How will a UK recession hit fashion retail?

With the Bank of England warning that the UK is headed for recession, retailers and brands are bracing for yet another crisis to manage.

“We’ve never ever been through a three-year period with so many incidents like we have now,” said Simon Berwin, owner of his eponymous menswear advisory firm.

“But this is a very resilient industry that is used to ups and downs.”

Nevertheless, businesses will need a plan for what lies ahead, according to KPMG’s UK head of retail Paul Martin.

“Nearly every business needs to have a plan to be able to save 25% of its pre-Covid cost base,” he said, noting that costs of everything from utilities to labour are increasing.

“Cost and efficiency will be top of mind for just about everybody.”

The current data paints a mixed picture, with UK retail sales still technically growing, according to KPMG’s latest figures, even as consumer confidence hits alarming new lows.

Martin’s expectation is that September and October will be tough, but the prospect of the first unrestricted Christmas in three years will get Brits spending in November and December.

But this is set to be followed by a bleak first quarter of 2023, in which he expects UK retail sales could decline by as much as 5%, especially if a cold winter forces households to divert more money to energy.

“Essentially people’s disposable income is going to evaporate really quickly,” one senior figure at a value retailer told Drapers. “Nobody’s going to be untouchable, unless you’re super-rich.

“They’re going to prioritise their kids in terms of disposable spend and trade down on things that aren’t essential.”

However, he added that some consumers would continue to spend, given that interest rates are still low despite the central bank raising the base rate last week. This could allow more to opt for credit facilities when making purchases.

Another senior retail executive echoed this assumption that consumers will tighten their belts. However, he said he had not yet seen signs of this impacting trade.

“May and June were quite strong, while July and August have been quieter, but it’s difficult to tell if that’s a seasonal thing.”

He added that it can be hard for businesses to pinpoint how they are performing, given that the past two years of sales history have been disrupted by Covid.

However, he expects to see retailers carefully consider their ordering for spring/summer 2023.

“I think they’ll be prudent, and considering whether it’s local or on-shore production. Countries like Turkey will probably benefit even more from that.”

Store closures or reductions could also be on the horizon, he added. “They’ve done an awful lot of consolidation already, but a lot of space is still inefficient and it can be repurposed. I would expect retailers to look at that.”

KPMG’s Martin said many companies will be looking at reducing costs with store closures, headcount reductions and shrinkflation [the process of items shrinking in size, quantity or quality, but keeping prices the same.]

“But there’s also only limited runway for doing more of these activities,” he said. “In fashion you can’t produce a pair of trousers with only one leg!”

He warned, too, that a difference between now and the 2008 recession is customer awareness of ESG (environmental, social, and governance) concerns.

“More and more consumers are becoming aware, so if you are cutting corners, you will alienate a proportion of your clientele. One of the really important differences to 2008 is you need a real consumer insight.”

As with every recession, there are likely to be some categories that fare better than others. Berwin, who wrote in Drapers in March that the men’s suit is not dead, said tailoring could even get a boost if unemployment increases.

“Although it’s not as important for work now, when times are tougher, people start to dress up again and go to more job interviews.”

Ultimately though, another retail veteran told Drapers, the businesses which will be successful are the ones with healthy balance sheets.

“Businesses that haven’t sufficiently invested in the brand, that don’t have experienced enough leadership, their balance sheets may not be well equipped for a downturn,” he said, and suggested some may need to recapitalise now if they have not done so already to keep cash flow going.

However it’s not all doom and gloom, the same retailer added.

“I do think there could be some positives from a recessionary environment. We’ve heard a lot about ‘the big resignation’, it’s been widely publicised, but with a cost of living crisis we could see a big return to work.

“And I always say the best businesses are created during a recession.

“You focus on the right areas, the right products, you set it up with a slick operating model. You retain strong leadership, that stands you in good stead for many years to come.”

Amid all this, several factors remain unknown, including the identity of the UK’s next Prime Minister and what they might do to tackle the economic crisis. Meanwhile, the Bank of England is expected to raise interest rates again this year, following its prediction that inflation will go as high as 13% next year.

“This is not going to be a short-lived scenario,” said KPMG’s Martin.

“This is probably going to be 12-18 months of stagnation or downturn, depending on some of the macro factors – be it Ukraine, oil prices, or inflation.”

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