Business buyers’ guide: UK fashion industry 2017

The UK fashion retail industry has entered 2017 amid uncertain times. Many big name brands have gone into administration or been forced to make major changes to their infrastructure. Jaeger and Jimmy Choo are just two of the iconic British names to be affected so far, with several others in flux.

Other high street brands have been facing similar uncertainty. For the first time since the recession, Next have reported a fall in their profits, and commercial giant John Lewis are being forced to cut jobs and staff bonuses in an effort to safeguard their future.

Likewise, profits at Marks and Spencers fell by almost two thirds last year following a costly business overhaul. The retailer cited a decline in clothing sales as being partly to blame for the 64% fall.

These closures and cutbacks can be partly attributed to the volatile political and economic climate of the past 12 months as cost pressures, rising inflation and slowing wage growth have impacted consumer confidence and dampened demand.

General anxiety around Brexit has been an aggravating factor, too, whilst disposable income growth has been unusually sluggish. What’s more, consumer spending has become increasingly debt-fuelled with unsecured lending rising at the fastest rate since the financial crisis - all contributing to a dip in consumer confidence.

Despite these concerns, consumer spending remained remarkably robust heading into the final quarter of 2016, and strong momentum created positive trading results through Christmas and beyond, proving that the UK market is still a lucrative one for those looking to acquire a business.

According to the British Retail Consortium, the UK is well ahead of Western Europe and the US in terms of online sales. Latest figures have shown that 24 per cent of clothing and footwear purchases in the UK are via e-commerce - this is compared to only 17 per cent in the US. Many UK brands are leading the field in online innovation, beginning to incorporate “click and collect” before our American peers.

However, for others, the new consumer shift to increased digitisation has caused some major problems, and combined with recent economic upheavals, certain businesses are finding it difficult to stay afloat.

New wave of digital technology
With technology causing an evolution in retailer business models, many traditional companies are struggling to keep up. Companies who fail to move towards online retailing are finding it more difficult than ever before to retain a customer base who are increasingly avoiding the high street in favour of fast and efficient e-commerce.

Online sales grew by 15 per cent last year alone, meaning it now accounts for 18 per cent of total sales compared to just 2.8 per cent 10 years ago. At the same time in-store sales have witnessed a stagnation in profits.

In the UK, 2015 was the first year where card was used on more than half of all transactions, and this figure is expected to rise to three quarters by 2025, demonstrating a growing preference for digital payments.

According to Ashley Armstrong, Retail Editor at The Telegraph, "Smartphones and social media feed a demand for instant gratification that has played into the hands of youth-focused online retailers like Asos, Missguided and Boohoo, who are stealing sales away from their traditional rivals."

The growth of these brands has put added pressure on traditional retailers to regain this part of the market, leading to a dilemma of choice between investing in upgrading logistics (e.g. delivery) to compete against their online rivals, or investing in revamping their stores to bring in shoppers at a time of dwindling high street profits.

Due to the constantly changing nature of trends within the fashion industry, some buyers have adopted a “multibrand strategy” to bring more consistency and hedge the fashion risks.

American luxury handbag maker Coach has recently set its sights on building a multibrand company through acquisitions, and are currently on the lookout to buy fashion and fashion accessory brands. This is the firm’s latest strategy after spending the last few years “working on reviving sales, refreshing designs and shaking off heavy discounting”. Burberry Group and Jimmy Choo are still potential targets, though the company’s recent move to buy accessories company Kate Spade & Co. may require time to digest. This was an interesting purchase in that the acquired business didn’t diversify Coach’s product portfolio as much as another purchase may have, however Kate Spade’s customers skew younger, with a far higher proportion of millennials. This is a key strategy for a growth-hungry fashion company.

Other buyers who have adopted a similar approach are French luxury fashion giants the Arnaults and the Pinaults who, between them, own the majority of large luxury fashion brands. The latest acquisition by one of these two families was a $13.1 billion deal from the Arnaults to consolidate control over Christian Dior, the 70-year-old Parisian fashion house.

These big money deals show that the global hunger for fashion is as strong as ever and brands are following the maxim: ‘eat or be eaten’. However there are economic changes specific to the UK which should also be taken into consideration when reviewing the market. These affect both business buyers and sellers, and include:

Business rates
Business rates continue to lay heavily on retailers. The government is expected to collect £25 billion in rates this year alone – most of which will come from the retail sector.

This year has been especially difficult as the government undertook the first rates evaluation since 2010. The retail sector alone is forecast to face a £2.3bn hike in rates while shops in London will experience a rise equivalent to a 6 per cent rental increase.

This is another area in which online retailers benefit since they do not face the same level of property taxation. The government has acknowledged this disparity, but it's unlikely they'll act until the next rates bill of 2022.

Changing spending habits
According to research, consumer habits have switched from spending money on products to investing in experiences and leisure pursuits such as eating out and holidays.

Despite discretionary income remaining the same, retail spending fell by 1.2 per cent last year, with fashion sales suffering a 2 per cent slump - the steepest decline since the 2008 credit crunch.

Some brands have taken this as a motivation to build on and improve their brands and brand image in order to appeal to this new generation of shoppers.

An example of this is House of Fraser who have recently acquired British fashion brand Issa. The department store claim the acquisition will reinforce a strategy to invest in “improving the quality and designs of the most popular House Brands”.

“It truly epitomises confidence for women, something which resonates well with our customers,” said Maria Hollins, House of Fraser’s executive director for buying and design.

Living wage rises
In April, the National Living Wage rose to £7.50 for staff aged 25 and over.

As the UK's largest private sector employer with a workforce of 3 million people, the retail industry has been hit the hardest by this. Figures from Deloitte estimate that the Living Wage increase is equivalent to a 2 per cent to 4 per cent increase in the retail sector's total wage bill.

This rise has put an added pressure on companies to lift salaries across the board, further stretching their resources.

Apprenticeship levy
Retailers are expected to pay around £235m of the £3bn levy this year. This additional bill will be hard to swallow when the sector is already struggling with bill increases and declining sales.

Currency spikes
The fluctuating pound has had a huge impact on retailers.

In order to minimise the impact of foreign exchange, retailers must choose between passing the cost increase on to the customer, which could affect sales, or absorbing the higher sourcing costs, which could affect profits.

UK high street brands will be at an even bigger disadvantage since their European rivals, such as H&M and Zara, will not be facing these same currency pressures.

Looking forward, retailers may benefit from prioritising investment in the technologies that will add value to their customers’ lives and increase the efficiency of their operations. Overhauling finances will also help to create a buffer for any fluctuations caused by an unsteady economy. Buyers should be sensible but optimistic when searching for acquisitions, and focus on potential for growth.

It will take time for the damage to trickle through the market as companies begin to make difficult decisions on jobs, prices and technology, but this new era of digitisation brings with it many new opportunities for a brave new era in retail.

Overall, it's clear that the sector is undergoing a seismic shift in consumer habits and the fallout from absorbing various economic factors. But despite the retail market of 2016/2017 proving itself to be a volatile one, this hasn't stopped many big deals going through, showing that UK retail still has a firm foothold for buyers and sellers alike.

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