(Bloomberg) — Next Plc and Swedish fast-fashion retailer Hennes & Mauritz AB joined a growing chorus of corporate warnings about a prolonged conflict in the Middle East, as firms brace for higher prices holding back consumer spending.
Higher freight and energy charges will add £15 million ($20 million) of costs in the short-term, Next said Thursday, adding it could lift prices of some clothes 4% to 10% by September if the Iran war starts to hit manufacturing costs. H&M said a sustained conflict would raise energy prices, hurting squeezed shoppers.
The warnings underscore the risks facing consumers from Middle East events, as shocks to energy and shipping markets work through the supply chain. European chemical makers BASF SE and Lanxess AG are among those that have already raised prices, with a knock-on effect on products from detergents to car tires.
Next, the fashion and homeware company with about 500 stores across the UK, set out £8 million in added costs related to air freight, £4 million in surcharges on sea freight and £3 million due to higher UK energy costs. That was fully offset with savings elsewhere, but Next warned the full impact on supply chain resilience, consumer demand and shipping costs would depend on how long the Middle East instability goes on and the damage to energy infrastructure.
“If this conflict finishes relatively quickly, then we’ll just swallow that cost,” Chief Executive Officer Simon Wolfson said in an interview. “If it carries on — you know, those surcharges will remain there for more than three months — we’ll need to build that into price for the balance of the year.”
Next said it had added a week to its freight lead times, as ships have begun slowing down to conserve fuel. The retailer clarified that it is covered for stock and the slower shipments shouldn’t delay clothing coming into stores.
Stretched Shoppers
Wolfson said if Next does lift clothing prices, a major reason would be higher costs for fabrics like polyester.
The full impact on the business would depend on whether higher prices dissuade shoppers. “Consumers tend to only react when it actually hits their wallet,” he said, predicting that would become visible once consumer energy bills go up.
H&M’s CEO Daniel Erver echoed that, saying that while the conflict in the Middle East has only had a minor impact on the retailer’s operations to date, a drawn-out war may trigger a spillover effect from higher energy prices that could in turn hurt consumption.
“We see a risk of higher energy prices and increased transportation costs,” he said in an interview. “If the conflict is prolonged and we experience disruptions — as we have seen before — there can be these ‘bullwhip effects’ where you don’t really know what the consequences will be.”
Shares of Next closed 4.2% higher in London after the retailer reported strong sales at the start of the year before the Middle East conflict began. H&M’s stock fell 2.2% in Stockholm.
The problem for consumer-facing companies — and their suppliers — is that higher prices risk landing on already stretched consumer budgets, amid stubborn inflation especially for food in the UK and parts of Europe.
Low Confidence
UK household confidence fell to the lowest level recorded under Prime Minister Keir Starmer’s Labour government, the British Retail Consortium said Thursday. The administration has promised “appropriate support” on energy bills, with experts warning of a spike when the price cap is updated in the summer.
Other European companies are also sounding the alarm.
Ferrari NV and Maserati have suspended most shipments to the Middle East. Porsche SE, the holding company of the Porsche-Piëch billionaire family that controls Porsche AG and Volkswagen AG, said Thursday a prolonged conflict in the region may have a negative impact on both automakers.
“Risks arise from rising energy and commodity prices, potential transportation and shipping route disruptions, and the resulting inflationary effects and possible consequences for supply chains,” Porsche SE said in its annual report.
–With assistance from Stefan Nicola.
(Updates with potential price rises in second paragraph.)
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