In a world of $100 oil, fast fashion loses its defensive charms

{"text":[[{"start":6.43,"text":"A received wisdom about retail is that, in tough times, shoppers trade down and the cheapest retailers win. With the war in Iran closing its fourth week and Europe facing higher inflation and worries of slowing growth, that logic should be taking hold. But one corner of the market — low-priced fashion — may be less of a beneficiary this time."}],[{"start":31.169999999999998,"text":"War not only drains consumer confidence but increases the cost of anything with a supply chain tied to oil. Freight rates carrying shipments between Shanghai and Rotterdam, for instance, are up a fifth since the conflict began, according to the WCI Shanghai to Rotterdam container freight rate index, and air freight prices between South-East Asia and Europe are up by a quarter, according to Freightos data."}],[{"start":57.45,"text":"Then there’s the impact on low-end, polyester-heavy players in apparel. About 70 per cent of polyester production costs are linked to oil-based feedstocks, according to intelligence provider ICIS. A 40 per cent rise in crude over the past month therefore translates into polyester fibre costs over a quarter higher. "}],[{"start":null,"text":"

"}],[{"start":80.99000000000001,"text":"Apparel companies have spent the past year or so enjoying healthy profitability. H&M last week reported a 1.6 percentage point increase in its gross margin helped, Berenberg analysts reckon, by lower input costs. The bank estimates that cheaper polyester, assumed to account for roughly 7 per cent of H&M’s input costs, added roughly 80 basis points to margins in the quarter to February. Lower freight contributed 60 basis points. "}],[{"start":112.39000000000001,"text":"That support may start to unwind. UK retailer Next told analysts last week that higher oil prices could begin feeding into input costs such as the cost of polyester from the second half of the year. At H&M, that 80bps polyester contribution to gross margin could reverse to a headwind next year, on Berenberg estimates."}],[{"start":137.08,"text":"Exposure to oil varies. Mid-market groups such as H&M, Next and Zara owner Inditex say they use polyester in roughly a quarter of their products. All of H&M’s polyester is recycled — typically from plastic bottles — making it energy-intensive, but perhaps less directly exposed to oil prices. At the cheaper end, BooHoo says in its sustainability report for the year ended February 2024 — the most recently available — that about half its products are made from polyester, and at Shein that number exceeds four-fifths. "}],[{"start":173.31,"text":"If costs rise, so too will prices. Next has already said that if the war persists beyond three months, it may have to increase prices for customers. If consumer demand is indeed K-shaped — wealthier households continue to spend while poorer consumers cut back — retailers at the cheaper end may struggle to pass costs on relative to their mid-market and premium peers."}],[{"start":198.7,"text":"None of this shields retailers from a drop in demand caused by broader economic impacts of the war. Consumers under strain might just buy fewer things from the brands they like rather than trading down. But polyester-laden operators may be the first to come apart at the seams."}],[{"start":227.32999999999998,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1774856009_2031.mp3"}