Europe’s fashion industry is bracing for inflation and the energy crisis

Almost 30% of the European luxury goods industry’s revenues are derived from abroad, with travel a key driver of income. The industry, which is at the very top of the consumption pyramid, managed to exit the pandemic in a stronger position than many others by significantly improving e-commerce coverage, especially with regards to the all-important Asian customers, who were affected by strict travel restrictions.

The pandemic also helped the industry to bring in efficiency measures that allowed better shaping of inventories and the broader supply chain. Marketing campaigns were also enhanced.

Post-pandemic, customers are travelling once again and the price gap differential in Europe allows Asian customers to enjoy buying goods at better prices, while exploring the continent.

The Italian and French landscapes and distinct styles have spawned a sophisticated ‘façonisti’ following, with a focus on premium products and materials, and both countries attract significant numbers of fashion tourists every year.

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However, in the first part of 2022, the industry has seen a significant derating attributable to the Russian/Ukraine conflict and concerns over continued inflationary cost pressures and the energy crisis, which both dominate the current economic environment.

There is growing concern around what this winter will bring, particularly if governments in Europe are faced with making tough decisions around keeping heat and power on for their populations. The fashion industry’s major worry is that non-essential industries could face periods of rationing, shutdown or furlough in order to conserve energy for essential power and service needs.

Currently under discussion at EU-wide level is the prospect of mandatory energy demand cuts during the peak hours of the day. To mitigate this, some fashion companies have been able to move from natural gas to renewable sources of electricity, such as wind and solar power, to ensure a more predictable energy cost and supply.

Further disruption comes in the form of transport issues, with products that once took 25 days to arrive, now taking over 60 days to make journeys from far-flung factories to retail warehouses. Transport costs are also much more expensive than before.

Despite the additional concerns surrounding the consumer’s disposable income, luxury goods purchases have so far continued to remain strong, especially in the highest-end companies where the relationship between price increases and demand is highly inelastic. In the luxury watches’ space, for example, demand is even outpacing supply with waiting lists several years long.

In the past, luxury fashion companies have been able to absorb inflationary pressures, rising freight costs and supply chain issues. Through their journey, they have learned how to bring in ‘self-help’ measures to reduce the impact of these pressures.

Top European brands like Brunello Cucinelli and Moncler, for example, have adapted their sourcing cycles for raw materials, such as yarns (namely cashmere), woollen fabrics, cotton and feathers, in such a way as to make the best of the pricing volatility.

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Traditionally, the negotiations around raw materials take place ahead of the season sales and so the sourcing costs feed into the price increases closer to the sales period.  Also, in the case of very high-end and prestigious raw materials, the pricing is less volatile given the significant cost of the raw materials – so this allows for better cost predictability.

By contrast, mainstream fashion companies may be more likely to suffer the negative impact of inflation in raw materials, transportation costs and supply-chain disruptions, as their pricing adjustments are more elastic and their products are for consumers who have less disposable income for discretionary spending. 

However, it is worth noting that companies offering essential ‘staples’, such as trainers, jeans and workwear that are at the bottom-of-the-range prices, should probably see their market-share faring relatively well.

There is no doubt that the current energy and inflation crisis poses a significant challenge to the fashion industry. It may even bring an existential threat to some brands – businesses that have lasted for decades that will struggle under these pressures.

However, despite the gloomy outlook, the fashion business and especially the luxury segment, is endlessly adaptive, creative and innovative. It is well-placed to work out how to pivot, create new products for new demands, survive and even thrive in the difficult times ahead.

Tzoulianna Leventi is an investment analyst and ESG analyst at abrdn