Fashion industry adds up true cost of energy crisis

For the best part of 2022, UK fashion businesses have been struggling to meet rocketing energy prices, mainly driven by Russia’s squeeze on supplies to Europe and its invasion of Ukraine  in February.

Soaring gas and electricity bills have pushed inflation to 10.1% in July – the highest level since February 1982. Last month, the Bank of England predicted Britain would enter a recession at the end of 2022, and warned inflation would hit 13% in October.

Drapers explores the true costs of the energy crisis on the fashion industry and whether new prime minister’s support goes far enough.

Department store chain Beales told Drapers last month that its energy bills have more than trebled from £45,000 to £150,000.

Several other fashion businesses have reported four-fold increases in energy costs, and have been introducing various measures to try and reduce their energy use.

“Our energy contract is coming to an end and we think [the new contract] is about three to four times the price before,” the CEO of one clothing multiple said.

“Like lots of other businesses, we have been looking at ways we could mitigate that costs, such as LED lighting and upgrading our air-conditioning units. We’re also looking at turning down the temperature a little. Other than that, it’s out of our control.”

The CEO of one menswear brand, whose energy bills have doubled, has been taking a similar approach: “We are looking at all sorts of things that could reduce our energy use such as turning down the temperature. We hope customers will understand if the shops feel a little colder than usual.

“Also, we used to keep our doors open as a welcoming gesture – that might have to go. For the stores that don’t have central heating, it’s about looking at each freestanding heater and seeing if we actually need it on.”

The Federation of Small Businesses estimates that between February 2021 and August 2022, a store with an energy consumption of 30,000 kilowatt-hours (kWh) a year in London would have seen its electricity bill increase from £4,700 to £21,200, and its gas bill rise from £1,350 to £7,050.

Martin Foster, managing director at Cumbria-based independent retailer Lakeland Leather, has also been exploring how he can mitigate the impact via his 15 stores: “The energy contracts for lots of our stores expired at the start of the year, so luckily we are locked in new contracts at a lower price for another two years. But for some stores that had contracts renewed more recently, it’s about two to three times the price before.

“Usually, you’ll get a cheaper rate if you sign a longer-term contract with the energy suppliers, but it has reversed and it’s now cheaper to sign for one year than two years because there’s so much uncertainty.”

Adam Mansell, CEO of the UK Fashion and Textile Association (UKFT), said: “Many of our manufacturing members are reporting five- to six-fold increases in energy costs and this is an issue that impacts all parts of industry, as well as consumers’ ability to spend. “

The fashion industry, alongside other businesses and households, has been calling for support from the government to help fix the crisis over the past few months.

In response to calls for support, new prime minister Liz Truss announced in parliament on 8 September that from 1 October energy bills for a typical home will be fixed at £2,500 for two years. Businesses will see their energy costs capped for six months at the same price per unit – or kilowatt hour (kWh) – that households will pay under the government’s new plans.

After that six-month period, ministers plan to offer “focused support” to “vulnerable industries”, with a review to be taken within three months. It is not clear whether retail will be included.

Many businesses welcomed the support that has been offered.

John Bason, CFO at Primark’s owner Associated British Foods (ABF), told Drapers: “We welcome the announcement of the energy price cap for consumers. It has been a very unsettling outlook for consumers when you look at the rapidly rising bills, and the price cap has removed some big uncertainty.”

“I think a six-month [price cap] is a great start,” the owner of a womenswear brand said.

“It means we can go forward in a more positive way and it’s good news for fashion businesses. For us specifically, we will be able to put more budget into our products in the upcoming season and we will have a lot more confidence for our autumn/winter 22 trading [period].”

However, some voiced concerns that the measures do not go far enough, and called for a wider range of actions.

The CEO of the clothing multiple said: “I don’t think introducing an energy cap [on businesses] is going to address the root cause of the problem. The whole energy pricing system is broken and there needs to be intervention [to examine the make-up of the price].”

The CEO of one clothing and lifestyle retailer said: “Even though [Truss] has capped the price, consumers and businesses are already in that mindset of being cautious, and it doesn’t really solve that.”

Matthew Sims, CEO of Croydon Business Improvement District (BID), which is funded by and represents and businesses in the south London town centre, said: “It’s a welcoming intervention. but it’s not enough. The clock is already ticking, and businesses simply do not have the time to wait for a review. Businesses need action, and they need it now.”

Fashion businesses are also calling for the new government to reform business rates, which need a “significant overhaul”.

In the autumn Budget last October, smaller companies in the retail, hospitality and leisure sectors were given a 50% discount on business rates, up to a maximum of £110,000. The scheme is open to businesses with a maximum of £15,000 in rateable value and covers the 2022/23 financial year.

In February, the government launched a consultation into possibilities for an online sales tax to ease the business rates burden on high street stores. The three-month government consultation on whether to introduce an online sales tax closed on 20 May. No update has been given since.

The CEO of the menswear brand said: “I hope Liz Truss will continue the discount of business rates for retailers to compensate what we have to pay the energy suppliers. I’d like to see a bigger discount [than the current 50%]. “

Andrew Goodacre, CEO at The British Independent Retailers Association, agreed: “The new prime minister needs to bring forward a Covid-19 type response by introducing a 100% rates relief for the rest of this tax year.”

Lakeland Leather’s Foster said: “There have been so many reviews [into business rates] but shops continue to pay for rates that are higher than their rent. I welcome the business rate relief which some of our smaller stores are eligible for, but it’s ducking the issue and not solving the real problem.”

Bruce Findlay, retail managing director at property owner Landsec, said: “Business rates continue to pose an issue – and we would welcome action from the new government here. We believe a significant overhaul of how these are levelled – particularly at high street retailers and SMEs [small and medium-sized enterprises] – would be beneficial, to stop the stifling impact on day-to-day operations.”

A government spokesman said in response to retailers’ concerns: “No national government can control the global factors pushing up the price of energy and other business costs, but we will continue to support businesses in navigating the months ahead.

“We are currently providing a 50% business rates relief for businesses across the UK, freezing alcohol duty rates on beer, cider, wine and spirits, and reducing employer national insurance. This is in addition to the billions in grants and loans offered throughout the pandemic.”

Energy costs will undoubtedly remain as a concern for fashion retail as the industry prepares for a tough winter ahead. However, the government’s energy price cap is likely to boost consumer confidence and provide some breathing space for retailers struggling to keep their stores running.