland & UK are therefore likely to see better value for the Euro spend.

It should be remembered that all consumer rights continue to apply as before and therefore Irish people buying online from UK traders are still entitled to all of the same rights under the EU consumer protection legislation.

For example, under EU rules, Irish consumers who shop online from UK based traders have the right to a 14 day cooling off period which allows them to change their minds and return the goods for a refund. This basis still applies as it is “business as usual” until further notice in dealing with UK retailers.

UK retailers

Likewise, UK retailers currently operating in Ireland are likely to see a benefit to their results from their Irish activities with the relative strength of the Euro and indeed prices are unlikely to change from the large UK fashion chains operating in the Republic as they will continue to sell stock at the previously quoted sterling/euro exchange rate thereby likely generating additional margin in the interim.

Although there is a small movement in the minimum wage here in Ireland from €9.15 to €9.25 as a result of the low pay commission recommendation, it is unlikely to have any major impact on results for such UK retailers here in Ireland.

With only certain brands of goods being manufactured in the UK it is not likely there will be any major impact to retail fashion prices as most of these goods are effectively sourced from dollar based economies.

Potential recession

Whilst UK fashion retailers may experience some boost to their results from their Irish operations, this is likely to be compensated by any imminent recession which may occur locally in the UK. For many of the larger entities, loss of confidence in the UK stock market has resulted in big share price falls for many of those larger entities.

Those that will struggle are likely to be the British focussed fashion retailers with already tight margins whilst some of the larger retailers such as luxury brands, online fashion retailers such as ASOS and discount chains such as Primark/Penneys are likely to see benefits to their results.

Typically those larger retailers will have protected themselves from volatility in foreign exchange rates through hedging and therefore the hit to confidence is the more immediate threat as consumers in the UK are likely to curtail their clothes shopping in hard times.

Foreign exchange policy

Many of the larger companies are now looking at their foreign exchange policy but this can be difficult for companies to predict and adjust. It would be usual for most clothing companies to hedge for the second half of 2017/2018. With foreign currency markets volatile, treasury departments of many of those firms are likely to be reviewing their hedging policies.

Obviously faced with higher sourcing costs, one solution may be for those retailers to pass on those costs to consumers through higher prices. However, in an already weakened market in the UK, there will be little appetite from consumers in the UK to bear any inflation costs. The average price of clothing has fallen by 15% in the last 10 years according to official UK data. Therefore the key for many of those UK headquartered retail fashion companies will be their ability to mitigate the cost increases they face.

Other options could include changing the mix of sourcing countries and further increasing the proportion of direct sourcing from factories, cutting out middle-men. This is likely to have an impact on those retailers and their pricing in the future in the Irish market as they are obviously a significant presence on the Irish fashion scene.

Those clothing retailers with the biggest margins are best placed to be able to weather the storm. Major UK names such as Next, Britain’s most successful clothing retailer of the last decade, has achieved an operating margin for 2015/2016 of 20.8% according to recent Reuters data whereas Marks & Spencer on 7.4% is diluted by half of its business being in the lower margin food sector, with Debenhams on 5.8% for 2014/2015, Sports Direct on 9.4% and Primark on 11.9% (for its most recent quarter).

It is therefore likely to be a difficult trading period over the next while for many of those retailers and indeed Irish indigenous fashion retailers coping with such volatility on the currency market. The potential for an impact in the Irish market from any recession, even if temporary, in the UK, will likely have an impact on the spending habits of Irish consumers and if there is an impact from Brexit for many normal Irish indigenous trading companies, this may also have an impact on the spending capacity of employees and general consumers going forward.

In summary, it looks like an unsettled trading period until there is some certainty in the market around the timeline and future trading relationship which the UK will have with the rest of the EU.