Clothes shops' price gamble may backfire

By James Davey

LONDON (Reuters) - Clothing retailers, facing sharp cost increases, are planning a gamble that could backfire by raising prices next year in what could be one of the worst consumer downturns in 30 years.

Top chains such as Marks & Spencer Group Plc, Next Plc, Debenhams Plc and Top Shop owner Arcadia are not only struggling with higher fuel and utility bills, but also the sudden weakening of the pound and soaring cost increases from suppliers in Asia.

The rising costs present retailers with a major problem.

If they cannot pass the increases on to shoppers -- in a market some analysts reckon could be as tough as the recession of the late 1970s -- their profit margins will be hit, and if they do pass them on their sales volumes will likely suffer.

"Is it more important to try and maintain sales levels with a slightly squeezed ... margin, or is it more important to have a better margin with a lower volume of sales? That's a very difficult judgement call," said Neil Saunders, a director of Verdict Research, a retail consultancy.

In the two years to July 2008 British clothing retailers, whose sourcing of clothing from Asia is U.S. dollar denominated, benefited from the pound's 15 percent appreciation against the U.S. currency.

This benefit is now going into reverse. Since July the U.S. dollar has gained 8 percent versus the pound.

Suppliers in Asia are also hiking prices as they face cost increases themselves.