After performing so well during the recession, value-driven clothes retailers are now facing a crisis. The underlying reasons are twofold. First, the price of cotton has rocketed by 45% in the past year, due to a combination of floods, crop problems and logistical issues in producer-countries. Second, there is next January's planned rise in VAT to 20%.
A raft of retailers, including Primark and Next, have already warned of price hikes and newspapers are busy heralding the end of an era for cheap clothing. However, sounding the death knell for this sector could be premature. After all, as some industry watchers point out, passing these higher costs onto consumers would be disastrous for brands that are built on the promise of a bargain.
'If you're a UK retailer with a value proposition, you have to stick to it, regardless of the market conditions,' says Tristan Rogers, chief executive of retail and merchandising consultancy Concrete. 'All value retailers can do is carry on as they are and absorb the increased costs in their international operations so they become the cash cows for the UK.'
Bowing to pressure
In Rogers' opinion, price-conscious UK customers will not want to bear the brunt of market changes. 'It will be detrimental to brands if they do (pass on their costs to customers),' he says. 'Besides, retailers have so many other levers they can pull.'
Rogers claims that retailers such as Marks & Spencer, Debenhams, Gap, Levi's and Asda - which sells cheap clothing under its George brand - are considering their options. They may not have control over the rising costs of raw materials, but they could find efficiencies by making tweaks to their supply chain and buying processes, he suggests.
On the other hand, Neil Saunders, consulting director at research company Verdict Consulting, says retailers have no option but to pass on their costs to customers. 'The consumer has had it good for the past 10 years, but the good times have now come to an end. Prices can't defy gravity forever and many retailers now have very little choice but to ease them up,' he explains.
However, Will Lever, head of JWT High Street, believes that value retailers will be able to introduce price rises in ways that will not unduly concern their customers.
For instance, they can bundle products into group deals and increase the price of premium items only - justifying the extra expense by linking it to product quality. Lever does, however, add a proviso. 'But retailers wouldn't want to give up the attention-grabbing cheap deals that draw people into the store.'
This strategy is also being adopted by New Look. A spokesman for the retailer says: 'There will be price increases but we remain committed to providing low-cost fashion. We will freeze the prices of our entry-level ranges, which make up about 20% of our offer. However, pricing on the premium lines will rise to reflect the increase in our costs. The overall likely impact across the mix will be a 4% price increase.'
Retailers can take some cheer from the fact that more than half of the UK population did not reduce their spend on clothing in 2009, despite the recession. However, the latest research from Mintel has found that one in three adults does plan to cut back over the coming 12 months, and Verdict is forecasting that clothing prices will continue to rise until at least 2014.
Saunders, however, predicts that value retailers will continue to thrive 'as the economy becomes tighter'. He adds: 'Although the market outlook is not great, consumers still have money to spend. Retailers just have to work hard to entice them to do so.'