Many of the headlines about Brexit’s effect on the retail industry have focused on the dent in consumer confidence that retailers may face.

But retailers, particularly fashion retailers, face another threat because of how they source.

Next’s Lord Wolfson, who has spoken in favour of Brexit, said last weekend that he believed clothing prices would rise in response to the increased cost of sourcing in foreign currencies as the pound weakens.

Wolfson said that he did not believe prices at Next would rise until this time next year because of Next’s currency-hedging policy, which gives it access to the most advantageous exchange rates.

However not all retailers will be insulated from currency volatility.

Sports Direct issued a statement in the aftermath of the Brexit decision, when it said: “Following the outcome of the referendum, Sports Direct notes the associated market volatility and in particular material changes to sterling/dollar exchange rates, and the lack of transparency as to those rates in the short to medium term.

“These factors are likely to impact purchases for which the company is currently not hedged for the 2017 full year period and beyond.”

Uncertain times

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Not all retailers are insulated from currency volatility

As with almost all things Brexit, no one can be sure of how severe the volatility around currency will be, and where the pound might stand in relation to the dollar and euro. But what is certain is that there will be volatility.

“One way or the other it is negative,” says N+1 Singer analyst Matthew McEachran. “It is just trying to quantify how negative it is which is difficult.

“The costs of goods for big orders from the Far East, which are bought in dollars, will become more expensive.

“Bricks-and-mortar retailers already have the national living wage burden. Because of business rates their occupancy costs are increasing”

Matthew McEachran, N+1 Singer

“And COGS [cost of goods sold] headaches will translate into margin headaches if retailers don’t something to counteract that.”

McEachran believes that it will be almost impossible for retailers to absorb the costs.

“That option will not be available to many,” he says. “Bricks-and-mortar retailers already have the national living wage burden. Because of business rates their occupancy costs are increasing.

“They are doing what they can to mitigate that. So having to take a big hit on gross margins doesn’t look feasible.”

Perfect storm

Peel Hunt analyst Jonathan Pritchard says the rising cost of sourcing, and the consequent rise in prices, could create a “perfect storm” for fashion retail.

“Consumer confidence is sure to come under pressure,” he says. “Nobody has any certainty on what will happen, and uncertainty breeds a lack of activity.

“People are worried about their jobs, house prices and inflation – it’s a perfect storm for retailers if you throw in the National Living Wage too. And if the weather continues to be unseasonable, it could make things even worse”

Jonathan Pritchard, Peel Hunt

“People are worried about their jobs, house prices and inflation – it’s a perfect storm for retailers if you throw in the National Living Wage too. And if the weather continues to be unseasonable, it could make things even worse.”

“Seasonal weather is the most important factor,” echoes McEachran. “We have had three seasons of very unseasonable weather and the market is down 4%. If the weather improves then it will be a more significant benefit than any economic factor.”

Even in extraordinary circumstances, it seems that fashion retailers’ fate rests with the weather – a suitably British situation.