Arcadia Group’s latest demand for a discount from its suppliers underlines a key dilemma facing the fashion industry – how and where to make cost savings.
While the move has been met with outrage from suppliers, Arcadia has sought to defend itself, explaining that the cost of delivering to its customers through “new channels” is “considerably higher” than traditional retail.
Presumably the main channel it is referring to here is online, where fast fashion players such as Boohoo, Missguided and Asos are putting a huge amount of pressure on high street retailers to increase their speed to market.
Like its competitors, Arcadia has had to invest heavily in its systems, distribution and workforce structure to deal with these new demands. It said this investment would ultimately benefit its suppliers.
However, although a 2% discount may not sound like much, high street suppliers have been steadily squeezed for years and are already operating on paper-thin margins. They will agree to discounts rather than risk losing a large order or future business from that retailer, but that doesn’t make it the right thing to do, nor is it sustainable in the long term. We have seen some well-known suppliers go under in recent years because their margins became unviable.
As one Drapers reader argues: “All the investment [Arcadia is] talking about should translate to higher demand or better efficiencies, and should not be funded by suppliers.”
Arcadia is by no means the only retailer making tough demands of its suppliers. JD Williams, House of Fraser and Debenhams are among those to have asked for discounts over the past few years.
Last year, we undertook an investigation into the relationship between retailers and suppliers and found that, for many, it was already at breaking point, as the weakness of sterling piled pressure on both sides to cut costs.
Retailers are understandably reluctant to raise prices in what is an increasingly tough economic environment. However, squeezing suppliers could have a serious knock-on effect, as costs within their own businesses may need to be cut to keep margins at a sustainable level. There are only so many ways suppliers could do this – by looking at staff costs, property and of course product, which may suffer as suppliers are forced to seek cheaper base fabrics and trims.
Large retailers have suppliers over a barrel, but demanding discounts is taking a short-term approach that has wider negative implications for the industry. Instead, they should be working with suppliers to identify efficiencies, as well as continuously looking at ways to streamline their operations.