The fashion industry is facing a bleak winter. And Europe is ground zero. Rising energy prices, caused by Russia’s moves to cut gas supplies to Europe in retaliation for Western sanctions following its invasion of Ukraine, are hitting the industry from all sides.
For consumers, the resulting cost-of-living crisis is “just beginning,” according to a JPMorgan note published this week with the foreboding title “Winter is (Still) Coming.” Meanwhile, retailers are being squeezed between rising operating costs and falling demand, especially at the lower end of the market.
The pain is just as intense on the supply side.
This summer, the energy bill to run Italian jeans maker Candiani Denim reached 4 million euros ($3.98 million), a more than fourfold increase from last year. Austrian wood-based fiber producer Lenzing has taken to joking that it’s “an energy-based fiber producer” now because powering its factories has become such a big part of its operating costs.
The energy crisis in Europe adds to the wider pressures affecting the global fashion industry. Inflation is rising around the world, fueled by sanctions and disruptions related to the war in Ukraine. Meanwhile, regional political unrest, Covid-19 and climate change-related disruptions are causing massive volatility.
The result is a toxic cocktail of rising costs and falling demand. the long-term impact could be even more dramatic than the pandemic.
In Europe, national governments have already set aside hundreds of billions of dollars to protect households from rising energy prices. New UK Prime Minister Liz Truss announced a two-year cap on household energy bills on Thursday, with businesses getting a separate six-month cap. EU energy ministers gathered in Brussels on Friday to discuss emergency measures to curb energy costs.
But despite efforts focused on protecting consumers from energy bills that threaten to drive some into poverty, spending on discretionary products is expected to continue to decline, leaving brands and manufacturers with tough decisions about when and if to pass on the rising costs or they will eat the pain themselves. .
On Thursday, British discount retailer Primark warned on profits as it decided not to raise prices to offset higher energy costs in recognition that consumers are likely to have less disposable income next year.
The retail business is facing “volatility and increasing costs like I’ve never seen before,” said John Bason, outgoing chief financial officer of parent Primark AB Foods. Reuters.
Candiani Denim raised prices by nearly 40 percent at the start of the year to account for rising raw material costs. “These are peanuts” compared to the higher energy bills the company now faces, said chairman Alberto Candiani. But the company’s average denim price of €7.25 per meter is already much higher than what competitors outside of Europe could charge. Although the company hired 100 new employees to meet growing demand at the start of the year, it is now trying to reduce operations to just four days a week to manage costs.
Some European manufacturers are simply closing or moving their operations elsewhere, said Dirk Vantyghem, director general at the European Clothing and Textile Federation.
Europe’s energy crisis is particularly acute because the region gets so much of its supply from Russia. Last week, the country cut off natural gas flows through a critical pipeline to Germany, blaming sanctions for the fact that supplies remain tight and further pushing up gas prices.
But broader shockwaves from the war in Ukraine have been rippling through the industry’s supply chain for months, amplified by regional challenges and creating uneven pockets of pressure. Currency fluctuations, political instability, extreme weather and high raw material and freight costs are clouding the industry as demand declines.
“The impact on the textile value chain could be much more severe than in the Covid pandemic,” said Johannes Stefan, commercial director for Europe, the Americas and Turkey at fiber producer Lenzing. Unlike the demand shock of 2020, now there are extremely high raw material and energy costs, as well as very low demand. “There’s almost a judgment for every letter in the alphabet,” he said.
FASHION, BUSINESS AND ECONOMY
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Rolex raises watch prices by 5% in UK as sterling weakens. The price hike, first reported by trade publication WatchPro, follows a slide in the value of the British pound against the US dollar to $1.15 and near its lowest level since 1985.
THE BUSINESS OF BEAUTY
TikTok stars Charli and Dixie D’Amelio to launch their own brand house. Investors such as Fanatics Inc. CEO Michael Rubin, Apple Inc.’s Eddy Cue and Autograph co-chairman Richard Rosenblatt participated in the $6 million funding round to be announced Tuesday.
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Written by Darcey Sergison.