What Europe’s Energy Crisis Means for Fashion?

For consumers, the resulting cost-of-living crisis” just started,” said a JPMorgan note published this week with the ominous headline “Winter is (Still) Coming.” Meanwhile, retailers are caught between rising operating costs and softening demand, particularly at the lower end of the market.

The pain is equally intense on the side of nutrition.

The electricity bill for Italian denim maker Candiani Denim reached 4 million euros ($3.98 million) this summer, more than quadrupling from last year. Austrian wood-based fiber producer Lenzing has taken to joking that it is now an “energy-based fiber producer” because powering its factories has become such a large part of its operating costs.

Europe’s energy crisis adds to broader pressures to impress the global fashion industry. Inflation is rising around the world, fueled by disruptions related to the war. Meanwhile, regional political upheaval, Covid-19 and climate change-related disruptions are causing more volatility.

The result is a toxic cocktail of rising costs and softening demand; the long-term impact could be even more dramatic than the pandemic.

In Europe, national governments have already allocated hundreds of billions of dollars to protect households from sharp increases in energy prices. EU energy ministers gathered in Brussels on Friday to discuss emergency measures to curb energy costs.

But despite efforts to protect consumers from poverty-threatening energy bills, spending on discretionary goods is expected to continue to decline, leaving brands and manufacturers with tough decisions about whether and when to pass on rising costs or eat the pain yourself.

On Thursday, the British discount retailer Primark issued a profit warning as it decided not to raise prices to help offset higher energy costs, acknowledging the fact that consumers are likely to have less disposable income next year.

The retail business is experiencing “volatility and price increases that I haven’t seen before,” said the outgoing chief financial officer of Primark parent AB Foods.

Candiani Denim has raised prices by almost 40 percent at the start of the year due to rising raw material costs. “These are small things” compared to the higher electricity bills the company now faces, said the president. But the company’s average denim price of €7.25 per meter already far exceeds that of competitors outside of Europe. Although the company hired 100 new staff to meet growing demand at the start of the year, it is now looking to reduce operations to just four days a week to manage costs.

Some European manufacturers are simply closing or moving their operations elsewhere, said the director general of the European Federation of Clothing and Textiles.

The energy crisis in Europe is particularly acute because the region receives a large part of its supplies from Russia. Last week, the country cut off gas supplies through an important pipeline to Germany, thus supplies remain tight and gas prices rise further.

But the broader turmoil caused by the war has been ricocheting through the industry’s supply chain for months, compounded by regional issues and creating uneven pressure points. Currency fluctuations, political instability, extreme weather and high raw material and freight costs are all clouding the industry as demand declines.

“The consequences for the textile value chain could be much more serious than the Covid pandemic,” said the commercial director for Europe, the Americas and Turkey at fiber producer Lenzing. In contrast to the demand shock in 2020, there are now an extremely high commodity and energy costs and very weak demand. “There is almost a crisis for every letter in the alphabet,” he said.