Brexit and business
Industry views on the EU referendum and the potential effects on the schoolwear market.
By Laura Turner
10 October 2016
As retailers, we’re all waiting to learn the true effects of the referendum result, as we haven’t had any news on how it will really affect us. I think the US elections will affect business, depending on which way it goes. Most fabric is traded in dollars, and so the value of the pound against the dollar is a major factor, just as the value of the pound is against the euro. It will be interesting to see what happens after the US elections, but until then, there’s not much we can plan for as it could all change again.
I think we’re all anticipating an inflation of prices, that much is certain. The question of who will absorb the extra cost is still unknown at this point. It’s a very uncertain time. Exportation and overseas trading will no doubt be affected most by the poor exchange rate and increased prices. This will have a knock-on effect to the other areas of business, too.
“It’s a scarier world post-Brexit, but we all have to be brave and remain positive. We have a new Prime Minister and a new Education Secretary, Justine Greening, who has sensibly said that she is going to look at the strategies her department currently has in place before she changes anything.
Whenever there is a big change there are lots of opportunities and that is what we have to look at. There are downsides, such as the exchange rate, which will mean prices rise, but as the Governor of the Bank of England has said, there is not yet enough information about what will happen post-Brexit to make a sensible decision about the future. There are a lot of possibilities.
As an industry, we have to ensure we do a great job this year, to make sure we deliver in retail and manufacture and in all other areas. We have to make sure we deliver quality and value to parents. We know from a Department for Education survey that eight out of 10 parents are satisfied with the arrangements for uniform at their children’s schools, and we must all work to ensure that this continues.”
The outcome of the referendum has started a series of shockwaves for the UK and I feel we are only experiencing the start of it. The uncertainty we are now operating in means we’re going to need to be agile and quick to adapt to the changes around us.
Our industry has been dependent upon imports for a long time now, and what is likely to be a prolonged period of sterling weakness means costs for everyone will increase. The dream of a resurgence in UK manufacturing to counter this would take many years of investment and training, and I would still be doubtful about how ready we are as a nation to pay what we should for our clothes.
As a business, we are planning forward for next year, modelling the different scenarios, working closely with our factories, and trying to keep the communication levels high with customers and staff through any changes. We are confident that there will be positive outcomes and opportunities that will arise; at David Luke, we’re all up for the challenge of seeking them out and sharing what we find.
“The biggest concern for the clothing industry is the devaluation of sterling. With around a 15 per cent devaluation in sterling against both the dollar and the euro, we face significant price pressure for 2017. Almost certainly there will be a correction once the terms of Brexit have been sorted out and the rates will improve, but this could take a while. So, in the coming years, we have to face the reality that the price of clothes will go up. Schoolwear suppliers do not have the high levels of margins and profitability to be able to absorb such increases like fashion companies might, so must decide upon what level of increase we pass on to our customers and over what period of time.
Ultimately, I think both suppliers and retailers will ease the burden of price increases over a period of time, rather than put the full increase on with immediate effect. However, with standards of living and minimum wages increasing across the globe, it is not only the exchange rate we need to be looking at. We could find ourselves in the perfect storm over the next two years, whereby prices actually have to increase by over 20 per cent to cover factory increases as well as the currency issue. We can only hope that the Brexit terms are negotiated quickly, or maybe the whole Europe project falls down, at which point we could be talking about prices then decreasing. Either way, it’s going to be a rollercoaster for the next two to three years.”
“At the moment we’re in the initial stages of post-Brexit so it’s hard to say how we feel for certain, as no one has been properly informed. As a business, we will experience the knock-on effects from Brexit. It’s hard to say what the definite effects will be, as we’re in no man’s land at the moment, with little information available as to how it will affect us. One thing that has already happened is that our suppliers have increased costs by five per cent. No doubt exportation and the overall cost of transportation will be affected further as time goes by. I think the industry as a whole will see a knock-on effect. Employment and business overseas will be effected. We’re in a period of uncertainty at the moment.”
Chief executive, BMB (Blue Max Banner)
“The implications of the Brexit referendum have not yet been fully understood. No one expected it, and no one was prepared for it. However, the immediate effect was the weakening of the British pound, which has had significant implications for BMB as most of our product is purchased in foreign currency. The consequence is an increase in our buying costs, which increases our stock levels and cash requirement. Whilst everyone is focused on the euro and dollar, the impact had also affected other currencies, and this has not been helped by the downgrading of the British credit rating. We are in the market of selling school uniform and not gambling on currency, but we will need to look very closely at our forward currency buying policy. Our buying focus needs to be on stability in risk averse countries and currencies, as we can’t just pass on increases on as they occur. Management of stock and forecasting will be critical over the coming months and we will try to buy as efficiently as we can to keep prices where they need to be.
Other concerns include customers having to pay more for the same volume of product, which ties up more cash and thus could affect their ability to pay. If consumers buy more from supermarkets then the independent retailer will suffer. Some may take the decision to compromise on quality to lower their selling prices. It is a concern to BMB, and undoubtedly to the industry as a whole, as there has already been pressure on school uniform prices. It will be interesting to see how the supermarkets respond with their pricing strategy. There is also the wider implication for how families will be affected as wages will not rise in line with price increases. How people manage their household budget is going to be key.”
“The decision to leave the EU is going to have far-reaching consequences for the economy and for the schoolwear industry, specifically in the next couple of years. Inflation rates of four per cent and the possibility of the planned living wage increase being scrapped, combined with a predicted rise in unemployment, means that there will be less disposable income to go around, so parents will probably buy fewer items and make school uniform last longer.
HSBC is forecasting that the US dollar currency rate to sterling will be $1.20 by the end of 2016 and $1.10 by the end of 2017. The impact of weak sterling will be massive for anyone who manufactures overseas – it is very bad news for importers and for most people in the schoolwear market. Based on previous challenges in the economy, everyone in the supply chain took a hit to minimise the impact for consumers as much as possible. We also expect that this won’t just affect schoolwear – all clothing will cost more by 2017.
We have already seen fuel prices increase, as well as the costs of taking holidays abroad, where you get much less for your pound than previously. This may appear pessimistic, but we prefer to be realistic about the challenges ahead. At Rowlinson Knitwear, we will continue to focus on premium quality products and great service.”
“Like many companies across the country, we didn’t anticipate that we would vote to leave the EU. However, following the result, we have done what we can at this initial stage to prepare for the challenges ahead, but also try to make sure we are well placed to capitalise on the opportunities.
Fortunately, we have been manufacturing our ties and scarves in our UK factories since 1969, so these products are, by and large, unaffected by currency fluctuations, especially as our main customer base is also the UK. However, due to the significant decline of the British pound against the Chinese RMB, we have reluctantly had to increase our prices for imported products – bags, predominantly. This price change came into effect from 1 October.
We’ve always been proud to employ local people and now have 125 dedicated employees, with 53 per cent of our staff being a part of the company for 10 years or more. Over the last few years, we have recruited some skilled machinists from Eastern Europe; it is difficult to foresee how Brexit will affect future staffing long term. In the meantime, we’ll continue to support our workers and prepare to adapt to any changes to ensure any disruption is kept to an absolute minimum. We hope that in due course, it may now be possible for the Government to remove VAT on all school uniform, not just smaller sizes.
Our main concern is the prospect of the vote triggering a recession, which would damage confidence. We are about to invest a significant amount in a new tie factory in Lancashire and we would, of course, rather that was in a positive economic environment. But, having been in the industry for nearly 50 years, we’ve gone through many ups and downs before, so we feel robust enough to withstand any economic turbulence that Brexit may throw up. For now though, until 2019, it is business as usual.”
“We have to accept, for better or worse, the result of the referendum. Whilst there is a degree of uncertainty in the short term that will drive some business decisions, the biggest step change as a result of us moving to leave the EU is likely to be the long-term devaluation of the pound sterling against all currencies, but the US dollar in particular. There has already been a significant downward movement over the last 12 months, and the pound is forecast to continue weakening against other currencies in the next few years. This has increased the cost of most, but not all, schoolwear made outside the UK and paid for in foreign currencies, which will be a challenge for everyone. However, it’s important to remember that the currency effect will impact all imported goods, not just schoolwear.
As a company, we aren’t making any changes, or taking any preventative measures for the business, as a direct result of Brexit. We will continue to manage our currency exposure as previously, accepting the fact that the costs have increased significantly as a result of the weakening pound. Generally, I don’t have any concerns for the wider schoolwear industry post-Brexit. There will still be the same requirement for schoolwear across the UK and it is up to all of us to manage our businesses accordingly to adjust to the changing market conditions.”