Furthermore, several store- based retailers will be seeing a net reduction in business rates from April, due to the removal of downward transitional relief, even after netting off warehouse rate increases. The rental market remains favourable for retailers, given weaker occupier demand for retail space as well as increased risk of tenant failure, with relatively high levels of vacancy. We have seen a tight labour market here in the UK although this is beginning to ease now, with more people entering the workforce and some redundancies. We note that high minimum wage inflation has been a significant pressure in recent years, in a number of markets, most notably the UK, the US and France. Labour tends to be the largest element of operating cost for retailers, with property/rental costs second most important. Opex outlook – labour cost a major headwind, but helpful for top line. Now, given USD and wage pressures, we expect a further pivot, to cheaper areas in existing markets (often driven by Chinese suppliers), and to more near-shoring to improve speed to market. Bangladesh, Cambodia) given lower labour costs which allow for cheaper production. In apparel, over the last two decades retail supply chains have been shifting towards Asia, first into China and then other regions (e.g. Although prices have risen year to date, we note that these are still well below the early 2022 peak. Lumber prices, which are important for retailers in the home improvement space, were falling for much of 2022. Polyester prices have been relatively stable in recent months. For apparel retailers cotton prices have fallen significantly over the past 9 months, albeit still remain ahead of pre-pandemic levels. Raw material costs overall have stabilised. Freight rates made up c.3-4% of a typical apparel retailer’s COGS pre-pandemic but were a much higher proportion (c.6-7%) in 2022. Lower freight rates should also become a material tailwind for the sector later this year. However, the GBP and the EUR have strengthened versus the USD since October and, as such, we expect FX to be a gross margin tailwind for retailers heading into 2024. The lagged effect of USD strength versus the GBP and the EUR will be a headwind for apparel retailers near term. ![]() Gross margin outlook – challenging near term, looking better for H2 2023/H1 2024. Great article for anyone interested in retail and strategy: economics, society, trade…įollowing my long-term collaboration with RBC, I take the opportunity to inform that I will be talking next May about Supply Chain trends to RBC’s Retail Director, Richard Chamberlain. This is a very interesting article from RBC Capital Markets about the current status of the apparel industry in relation to different variables impacting the value chain, specially the ones affecting COGS and OpEx (MaRBC Elements™: European General Retail Profit is sanity…).
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