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High Costs, Slow Spending Vex Apparel Manufacturers

Manufacturers are wrestling not only with a weak economy, but the rising costs of doing business.

Manufacturers are wrestling not only with a weak economy, but the rising costs of doing business.

Richard Noll, chief executive officer of Hanesbrands, said in a recent conference call to Wall Street on the company’s earnings, “We are beginning to see systemic rising input cost.”

Noll explained that cotton has broken out of its trading range, and that other costs have worked their way through the value chain.

“Cotton has recently moved outside its historical trading range of 30 cents to 70 cents per pound, into the high-70-cent range. And while cotton prices could move back down, there appears to be substantial support at these elevated levels,” Noll said.

The ceo explained that prices for the crop grown this summer, which will be used in production in 2009, have been in the mid-80-cent a pound range. “This leads us to believe that instead of prices close to the historical average in the mid-50-cent a pound range, we need to plan for cotton to be in the mid-80s for later in 2009,” the ceo said.

Noll then told investors and analysts that the rising input cost has the company thinking differently about pricing.

“First, it is clear that sustained price deflation is over for much of the apparel industry, since most of the industry’s supply chains have already moved to lower-cost geographies. And second, over time, price increases will need to become a tactical tool in this new environment,” Noll said.

The ceo said that while the apparel industry has been mired in a deflationary environment for some time, he is seeing some price increases in select areas. He added that he doesn’t yet have any answers for the questions “How much?” and “How soon?”

Archstone Consulting conducted a survey in February and March asking consumer packaged goods and general manufacturing firms about their approaches in dealing with the recent spike in commodity and raw material costs.

The Archstone survey found that companies will likely plan for price increases or cost offsets to deal with inflation. Of the respondents, 44 percent said they plan price increases, either through a direct price boost, the reduction of the number sold at the same price or fewer promotions. In addition, 57 percent of the firms surveyed said they are planning cost cuts in other areas of operations, such as material use and waste, to offset cost inflation.

This story first appeared in the April 28, 2008 issue of WWD.  Subscribe Today.

“The dual challenges of managing cost inflation and soft customer demand have become the critical business issue for U.S. corporations during 2008,” said Todd D. Lavieri, president and ceo of Archstone Consulting. “Success in managing levels of cost inflation, which have not been seen since the 1970s, and addressing an economic slowdown will be essential to lift sagging stock prices.”

The Archstone survey said cost inflation has arisen mainly in three areas: transportation, energy and raw materials. So far, the economic news doesn’t suggest an easing of those inflationary costs anytime soon.

The good news is that jobless claims fell recently and durable goods orders held up in March. However, new home sales declined, indicating the housing market is still weak. Crude oil prices peaked at $119.55 a barrel Friday.

Meanwhile, consumers have been paying higher energy costs in recent months, from heating bills to gas for their cars. Higher food costs are also a growing issue. The World Bank earlier this month said higher food prices could push millions of people in poorer countries further into poverty.

And last week, the price of rice was in the $24.70 range per hundred-pound weight, rising 68 percent in just four months. So great was the perception of a rice shortage fueled by high prices that two warehouse clubs, which sell to individuals and small businesses such as restaurants, began rationing the sale of bags of rice to its members. Sam’s Club, owned by Wal-Mart, on Thursday limited the number of 20-pound bags of rice that could be sold to four per person; the limit was for jasmine, basmati and long-grain white rice. The move followed a similar tactic by Costco.