There could be baa-bad news for retailers afoot
DE-BLEAT-ING sheep numbers across the globe could have traders flocking into short positions on retail stocks later this year. Wool hit a 23-year high last week. Clothing retailers were decrying the increase yesterday, speculating on how long they can absorb the cost. The UK managing director of Hugo Boss Bernd Hake said that they would be forced to increase prices if the soft commodity remains so high. With little chance that farmers can replenish their flocks for another few years, traders can expect retailers to pass on the cost to shoppers before the end of the year.
Stephen Oldfield, agri-food leader at PwC, says he can’t see how retailers will be able to reach the end of the year without passing on the wool cost: “The high street is hugely competitive at the moment. Retailers are pushing back on suppliers and suppliers are pushing back at retailers. Ultimately I can’t see how consumers won’t be left with the bill.”
Hake suggested that prices could increase by 10 per cent, adding up to £300 to the final bill of a top quality bespoke suit. It’s not just the wool price that is threatening the return of the shiny suit. The British Retail Consortium’s May Sales Monitor said consumers’ reluctance to spend is now clear to see (see graph, right). Against a backdrop of rising fuel prices and inflation, they explained, the increase in the wool price is harder for retailers to bear.
When will we see this nasty collision of weak consumer demand and rising prices? Colin Ellis, chief economist at the BVCA, says he thinks retailers will be hard pressed to stomach the increase until next year when household income increases: “It’s going to be really difficult for clothes retailers in the short term. Many are getting close to the wall already and will have no choice but to pass the cost on.” He believes low-end retailers like BHS and Primark will be hit hardest, since they will lose their unique selling point, while higher end retailers have more ability to absorb the cost.
David Jones, chief market strategist at IG Index, suggested traders should be looking to go short towards the end of the summer when retailers gear up for the woolly jumper season.