Given that even the UK’s Chancellor of the Exchequer only “thinks he knows” the Prime Minister’s Brexit thoughts, despite Parliament’s deep desire to avoid “No Deal,” the need to fall back on World Trade Organization tariffs may well arise. Clothing tops the list of the UK’s most affected industries, given that fashion is an approximately £30 billion industry. This is not something to be overlooked, not least because apparel is globally the most popular category for online shopping. Retailers are being hit directly from manufacturer sales. KPMG reports that 63% of shoppers bought directly from a brand versus 37% via a retailer. But the international opportunity is there, and already over 55% of UK-based online companies sell to at least four other countries.
In common with other industries, complex, multi-tier supply chains proliferate in the clothing industry. Office for National Statistics (ONS) data shows import and export data for textile fiber, textile fabric, as well as clothes. Even from a high level, the trade flows look interestingly complex. “No Deal Brexit” suggests that a tariff of up to 12% for both imports and exports is likely, and with that will come increased margin pressure on an already lean set of supply chains. Currency fluctuations will clearly offset or exacerbate the impact of tariffs, and as such, are an important variable in any impact assessment.
The trajectory of the pound-euro exchange rate isn’t in the pound’s favor. A scary thought is that, although there is an Irish border backstop, there isn’t a sterling depreciation backstop. That could be called scaremongering; after all, in 2018, the UK was the world’s fifth-largest economy. Even so, it’s a big bet on Britannia, and she isn’t doing well against the dollar either.
The GBP-USD exchange rate on June 5, 1975, the date of the UK’s first Europe referendum, was 2.3. Since then, that exchange rate has declined to about 1.3 to 1.4 (~43%), meaning that it has been comfortably outstripped by the performance of the UK Remain vote with its mere 28% fall in that time. To the extent to which a strong currency is an indicator of overall economic strength, it can be said that the UK’s membership in the EU has not coincided with a period of economic strength. While being aware of confusing correlation and causation (but not dismissing it out of hand, given the ever increasing possibility of a No Deal Brexit), perhaps it’s worth being optimistic that life outside the EU might be quite good.
As far as clothing is concerned, whether any optimism turns out to be justified will have a lot to do with supply chain agility, especially in terms of sourcing (see my colleague Florian’s view on this) from newly financially favorable locations. That’s for the buy/make side of the equation. For the sell side, it seems that only a bumper trade deal with the U.S. will compensate for losing free access to our top, mostly EU-based clothes-export markets.
Part of the answer must be a “buy British” fashion drive, which is bound to collide with “America first” in fashion. Let’s hope being cheap works in the U.S., just as it has in Canada. Even without a further dive in the value of sterling, our labor costs seem reasonably competitive. Bureau of Labor Statistics (BLS) data shows that the 2017 average annual wage in the textile sector was $31,280, approximately £27k. I didn’t find ONS-like data, but Totaljobs’ £29k is a sensible guide. For product and distribution, it’s a different matter. When I was growing up in the UK, there weren’t any cotton fields back home. If only we could retain and attract the best international talent, we might compete on style and quality. But it’s not clear that Brexit is good news for the industry in that respect, either.
In the interim, it looks like UK retail needs to make the most of supply chain agility, mixed with a good dose of lean, and lots of sourcing efficiency.