By Manfreda Cavazza
As prime minister Theresa May continues to negotiate the UK’s separation from the European Union in a year’s time on 11pm on 29 March 2019, Drapers brings you a snapshot of the knowns and unknowns, and where opportunities and challenges lie.
The clock is ticking. In just over a year’s time, at 11pm on 29 March 2019, the UK will leave the European Union.
Prime minister Theresa May continues to negotiate the UK’s separation from the European Union, but much is yet to be discussed, let alone decided.
The uncertainty that has rocked the industry since the referendum in June 2016 has proved the biggest challenge for many retailers.
As Peter Ruis, who spoke to Drapers just before he stepped down as chief executive of Jigsaw last week, argues: “Everything is still so very opaque. Is it going to be a soft or hard Brexit? How long is the transition period going to be? Are we even sure of the fact that we are leaving?”
Former Marks & Spencer chief executive Lord Rose agrees: “The practicalities of the UK’s trading relationship with the EU needs to be explored urgently. Has there been a proper impact analysis on what will happen to the fashion sector if there is a sudden change in regulations? No. We need to know the facts – otherwise we can’t make any decisions.”
The scenario that most retailers are planning for is the so-called hard – or no-deal – Brexit, although that is also still the subject of debate.
May’s government has said it will not maintain membership of the European single market or Customs Union, beyond any agreed transitional period, and will push for “managed divergence” instead. This means Britain will agree to follow EU rules in specific areas in return for temporary market access. But questions remain over customs clearance and the movement of people.
The British Fashion Council (BFC) is lobbying against a hard Brexit, citing the negative impact it will have on the free movement of talent, and also of goods and products. It notes that the fashion industry supports 880,000 jobs.
Rose has similar concerns: “I have always said if we continue to make great product at great prices with great innovation, people will buy. But my worry is we will be net losers after Brexit. I’m particularly worried that young designers and young people will suffer. We need to be able to exchange ideas and technology with Europe. If we are left out on the edge of all that, we are going to be the losers.”
The post-Brexit regulatory environment is another unknown. At present, European rules govern supply chains, from what chemicals can be used in fabric to what to do in the event of a product recall.
“There is all that detail that has yet to be decided. Every single retailer in the country wants to know what the plan is,” says Adam Mansell, chief executive of the UK Fashion and Textile Association (UKFT).
“Boards are reluctant to invest in anything at the moment,” says Peter Williams, chairman of Boohoo. “I know of businesses that have put off making big decisions about where to locate their offices or warehouses because of Brexit.”
Ruis concludes: “In the 25 years I have been in business, this is the biggest downturn I have ever seen. We’re just not used to this level of volatility. We have two diametrically opposed visions of what a post-EU Britain could look like and we just don’t know what will happen.”
The drop in the value of sterling following the referendum has already proved a challenge, and many fashion businesses have taken a hit on margins. Although the pound has rallied somewhat against the dollar over the past month, it is still nowhere near pre-Brexit levels.
Lee McDarby, managing director, foreign exchange and international payments, at foreign exchange provider Moneycorp, says this has forced businesses to be nimble:
“We’ve noticed companies are planning ahead to mitigate currency fluctuations, either setting up forward contracts to fix exchange rates or booking a limit order, allowing companies to target specific exchange rates.”
Some commentators have argued the weak pound should help exports, but a February report by the UK Trade Policy Observatory shows British manufacturing will suffer whatever is negotiated. It has looked at five scenarios, ranging from soft to hard Brexit, and none of them lead to a positive outcome for UK manufacturing.
Textiles, clothing and footwear production were predicted to have one of the largest declines as a result of the increase in the costs of trade.
Restriction of movement post-Brexit is another concern for retailers. Boohoo’s Williams says the company is one of the biggest employers in Burnley, where it has a distribution centre employing more than 1,400 staff.
“Many of those people are seasonal workers who come from the EU,” he explains.
“They come for a few months to work and then they go home. We’ve drained the local supply of labour, so if there is a restriction of movement, we can’t just hire locally. We’re anxious to hear what the situation will be.”
Tariffs are a worry. The British Retail Consortium has warned that if the UK fails to secure trade deals identical to those negotiated by the EU, retailers will face higher tariffs and customs barriers from non-EU countries, as the UK would no longer be covered by EU trade deals negotiated with countries outside the bloc. It predicts the tariff on clothing from Turkey and Tunisia, for example, could rise from zero to 12% in the event of no deal being reached.
And there have been no decisions on Generalised System Practices, which allow developing countries such as India and Bangladesh to pay fewer or no duties on exports to the EU, giving them vital access to the market. Tariffs on UK exports are also a concern for retailers such as Boohoo, which ships to 229 territories worldwide, Williams adds.
Consumer confidence has also taken a hit at a time when the industry was already facing challenges, argues Lord Rose:
“The fashion sector was facing headwinds even before Brexit. The cost of goods is going up, we’ve seen greater inflation and input prices are going to go up even further. My worry is there is going to be more downside than upside – especially for the consumer.”
New sources of potential growth can be identified, and there is a chance to focus on what is really important for the fashion industry. Despite the initial shock of the Brexit vote, Caroline Rush, chief executive of the British Fashion Council, sees the UK’s departure from the EU as an opportunity for a thorough market and industry analysis.
Free trade agreements with new markets such as the US, Australia and New Zealand are another reason to be positive, suggests the UKFT. The US is the UK’s largest export market outside the EU, but duties and tariffs make many UK companies reluctant to target the US. A free trade agreement would simplify the process, allowing brands to enter the US more easily.
Daniel Najar, co-founder of Chi Chi London, one of the UK’s fastest-growing womenswear businesses, is optimistic:
“There may be opportunities to get some great trade deals with countries such as China, which would significantly benefit Chi Chi, as most of our production comes out of the Far East. The fashion industry will adapt – it’s inherent in its nature.”
Published in Drapers Magazine: 11 March 2018