Small fashion brands battle the costs of Brexit

Fashion brands in Europe and the UK usually spend the month of January preparing their autumn/winter collections for the show and exhibition season. But this year many found themselves also coping with a mountain of new post-Brexit paperwork and extra costs.

When a Brexit deal was concluded on Christmas Eve 2020, businesses were left with days to adjust to the new regulations implemented in January. Before Brexit, goods could move freely between the UK and the EU without import taxes. Now, for goods costing more than £135 exported from the UK to the EU, customs duties may apply, adding up to 25 per cent on costs. For orders worth more than £135, VAT is now collected at the point of delivery rather than at the point of sale.

Questions abound, particularly for smaller brands. “It’s still a bit difficult to strategise prices when selling to the UK. We are an emerging brand and we don’t know yet if we can cope with it,” says Giulia Venturini, co-founder of Medea, an accessories brand in Milan. Shipping costs to the UK have doubled, while paperwork has expanded exponentially, she adds. “This might lead to limited distribution in the UK where we cut out smaller accounts and focus on distribution with larger retailers in order to have a better price point that is aligned with the European area.”

Goat, a British brand best known for its cashmere and tailored separates, is one of many fashion businesses with a lot to do besides finalising Autumn/Winter 2021 designs to show to buyers. The Goat team is currently dealing with new paperwork for shipping as well as catering for “people who were shopping on our website over the holidays, many who were hit with big duty charges”, says managing director Kalpa Shah. Some 50 per cent of Goat’s business is from DTC customers, with 40 per cent of sales from outside the UK.

Delayed shipments, extra courier costs

Some fashion brands have put sales to Europe on pause. Yolke halted shipping to Europe for about three weeks in January. “The ports were full, and deliveries [to Europe] weren’t getting through and were coming back to our warehouse, so we made a decision quite early on to pause and take stock of what was going on,” says Yolke’s co-founder Ella Ringner. Sixty per cent of Yolke’s business is DTC, with Europe its second-biggest growing market — resuming business as soon as possible was a priority.

“There’s no sugarcoating it — there are delays at the border,” says Louis Kurlander, director at Freight Brokers, a courier broker that works with 250 fashion brands including Tommy Hilfiger and Calvin Klein in the UK as well as Yolke, Shrimps, Mackintosh and Preen by Thornton Bregazzi. Brands are often not getting their paperwork right, he says. “The border is very stringent on paperwork at the moment, and everything needs to be done correctly.”

This paperwork is here to stay. “Previously, it was assumed that anything made in the UK complies with European regulations. Now, brands need to prove it every time they export something. Each item exported from the UK now needs at least 20 pages of documentation, to show that it conforms with a whole range of EU regulations,” explains Geoffrey Heal, an economist and professor at Columbia Business School.

Extra courier costs have also proven to be a headache for brands. Yolke’s Ringner soon realised that even customers placing orders below the £135 cap were receiving unexpected bills from couriers, who were charging additional handling fees to shoppers to cover admin costs and extra customs checks. Royal Mail, for example, is charging an additional £8 fee, while DHL charges 2.5 per cent of the total duty or VAT incurred. “It was the biggest shock. No one had mentioned this,” she says.

Some upset customers reached out to Yolke after receiving unexpected bills. All were compensated by the brand, says Ringner. “We had to make the decision on whether to risk losing customers or to cover these fees ourselves.” But absorbing extra costs hits margins, so the brand is increasing the prices of its products.

The British fashion industry is lobbying the UK government. An open letter, led by Tamara Cincik, chief executive of Fashion Roundtable, and signed by more than 400 industry names, was sent to the British government on Tuesday, calling for more support. “The deal done with the EU has a gaping hole where promised free movement for goods and services for all creatives, including the fashion and textiles sector, should be,” the letter says.

London-based womenswear designer Eudon Choi says that his brand’s future is up in the air. “As a small company we cannot afford the amount of admin, taxation and research going into navigating these trade changes with the EU,” Choi says. “If we move part of our business to Europe we risk a loss of profit and the ability to employ people in the UK. I don’t think anyone wants that to happen, but it is the position we are in without support from the government and a push for a better deal with Europe.”

Wholesale partners, a saviour?

A saving factor for Goat has been big wholesale partners, such as the Net-a-Porter Group, which was “very well prepared”, according to Shah. The online luxury retailer has been able to help Goat absorb some of the VAT and customs charges, and also provide logistics support.

Contemporary London-based label Cold Laundry launched in 2019 as a DTC business, with 70 per cent of its customers now outside the UK. The brand has been hit hard by tariffs, extra duties and new shipping costs to Europe, says co-founder and creative director Ola Alabi. Physical store sales, which previously made up 30 per cent of revenue, have also been heavily affected. The brand has responded by raising prices by 15 to 20 per cent and is now exploring wholesale options.

European brands are also looking to bigger partnerships. Holzweiler, a six-year-old brand that shows at Copenhagen Fashion Week, launched at Selfridges in November. Major retailers such as Selfridges can “find solutions to get goods shipped”, says co-founder Andreas Holzweiler.

Another post-Brexit challenge is returns. E-commerce return rates have spiked 95 per cent over the last six years, and brands face an additional challenge of products marooned in the EU that customers have wanted to return because they have been asked to pay unexpected extra costs. The UK Fashion & Textile Association (UKFT) has even advised retailers that the most cost-effective option may be to abandon or burn these goods.

Both Goat and Cold Laundry say they refunded some customers in January who complained about unexpected bills, but sometimes there’s no straightforward resolution. “We had a return from Canada but when you look at how much the customer spent and how much we spent on shipping, it would have made no sense for us to pay for a returns label and also refund the customer,” says Cold Laundry’s Alabi. His team has advised customers to keep refunded goods. “We’ve seen an increase in returns and it’s frustrating if you couple that with the pandemic and how much more effort it is to ship products.”

For smaller to medium-sized brands in the UK, strong retail partnerships with the likes of Net-a-Porter could become critical. “It’s easier for someone like Net-a-Porter simply because it’s a bigger company and they have more resources,” says Columbia Business School’s Heal. “For smaller, especially family-run businesses, [administration] is a major problem, because all this documentation will cost £100,000 to £200,000 more a year. That’s a big slice of profits.”

New opportunities

Temperley London’s chief executive Luca Donnini expects more red tape for labelling and origins of the product. He predicts that UK brands will have no choice but to open a branch or hire a VAT representative in a European country, “to keep the fluidity of outbound deliveries of products without losing competition with European-based brands”. Brands will also need to hire brokers to facilitate shipments of both inbound and outbound deliveries. “Production lead times will increase by several days, as raw materials will also not be able to move freely without the proper certification and customs control,” Donnini adds.

The extra costs for goods sold via e-commerce to Europe from the UK will be 20 to 25 per cent higher, says Freight Broker’s Kurlander. Cold Laundry’s Alabi is being extra vigilant on spending on manufacturing, packaging and even design to offset extra costs. “We found ourselves being a lot more conservative and thinking about whether we really need to add certain intricate details or hardware to a jacket. But while we’re cutting costs, we’re cautious not to jeopardise quality or service,” he says.

Keeping the customer happy is paramount. “We are making the process of returning and exchanging items easy, including arranging pickups and liaising with them on a personal level [to ensure that] our return rates are low,” says Alighieri founder Rosh Mahtani. “Our main focus is to continue to provide excellent customer service.”

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