Wednesday, December 01, 2010

Clothing Prices to Rise 30% And What To Do About It

Cotton prices are up 70% in 2010. That’s because Chinese demand for cotton has outstripped supply. The question that retailers face is whether to raise prices 70% or to hold the line.

Many retailers are raising prices in the 5% to 30% range so they are eating some of the cost increases with the idea of holding off market share losses to competitors who decide they must keep prices where they are in order not to lose consumers in an economy with a 9.5% unemployment rate. But with holiday sales running 33% above 2009, many manufacturers may try to pass on more of those cost increases in the form of higher prices.

To fight this, consumers ought to buy their clothes at discount retailers after the holidays as they seek to clear out their excess inventories.

Why Are Cotton Prices Rising?

Cotton hit a 140 year record price in October. And over the last year, cotton futures in China have spiked over 70% -- to $2.30 a yard since July, according to Bloomberg. With the global economy emerging from recession, people have been spending more on clothes. And the world's biggest importer and user of cotton fiber is China whose demand has exceeded supply for the 12th year in a row -- cutting its supply to the lowest level since 1995, according to the U.S. Department of Agriculture.

The most recent imbalance is significant. Demand for cotton outstripped domestic production by 3.6 million metric tons in 2009 to 2010. And cotton production in China is expected to consume about 41% of the global harvest -- 17 million bales short of demand in the year that began Aug. 1, 2010, according to the USDA.

One reason for the supply shortage is that production of cotton was down because of lower demand during the global recession. Another reason was weather related supply problems in major cotton-producing countries. For example, in the summer of 2010, new cotton crops were depleted because of flooding in Pakistan and bad weather in China and India, according to the New York Times.

But the price of cotton is not the only factor that's driving up costs for Chinese clothing manufacturers. Its real estate and labor costs are also skyrocketing according to Bloomberg. This means that the Chinese suppliers are going to either lose money by holding their prices firm or they'll pass their higher costs along to their customers in the form of higher prices.

And some Chinese manufacturers are opting to pass those cost increases along to their customers. One example is Shandong Zaozhuang Tianlong Knitting Co, a maker of T-shirts for Polo Ralph Lauren Corp. (RL) and track suits for Le Coq Sportif Holding. This Chinese manufacturer has raised prices 70% in 2010 -- boosting the T-shirt prices in July 2010 by 25% from $3.20 to $4 each. And it expects an additional 30% boost in Spring 2011, reports Bloomberg.

How Clothing Makers Are Reacting

Clothing makers are switching strategy along a number of fronts. They're moving production to places with lower labor costs. For example, Lululemon Athletica (LULU) is switching production from China to Vietnam, Cambodia and Bangladesh, where wages are lower. The manufacturers are also replacing more expensive buttons and thread with cheaper ones as they replace cotton with cheaper fabrics like polyester.

It seems as though prices are going to go up and quality will go down. Nobody seems eager to say how much more consumers will have to spend. But Bon-Ton Stores (BONT) raised its prices between 5% and 8% through November 2010. And if other retailers do the same, they are quite reluctant to make it clear how much -- fearing backlash from consumers and competitors who will publicize that they're holding the line on prices.

For consumers, the best option may be to take advantage of post holiday inventory clearing sales. There is little doubt that prices will rise next year but the problem for consumers is that the inventory that may be on the shelves after December 26th may not be what they want to buy.

Despite official reports that inflation is at a 53 year low of 0.6%, it's hard to see how that low inflation will remain if the prices of cotton and many other commodities keeps spiking. The best hope for consumers is that world cotton production rebounds and more retailers switch production outside of China.

In the meantime, prepare to pay more for cotton clothing.


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1:59 AM  

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