Discount fashion chains feel the pinch

The prospect of a recent entrant to the UK value fashion market reducing the size of its flagship store has highlighted the pressure on 'cheap chic' chains. While they remain popular with cash-strapped British shoppers they are among the victims of falling disposable incomes and rising costs.

Forever 21, the US chain, says it is "currently evaluating options" with the landlord of its Birmingham store. This "may include handing over square footage to complementary ventures," according to Larry Meyer, executive vice-president. The California-headquartered chain made an operating loss of USD 1.99 million in the 12 months to February 26, 2011.

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But in a market under pressure there are winners and losers. Fashion-conscious consumers are still making purchases but cutting back on the number as household budgets are squeezed, placing a strain on retailers whose model relies on selling cheap items in bulk.

"High volumes and low prices are a very difficult [combination] in the current climate," says Maureen Hinton, practice leader at Verdict, the retail research group. "You have to be the prime destination when you go shopping, to pick up a share of their spend," she adds. "If you're second or third on this list you're just not going to be visited."

Keeping prices low in the face of higher cotton prices and preserving fashion credibility with the younger female shoppers who are the lifeblood of the value-fashion market are key. On this score Primark and Hennes & Mauritz have emerged as victors.

Primark, part of the Associated British Foods group, "is the pre-eminent player and dominates the value segment" says Neil Saunders, managing director of Conlumino, a retail consultancy. "It has absolute price leadership - it is just the cheapest by a long way."

Like Primark, H&M has also kept its fashion credentials sharp, selling ranges put together by top fashion designers or luxury groups including Versace and Marni. Despite the economic downturn the Swedish budget chain said the UK was one of its fastest-growing markets last year.

Zara, the Spanish chain owned by Inditex, has also managed to ride the storm, helped by its ability to transform the hottest looks into affordable pieces in as little as two weeks. This helps it to adapt to trends such as the weather, but also to be able to command slightly higher prices for its trend merchandise, such as last year's bright colours.

Yet structural pressures affect them all. Both Primark and H&M have deemed it necessary to shield customers from commodity price rises, and cope with the ensuing pressure on margins, rather than risk losing customers.

"It's a deliberate stance," argues Mr Saunders, who says the move is sensible given the current trading climate. "They still have their economies of scale going through."

But with the sector's customer base of mainly young shoppers among those hardest hit by unemployment, not all retailers have proven resilient. While still profitable, Peacocks was forced to call in administrators earlier this year after debt restructuring talks collapsed.

New Look received some uplift in revenues over the Christmas period but warned that UK like-for-like sales had fallen 3.7% across the 40 weeks to December 31, its financial year to date, compared to a year earlier.

Both Peacocks and New Look were lumbered with sizeable debt piles after expanding their store portfolios.

Peacocks was obliged to close 224 outlets earlier this year before its remaining 400 stores were bought by Edinburgh Woollen Mill in February.

New Look recently completed a review of its 600-store UK estate and has earmarked around 10% for closure. It is also seeking ways to restructure its USD 1 billion of net debt.

"The capital structure needs to be addressed, but they are actively working to take costs out of the business, and it is trading pretty well in what is a difficult environment," someone close to the situation said.

Budget retail chains are also facing more competition from mid-market rivals pricing their ranges to appeal to cash-conscious consumers.

"Core mid-market chains like Marks and Spencer have introduced price competitive ranges, which has encroached on the discounters," says Clare Rayner, an independent retail consultant.

Nonetheless, the high density of fashion-conscious shoppers means the British market remains attractive for retailers. Forever 21 still plans to double its number of UK stores with openings in the Lakeside and Bluewater shopping centres and Manchester.

"British consumers like shopping," says Mr Saunders. "And [they] like shopping for fashion."