NEW YORK — Apparel price deflation, concerns about shortages at year-end and shorter lead times were some key issues raised in a recently released Smith Barney research report.

The report was based on a conference call hosted by retail analyst Deborah Weinswig with the firm’s Asian Pacific group’s Mark Rosenfeld and David Wong. The report was titled: “Future Apparel Pricing: China and Deflation.”

Rosenfeld and Wong “estimate that price deflation” will be in the mid-single-digit range following the lifting of quotas on China in 2005. They also said some retailers are concerned over the possibility of product shortages at the end of 2004. Typically, when the quota is used up at year-end, manufacturers borrow from the following year’s quota. With the lifting of quotas, there will be nothing left to borrow from.

The analysts said they didn’t believe there would be any serious problems ahead because there’s “plenty of supply and capacity in the factories.” However, they’ve noticed some U.S. retailers hedging their bets by shifting orders to other countries to minimize any possible impact that might occur. Some countries benefiting from their quota-free status are Cambodia, Bangladesh and Mexico. The expectation is that a temporary shift to these quota-free countries would happen during the short term. As the dust settles, the expectation is that sourcing would move back to China.

“We would expect retailers to buy less before the lifting of quotas and then buy more in January 2005,” the analysts said in the report. “U.S. retailers have certainly been concerned, but half have said they will shift orders to China, while others have said they will disperse orders around the region, but eventually increase orders to China.”

Anticipation of the end of quotas, they said, resulted in some changes in how business is being conducted compared with last year. Retailers seem more willing to buy earlier than before, and contract pricing seems to have stabilized, they noted on the call.

Another change has to do with how sourcing companies are doing business with retailers, especially in regard to replenishment needs.

Agreements between retailers and the lead sourcing firm Li & Fung, for example, are requiring shorter lead times and smaller quantities to address the needs of the retailer. This is also occurring in Central America and southern Europe. The analysts also noted that China’s low labor costs, plus improved supply chain technologies, have forced shorter lead times, which led analysts to conclude that “retailers could now have 12 to 20 seasons rather than four per year, as orders are much more frequent, but smaller in size.”Subsequently, the analysts said the ability to reduce lead times on the supply side will depend on how much more retailers are willing to pay for the goods. Lead times could be “very low,” for example, if retailers are willing to spend money on air freight once the goods are manufactured. For department stores, the analysts projected lead times could shorten to four to five months, down from the current six months, over the next few years.

The analysts pointed out, however, that items subject to replenishment might be the exception because of unpredictable demand within a 12-month period. Those goods tend not to be sourced from China, where additional shipping time is required to complete the process.

— Vicki M. Young

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