The UK textile industry is absorbing a multitude of sector-specific headwinds alongside macro and geopolitical disruptions and the knock-on effects from retail sector weakness, which is impacting profitability and financial sustainability for many firms in the sector.
Textiles produced in the UK once dominated the world market – in the late 18th century during the Industrial Revolution, cotton mills were a major employer across the north of England. But the decline has been swift since the end of the last century as global competition, offshoring, and outsourcing have reduced domestic textile industry capacity. More recently, Brexit-related disruptions, the war in Ukraine and legacy pandemic impacts have coalesced to push inflation to multi-decade highs, forcing the Bank of England to raise borrowing costs amid a backdrop of lower cross-border investment and falling growth. In turn, these economic forces have pushed up the price of materials and the cost of debt at a time when government loan schemes have expired alongside the cost of living squeeze and surplus inventories causing retailer and consumer demand to decline.
At the same time, labour-intensive work processes, energy-intensive plant machinery, and rising production costs are squeezing profit margins. There is also an increasing focus on sustainable manufacturing practices. Textile companies must invest in eco-friendly technologies to modernise production methods, reduce carbon emissions and comply with incoming environmental regulations. However, the UK’s ambitious net-zero carbon targets require significant investment (e.g. for automation and artificial intelligence) that is not financially viable for many struggling small and micro businesses.
Brexit has stifled exports and imports while exacerbating labour shortages which disproportionately hurts the small and micro-sized firms that constitute the bulk of companies in the UK’s textile and clothing industry and, as such, are less able to adjust to trade shocks. Changes in trade regulations, and increased trade costs through non-tariff barriers (e.g. customs procedures, documentation requirements, regulatory compliance, etc.), have caused significant shipping delays, while new trade deals are yet to benefit the industry. Many UK textile companies operate on long lead times when sourcing from overseas suppliers. This can hinder their ability to respond quickly to changing demands and they cannot compete with larger, international competitors offering faster delivery times and cheaper products.
The weakness of the retail sector has also had a profound impact on the demand for textile products. Reduced orders from retailers due to store closures (e.g. New Look, M&S and H&M), inventory management challenges, pricing pressures, and payment delays are some of the retail sector’s struggles. Store closures and bankruptcies further compound the situation by causing the loss of key retail customers. For example, the Scottish clothes retailer M&Co fell into administration last December due to a sharp rise in input costs coinciding with a decline in consumer confidence and demand for its clothes which put pressure on cash flows and resulted in trading losses. The 189-year-old business was sold to AK Retail Holdings in February, aiming to reinvent itself as an online retailer and close all its 170 UK stores. However, M&Co’s unsecured creditors and suppliers are set to receive less than a penny in the pound of the £40.6m that is owed to them. The case is emblematic of broader industry dynamics where retailer weakness hurts textile suppliers.
Another example is the Boohoo Group, a British online fashion retailer which reportedly demanded a 10% discount from its suppliers on outstanding orders. The discount, which applies to both delivered and undelivered orders, came as the retail group reported a 14% year-on-year fall in profits for the 12 months to 28 February 2023 as “profitability [was] impacted by the fall in sales, freight and logistics inflation related to the pandemic, and labour and energy cost inflation”. Last December, the group changed payment terms for suppliers from 30 days to 60 days after credit insurer Allianz Trade reportedly reduced its cover for the retailer’s suppliers due to macroeconomic challenges and Boohoo’s trading performance. Some textile companies suggest cheaper overseas suppliers are difficult for UK-based firms to compete with.
The future outlook for the UK textile industry remains challenging due to the raft of intertwined headwinds. To mitigate these challenges, textile companies need to review their business model, modernise their manufacturing processes (e.g. leveraging technology such as automation and artificial intelligence) and invest in sustainability practices to align with changing consumer attitudes and corporate ESG priorities. For example, The Manchester Fashion Institute at Manchester Metropolitan University is developing a new fashion research facility called the Robotics Living Lab (RoLL) to develop more sustainable production methods for UK garment manufacturers.
BTG Advisory is well placed to assist textile firms, including with refinancing, corporate restructuring, debt-for-equity swaps and trade sales. Early engagement with professional advisors increases the options available to owners and directors, supporting more substantial negotiations with stakeholders (e.g. banks, landlords, investors/shareholders and suppliers) to raise new debt and equity capital, and form strategic partnerships to enhance financial stability.