Citi warns dollar strength is the real threat for UK fashion retailers as Middle East volatility hits sector

• ABF's Primark operates on the tightest margins in UK retail and has minimal capacity to absorb dollar-driven cost pressures without cutting orders or raising consumer prices
• Next faces similar currency headwinds but benefits from a more flexible sourcing model and stronger online margins that provide partial protection
• Secondary risks include potential air freight delays and increased shipping costs, adding further strain to supply chains already navigating volatile macroeconomic conditions

Summary

Citi has identified Associated British Foods (ABF) and Next as the UK fashion retailers most vulnerable to gross margin pressure amid Middle East geopolitical volatility, though the primary threat stems from dollar strength rather than direct regional exposure.

Key Findings

Both retailers source products heavily in dollar-linked currencies, creating margin compression as the strengthening greenback widens the gap between procurement costs and retail prices. This dynamic intensifies as oil-driven inflation keeps the dollar elevated.

ABF's Primark division faces particular vulnerability due to its razor-thin margins, leaving minimal room to absorb cost increases without either reducing orders or raising consumer prices. Next confronts similar challenges but benefits from a more flexible sourcing model and stronger online margins that provide partial protection.

Broader Sector Risks

Citi highlighted secondary risks affecting the wider retail sector, including:

• Potential air freight delays
• Rising shipping costs
• Supply chain pressure amid an already volatile macroeconomic environment

Market Implications

The analysis underscores how currency fluctuations and geopolitical instability can create indirect but significant operational challenges for retailers with dollar-denominated supply chains. Companies operating on tight margins face the difficult choice between protecting profitability or maintaining price competitiveness in a cost-conscious consumer environment.

The report was published March 9, 2026, following escalated Middle East geopolitical tensions. While direct regional sales exposure is limited for these retailers, the cascading effects through currency markets and logistics networks present material headwinds for UK fashion retail margins in the coming months.