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Retailers Brace for Price Jolts

By the second half of 2011, prices in apparel, accessories and soft home retail are expected to be 10 to 15 percent higher.

Shoppers will be facing rising prices for the first time in years.

The recession forced retailers to offer better value. Now they’re scurrying to maintain the proposition as they shop the world for fall goods and confront sticker shock as a result of soaring labor and raw material costs.

Prices for fall are expected to be 10 to 15 percent higher — and in some cases could rise even more depending on the product. While it will be mass and midtier retailers like Wal-Mart Stores Inc., Target Corp., Kohl’s Corp., J.C. Penney Co. Inc. and The TJX Cos. Inc. that will be hit the hardest, no company is expected to escape unscathed.

Higher apparel prices will only add to the growing specter of inflation across the economy — from food to gasoline. The skyrocketing price of oil because of turmoil in the Middle East has caused global stock markets to plummet in recent days, with the Dow on Friday closing below the 12,000 mark for the first time in six weeks. (For more, see page 2.)

“I’ve been at this game for a long time and I’ve never seen increases this steep, this quick,” Jeffrey Sherman, president of The Echo Design Group Inc., and formerly chief executive of Hudson’s Bay Co. and earlier president of Bloomingdale’s, said of inflating apparel prices. “This will absolutely impact consumers.”

“We are obviously keeping a very close eye on it,” said Jim Gold, president of specialty retail for the Neiman Marcus Group. Asked how serious the issue will be for later in 2011, Gold replied, “Hard to say. It’s hard to predict.

Some manufacturers have done a great job holding prices in line.” However, “cashmere, cotton, silk and leather have all been affected.”

“This is the first time in a decade or more that we are seeing some inflation that is quite high,” Glenn Murphy, Gap Inc. chairman and chief executive officer, said during a conference call late last month. And just last Wednesday, he raised the concern again at a consumer conference in New York, saying rising cotton prices will impact Old Navy and Gap Inc. outlets the most, where there’s less pricing flexibility compared with more upscale businesses. The $14.66 billion Gap will use its size and buying power to leverage prices, he stressed, “But we have to be careful. We are not going to take the price increase and spread it mindlessly.”

The Kurt Salmon consulting firm estimates a 10 to 20 percent increase in landed costs across major retail sectors for fall. That’s likely to translate into 10 to 15 percent increases in apparel, accessories and soft home retail prices by the second half of 2011, threatening the momentum retailers have going so far this year. Increases will be most acute in commodities where raw materials represent a greater percentage of the overall cost of creating the product, meaning chains like Wal-Mart, Target, Kohl’s, Penney’s and TJX Cos. must work the hardest to maintain margins, though retailers generally will have to take a more surgical approach in pricing products so they sell.

“For customers at the luxury and higher levels, price increases are less of an issue. At opening prices, customers will think twice about buying things,” said Arnold Aronson, managing director of retail strategies for Kurt Salmon. “Retailers that pride themselves as low-price leaders are going to have to be very careful. Price increases will start to hit late spring. Early fall will be the big impact.”

But store executives say they’re fighting the inflation by consolidating sourcing, pressuring vendors to absorb the increases, re-fabricating products with more details to justify price increases or fewer details to cut costs, or adjusting assortments toward more private label for higher margins. This fall, Kohl’s, for example, is launching Jennifer Lopez and Marc Anthony fashion collections and Sears is launching the Kardashian Kollection.

As a last resort, they’ll pass along some of their increased product costs to consumers, who have already been hit hard by higher food and fuel costs. And they’ll try to overshadow the price hikes by reinforcing the value message. It’s been their mantra throughout the recession; now the drum beat is getting louder.

“The consumer is prepared to spend as long as they believe they are getting great value, and value is determined differently by different customers,” said Terry Lundgren, Macy’s Inc. chairman, ceo and president. “Some might feel the lowest price possible is their definition; others might describe it as the highest possible quality and fashion for a reasonable price. That’s the Macy’s consumer.”

Asked how Macy’s can cope with inflation, Lundgren replied: “We have created a dialogue with our largest vendors and most significant partners to help us think through very specific strategies, including pricing for fall. With certain categories we will hold the line on pricing, like basic children’s merchandise. We just have to work together there and make sure we remain very competitive. In higher fashion, we will be able to take on more pricing. Frankly, it should, because it’s been deflating for the last several years.”

Wal-Mart is consolidating softlines suppliers “to improve purchasing power and leveraging our buying power with raw material suppliers,” said William S. Simon, president and ceo of Wal-Mart U.S. in a conference call. “We continue to work with our suppliers to reduce inflationary pressure where possible and only pass on price increases when they cannot be avoided.”

Retailers don’t appear to be panicked by inflation at this point. As Humberto Leon, co-founder of designer retailer Opening Ceremony, said, “I don’t see this situation as so crazy. We make sure each item we present has perceived value, with a fair price so the consumer sees the value. We are really trying to keep prices similar” to last year’s.

Saks Inc. chairman and ceo Stephen I. Sadove is confident Saks’ margins won’t be impacted this year, as the chain continues to rein in costs and enjoy luxury’s rebound. “You will see some price increases, but you will see it affecting the lower-end basics and commodities, such as underwear, a lot more than the luxury, designer end,” Sadove said. He said price increases could be noticed as soon as May and June with early fall deliveries, and that a ballpark estimate was that prices across the Saks portfolio could be up by 5 to 10 percent, depending on the category.

“We are in the market now buying products, so we don’t have a specific number yet.” By spring 2012, Sadove said, “There could be a different picture in terms of the supply. The labor shortage issue is a real one that will continue into the future, but when you take away the impact of major flooding affecting certain countries, you might be able to see a little bit of easing in 2012.”

“Right now, the retailers are not really passing a significant amount” of their higher costs onto the consumer, said Carol Meyrowitz, ceo of The TJX Cos., during a conference call. “I think that’s going to start to happen, probably towards the middle to end of the back half and possibly into the following year.” If TJX’s average ticket goes up and the consumer still shops, “it’s fantastic for us,” Meyrowitz said. But she also stressed the company will maintain “great value.…That’s what we’re focused on.”

Limited Brands Inc. doesn’t seem that worried either. Inventory discipline, faster execution, and significant global sourcing capabilities have improved merchandise margins over the last several years, according to Stuart B. Burgdoerfer, chief financial officer and executive vice president. In addition, 40 percent of Limited’s volume is in personal care and beauty, shower gels, body lotions and fragrance, cushioning the company somewhat from rising prices in apparel raw materials.

“With all that said, we do expect to see some pressure from increased costs, weighted principally to the back half of the year,” he said. “It is not practical to predict how much of that could be offset through more full-price selling. Therefore, our outlook does call for some decline in our merchandise margin rate in 2011. We believe that this decline will be principally offset by buying on occupancy leverage, so our forecast is for our 2011 gross margin rate to be about flat to last year.”

“Everybody is going to have to be doing something with pricing or markdowns to maintain their profit growth. It’s a pressure that’s affecting everybody,” said David F. Dyer, Chico’s FAS Inc. president and ceo, during a conference call. “We have some price elasticity where we have done really market research and feel that we have been [priced] under the market in some categories and had adjusted accordingly.” He also said the company might have been overly promotional last year and could be less so in 2011, “based on the fashion and the desirability of the products that we’ve been producing — certainly in Chico’s, White House|Black Market and in the fashion parts of Soma.”

The key question remains how consumers will response to any apparel price hikes as they battle higher prices in gasoline and food. “We may well find the consumer will balk at paying significantly higher prices for apparel, and if the consumer cuts back on purchases of apparel, owing to higher prices, unsold inventory will mount and that will ultimately put downward pressure on apparel prices,” observed John Lonski, chief economist at Moody’s Capital Markets Group.

For spring 2012, uncertainty looms. “No one can give us pricing right now for spring 2012,” said Lisa Mayock, co-founder/designer at Vena Cava. “It’s frustrating.”

“We are trying to absorb as much of the cost increases as we can to make it easier for our retail partners and assure that we have better sell-throughs,” said Mickey Ateyah, president of Artisan House, which has a stable of accessory brands including Carlos Falchi, Isabella Fiori and Danielle Nicole. “But there is a limit on how much we can absorb.”