WASHINGTON — Fashion’s sticker shock has only just begun.
This story first appeared in the February 15, 2011 issue of WWD. Subscribe Today.
If designers think the worst of their problems with spiraling fabric prices is over, they should brace themselves for even higher costs in the next few months — just in time for spring 2012. And while rising raw materials costs are on the verge of bursting through at the retail level, there’s no sign consumers are willing to absorb all the increases that designers have had to bear.
Over the last year, cotton prices have jumped 160 percent and wool prices have risen 44 percent. While the pace has slowed, prices continue to climb. The cost pressure on designers and manufacturers comes as there are signs consumers are willing to spend again — creating a delicate balance between how much firms can boost wholesale and retail prices without spooking shoppers who remain focused on value.
The increases are reverberating throughout the industry — from Wal-Mart Stores Inc. up to the designers showing their fall collections during New York Fashion Week. The Jones Group Inc., Esprit Holdings Ltd., Hanesbrands Inc. and Polo Ralph Lauren Corp. all recently said they have either begun to look at or started to pass on the higher fiber costs through retail price increases.
The raw materials crisis was a major concern at recent textile trade shows from New York to Florence, as well as in U.S. brands’ earnings calls with Wall Street. Wesley Card, chief executive officer of The Jones Group, told analysts last week that higher raw materials and labor costs are translating into apparel price increases “for the first time in many years.”
Card predicted price increases, which will have an impact on consumer spending, will be modest in the first half of the year but “more pronounced [when] we move into the back half.”
Hanesbrands said it will increase prices as much as 30 percent for cotton-intensive products, while Esprit’s group ceo, Ronald Van der Vis, said the company is trying to offset price inflation in cotton by consolidating sourcing, moving from 117 to 11 suppliers for its sweater business, for example.
Global raw cotton prices have hit historic highs to levels not seen since the Civil War. On Friday, one cotton price index, known as the A Index, hit $2.09, representing a 151 percent increase since August 2010, when the current marketing season began, and a 28 percent increase since Dec. 30, according to Cotton Incorporated. The New York futures “nearby” price traded as high as $1.87 on Friday, a 126.6 percent increase from August and a 33 percent hike from Dec. 30.
On top of that, wool prices are higher than they have been in years and synthetic fiber prices, while not approaching price pressures anywhere near natural fibers, are also on the rise.
Some of the increase in wool prices can be attributed to a rise in demand, but for the most part they have been driven by a production decline due mainly to sheep farmers in places like the U.S. and Australia choosing to use their land for less labor-intensive and more profitable farming, particularly corn and soybeans.
Cotton’s steep price hikes have also forced companies to blend it with synthetic fabrics, resulting in higher demand and prices. Polyester staple prices were 90.5 cents a pound as of Friday, compared to 77 cents a year earlier, while polyester filament was 79 cents a pound from 66 cents last year.
But cotton is the real culprit in rising fabric and apparel costs. Cotton prices have been driven up by an out of balance supply-and-demand ratio associated with the global economic recovery last year. That, combined with the already high demand from China, contributed to a cotton shortfall on the world market. The supply side was further impacted by flooding in Pakistan, Australia and China, and export policies in India limiting cotton exports last year.
How long prices will remain high and how consumers react to higher cotton apparel prices in stores are the burning questions on the industry’s mind. Kim Kitchings, senior director of corporate strategy and program metrics at Cotton Inc., said a recent consumer survey revealed that 56 percent of consumers said they will pay more for natural fibers.
“Higher-end retailers can absorb the price increases, but the big-box retailers will feel it and so will consumers,” Kitchings said.
Most analysts predict cotton prices will remain high in the short term this year, although they could drop from their record highs of $2 a pound. Still, they are expected to remain well above the historical averages of 60 cents a pound.
“We are looking at prices that are significantly higher than they’ve been at any point in history in terms of the futures market and also the A Index,” said Jon Devine, an economist with Cotton Inc. “I think prices will remain near the high levels they are now and chances are they may go higher. I expect to see a lot of volatility going forward.”
Gary Raines, chief economist at FCStone Fibers & Textiles, said, “It’s not just a U.S., Chinese, Indian, Australian or Pakistani issue. They have all been pointing in the same direction and creating little waves that have suddenly become a perfect storm.”
Raines said the storm will pass at some point this year, but “in the meantime it is not going to be a pretty picture.
“I expect at some point much later in 2011 that we will see prices come back down, but they will not return to the long-term average at all,” he said.
Bill Raffety, a commodities analyst at Penson Futures, said, “Globally, stocks are tight. A lot of it depends on user demand.” Raffety said cotton will face a “struggle for acreage” between corn, rice and beans, but as far as cotton prices this year, “the fundamentals will support the market,” adding, “I have a feeling we can stay above a dollar…if demand stays firm.”
Two main factors will help relieve the inflationary price pressures in cotton: an increase in cotton production of an estimated 1 metric ton of cotton in Australia that will be available in April and May, and a bump in the Western Hemisphere cotton supply to 126 million bales for the 2011-2012 season from 115 million bales last season, according to Terry Townsend, executive director of the International Cotton Advisory Committee. But the Western Hemisphere cotton crop will not be available largely until October and, in the meantime, the old cotton stock will be extremely tight, maintaining the cotton price pressures.
“On the downside, textile mills will space out the supplies they have and use less,” said Townsend. “Some factory owners are going to have to choose between losing money by closing down or losing even more money trying to buy and sell cotton at these prices.”
In the U.S., textile mills that purchased cotton “on call” from merchants and will secure the price later will continue to absorb higher cotton prices and feel a squeeze on margins.
“Before the new crop comes in, there is upward of 4 to 5 million bales of cotton that will have to be fixed at the higher prices,” predicted John Bakane, chief executive officer at Frontier Spinning Mills, headquartered in Sanford, N.C.
Bakane said the working capital requirement to support companies is three times what it was a year ago.
“The big wild card is the consumer and the question is: where is the consumer going to get all of the money to pay for the price increases?” Bakane said. “When we finally get to the point where the consumer runs face to face with all of the inflation, there is going to be demand destruction. I think there is a lot of demand destruction at the $2 [per pound of cotton] level and we’re now in uncharted territory and it’s risky.”
Bakane said a 7 cent price increase in cotton “pretty much wipes out the profits of many of these companies.”
“We’re still busy, but I think we are in a dangerous period right now,” said Anderson Warlick, president and ceo of Parkdale Mills Inc., a Gastonia, N.C.-based yarn producer. “We’ve got about a six-month lag time here when these new prices for cotton we’re running today are going to hit retail shelves. Nobody at retail is experiencing $2 a pound cotton yet. They are experiencing $1-to-$1.30 cotton. When they start to experience $2 cotton, there will have to be a significant price increase.
“We’re on the front end of this,” Warlick added. “We’re sitting here looking at the supply chain having to fund three times the dollar volume it funded last year even though it is shipping the same amount of units and you’ve got a credit squeeze going on worldwide throughout the textile chain.”
The price pressures are impacting apparel and textile factories around the world.
Amer Hameed Khan, director operations at Masood Textiles in Faisalabad, Pakistan, said he is buying cotton in bulk to get a better price.
Khan said importers have raised product prices 15 to 35 percent in the year through January, with higher-end retailers increasing prices more and low-cost retailers increasing in increments of 2 to 5 percent at a time.
“My fear is that from May onward for two to three months, until harvest time, there will be no cotton in the local market, with scarcity determining the price,” Khan said.
Due to Pakistan’s devastating floods last summer, only 12 million bales could be harvested against a projection of 14.2 million. This year, Khan predicted no more than 13 million will be harvested against the country’s demand of 15.5 million bales.