WASHINGTON — Modest retail price inflation in October has put certain segments of the retail community on alert as merchants head into the prime holiday shopping season.
Retailers are casting a cautious eye on their pricing power as they navigate the delicate balancing act of passing on higher raw material prices to avoid taking a significant hit on margins without alienating beleaguered consumers shopping for holiday gifts. Luxury stores should fare well even in the face of retail price inflation this holiday season, but analysts are concerned about the impact it will have on department stores and discounters that may not have as much price flexibility and could see profits slashed.
Price inflation crept in again in October after easing in September, as retail apparel prices rose a seasonally adjusted 0.4 percent, the U.S. Labor Department’s Consumer Price Index showed Wednesday. On a year-over-year basis, apparel prices at retail were 4.2 percent higher last month compared with October 2010.
Women’s apparel prices rose 0.7 percent in October compared with September and were 3.9 percent above October 2010. Men’s apparel prices increased 0.6 percent in October and were 4.4 percent higher than a year earlier. Retail apparel prices have not been as high on a year-over-year basis since November 1991, according to Scott Hoyt, director of consumer economics at Moody’s Analytics.
Hoyt pointed to four straight months of retail price increases of over 1.1 percent in apparel, from May through August, but said a 1.1 percent decline in apparel prices in September signalled a slowdown in the rapid price spikes from earlier this year.
“My assumption is [the 0.4 percent increase in apparel retail prices in October] has to do with the uptick in cotton prices that we saw earlier in the year working its way through the chain,” Hoyt said. “The good news is cotton prices are coming down so the end is in sight, but I have seen industry executives quoted as saying that apparel prices will not come down during the holidays so it may be next year until we see the benefits of a decline in cotton prices.”
Cotton prices topped out in March at more than $2 a pound before dropping back to about $1 a pound currently. J. Berrye Worsham, president and chief executive officer of Cotton Inc., speaking at a conference last month, noted that the rule of thumb is that a 50 percent increase in the cost of a fiber will result in a 3 percent cost bump at retail.
“This year, we might have seen it go up 5 percent, but other factors affected prices, such as dollar fluctuation,” Worsham said. “The feeling is that it will take a year to two years for that to work through.”
Some analysts and economists are confident about retailers’ ability to pass on higher cotton and other raw commodity prices to consumers this holiday, but others are sounding a note of caution, particularly as it relates to department stores and discounters.
“I think margin pressures are certainly still very high and retailers are going to be willing to take a little hit there to keep prices pretty low,” said Andrew Fitzpatrick, director of investments at Hinsdale Associates. “They know consumers are still very careful about spending and scrutinizing each price and looking for the best deals out there and certainly that makes it more challenging in terms of the pricing environment.”
He said department stores such as Macy’s are “caught in the middle” of the pricing game.
“They are going to have a difficult time initiating much in terms of higher prices but they have been generating good numbers” in volume, and managing costs and inventories, Fitzpatrick said. “But I’m doubtful they will pass on higher commodity prices. They don’t have a lot of pricing power there to pass that on and I would see that as being very limited.”
For the midtier, margins will be “challenging,” Fitzpatrick said, but he noted higher volumes are a “positive sign.”
“We are seeing better sales [with the exception of October],” he said. “There is certainly some demand from consumers to be spending.”
Craig Johnson, president of Customer Growth Partners, was more bullish about retailer pricing power across the board.
“There is actual true apparel inflation,” said Johnson.“The bad news is consumers will see some higher prices. The good news for retailers is that demand for apparel…[generally] is price inelastic. What that means is a retailer can increase the price on something by 10 percent and only see demand by unit go down 5 to 7 percent, which means they can pass through price increases for the most part and only have a modest impact on unit demand.”