Designer Alexandra Owen has had a singular obsession since starting her company in 2005: constructing beautiful, complexly tailored, structural ready-to-wear.
But tumultuous economic times, compounded by currency volatility within the last year, has directed some of that focus toward maintaining margins without sacrificing the quality of her namesake label’s garments.
“As we are based in New Zealand, the weakening U.S. dollar has meant our dollar has soared to new heights, buying up to 83 cents per U.S. dollar, as opposed to 53 cents five years ago,” Owen said. “This means exporting to the U.S. has become harder, with our pricing sitting higher through the conversion rate.”
U.S. dollar depreciation, combined with the rising cost of commodities, has forced apparel companies to consider using alternative fabrics like viscose and cotton blends and new generation polyesters in order to minimize the impact of the volatility.
“The price of silk has more than doubled in the space of a single season,” said Owen, adding that on the flip side, “if the U.S. dollar gets too low, product becomes more expensive for us to import.”
In the past year, the U.S. dollar has fallen by about 13 percent against a basket of major currencies, most of which are European, according to Raymond Attrill, senior FX strategist at BNP Paribas, who noted that against the many Asian emerging market currencies, the dollar has only shed 5 percent.
Higher raw material prices, elevated transportation costs and the rising cost of labor in China translates to an increase in apparel prices, but so far clothing companies have struggled to pass on higher import costs in the face of feeble consumer spending and income growth.
“Most apparel retailers can’t pass along increases in currency…[but] they are already trying to pass on raw material costs,” said Christian Callieri, a principal at A.T. Kearney’s consumer and retail practice.
One way to lessen the damage done by fluctuating currency is to hedge, a tactic that can help apparel firms compensate for any shifts in relative value of the currency type.
“Any period of increasing volatility forces the conversation of hedging,” said Kurt Salmon retail strategist Bruce Cohen, explaining that companies today hedge not to make a profit, but to create some “predictability” in their financials.
But this is just a short-term fix. What is paramount is having a diversified portfolio of sourcing partners, flexibility with vendors, strong inventory management and having business abroad, experts said.
The international route isn’t easy, as most brands entering foreign markets will have major growing pains as they acclimate to a new retail scene, said Scott Tuhy, Moody’s Investor Service’s vice president and senior analyst.
“Consumers are OK at best, right now,” said Tuhy, adding that luxury retailers may fare better as their consumers are less impacted by price hikes. “But really, the best hedge is a strong brand.”
Experts agreed that while Wall Street has already priced same-store sales and margin erosion into earnings, the wild card is how Europe will deal with the debt crisis and how the U.S. government will handle the debt ceiling issue.
Sara Johnson, IHS Global Insight senior research director, said even though the euro is anticipated to “rise modestly” this year as the European Central Bank raises its policy rate, sovereign debt problems could push the currency lower by next spring.
“Outsourcing could be ‘nearsourcing,’” said Standard & Poor’s senior economist Beth Ann Bovino, who explained that a weak dollar means that export growth would likely strengthen in North America and pull some manufacturing away from foreign suppliers, making U.S.-manufactured goods more competitive in overseas markets.
“We’re not going to see a tidal wave of business coming back to the United States,” said Kurt Salmon’s Cohen, who noted that “some small items will find their way back into the U.S. [production],” but the “swell of opportunity” will really be in South and Central America, India and in North Africa.
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