Retail companies warn: If the Iran conflict continues for several months, prices of goods will be increased.

Key Points

• The UK retail company Next warned on Thursday that turmoil in the Middle East not only could dampen local growth but might also have a ripple effect on costs, prices, and consumer demand in other business segments.
• H&M stated: “If the current geopolitical turmoil in the Middle East continues, it may bring slight additional cost pressure.”
• Retailers focused on non-essential consumer goods are more susceptible to the negative impacts of this conflict, as war adds more uncertainty to already pressured consumers.

Multiple retail companies have issued warnings that the conflict in the Middle East is driving up operating costs, and if the fighting does not cease soon, it may lead to price increases for goods.

The UK retail group Next warned on Thursday that turmoil in the Middle East would not only suppress growth in the region but is also likely to have a chain reaction on the costs, pricing, and consumer demand in other business areas.

The company has estimated that if supply chain disruptions last for three months, the conflict will result in an additional £15 million (approximately $20 million) in costs, primarily due to fuel and air freight expenses. Next stated that these additional costs have been offset by savings in other areas, thus will not impact its performance guidance.

Next stated in its earnings report for the fiscal year ending in January released Thursday morning: “If costs remain high three months from now, we will begin to pass on the cost pressure through price increases.” The Middle Eastern market accounts for about 6% of the company’s total revenue.

If the fighting in the Gulf region continues, it will create a double blow for retailers: on one hand, it exacerbates inflationary pressures and disrupts supply chains, driving up overall costs; on the other hand, rising living costs will squeeze consumer purchasing power, resulting in reduced spending on non-essential goods.

Since the first wave of attacks broke out on February 28, the conflict in Iran and the effective blockade of the Strait of Hormuz have driven oil and gas prices to surge, overturning inflation expectations in Europe and other regions.

European Central Bank Chief Economist Philip Lane stated on Wednesday that businesses’ price increase expectations and new employee wage salaries are inflation indicators that the ECB will closely monitor.

Cost Pressure

H&M stated on Thursday: “If the current geopolitical turmoil in the Middle East continues, it may bring slight additional cost pressure.”

The Swedish retailer has a relatively low exposure in the Middle East, with about 3% of its stores located in the region, and a low proportion of its supply chain relies on air freight.

H&M CEO Daniel Kullgren noted during an analyst call following the release of the first-quarter earnings report on Thursday: “At present, we have not seen significant impacts on consumer behavior globally. However, we are aware that consumers have long been bearing high inflation pressures, and rising energy prices will have spillover effects.”

He added that if the conflict persists, consumer behavior may be “significantly impacted,” but did not specify when this might occur.

Analysts noted that retailers focused on non-essential goods are more vulnerable to the negative impacts of war, as the conflict adds more uncertainty to already pressured consumers.

H&M stated it will continue to invest in quality improvements, seasonal purchasing, and pricing competitiveness to maintain its appeal to consumers.

Jefferies analysts pointed out that although H&M’s earnings report has not indicated significant changes in consumer behavior outside the Middle East, “if energy prices remain high, there may be a more lasting impact on disposable income in the future.”

H&M announced on Thursday morning that its sales in the first quarter decreased by 1% year-on-year in local currency, but good cost control allowed its profit performance to exceed expectations. The company stated that in this quarter, “consumer behavior has become more cautious, and the impact of exchange rates is significant.”

Later in the morning session, H&M’s stock price dropped by 2.2%, although this decline was smaller than before.

Meanwhile, London-listed fashion brand Next raised its guidance for the next fiscal year’s pre-tax profit by £8 million to £1.21 billion, causing its stock price to rise by 5%.

Jefferies analysts commented on Next’s earnings announcement, stating: “This update report is reassuring, showing strong sales in the UK market, and that the company has the ability to pass on costs in the face of known disturbances in the Middle East.”