OBSERVATIONS

Byline: Robin Lewis

THE PRICING DILEMMA
Harmonic convergence might be described as two events coming together as two complementary forces, creating a positive synergy.
When the inevitable passing along of ingredient price increases occurs, don’t look for harmony. It’s more likely to have the effect of two trains colliding.
The many reports of the deflationary price trend, WWD’s included, all speak of a consumer who just says no to anything but lower prices. She can say no for the simple reason that there are too many goods out there, and too many stores, not to mention all that other stuff about lack of excitement, no time or inclination for shopping, look-alike clothes in look-alike stores, more important ways to spend her shrinking income and on and on.
So, this is the consumer in her overabundant habitat that everybody wants to pass their higher prices along to. Good luck.
Most of the retailers, manufacturers, mills and ingredient producers know this condition exists. Accordingly, there is much anxiety about when, where and how much to pass on. This concern is justified not only because of the deflationary trend, which last occurred in 1952, but also because there are two other factors that weigh very heavily on the outcome of such increases.
First of all, many manufacturers have spent the last several years wringing costs out of their businesses by developing more efficient and productive systems, allowing them to grow more profitably in lieu of raising prices. Retailers were doing the same thing to their operations. Therefore, it’s unlikely that either of them will be able to squeeze out any more costs.
Secondly, our economy is in the midst of a mildly schizophrenic period in which inflation seems to be in check and the economy is near full employment. Yet, apparel sales are sluggish to slowing, inventories continue to climb and consumer confidence is eroding. Throw in the peso crisis and our resulting export losses and a weakening dollar, which could force interest rates up. All of these negative signs have the capability of quickly destabilizing the economy.
This all adds up to an environment that is highly unattractive, if not hostile, for increasing prices. Therefore, when they come, as they must, it’s quite possible that the all-powerful consumer will say no once again. Then what happens?
Well, the industry as we know it won’t suddenly fall into a sinkhole. However, two things will surely happen. First, the weak won’t get weaker. They will simply fail.
Secondly, vertical integration will likely increase, as a strategy to collapse margins and gain greater pricing flexibility. This will lead to more apparel being sourced by retailers, thus increasing store brands and private labels. Conversely, it will also result in more manufacturers venturing into retailing for the same reasons.
Finally, just as a major fiber producer recently spun off an apparel division and major textile mills are making or sourcing apparel for retailers, how can we not consider the possibility of this strategy as a proactive choice?
The argument against integration has always been that a business puts itself at risk by extending beyond its primary skill base and scope of knowledge. Of course, big businesses can acquire or merge to gain those skills. Present day strategic alliances or partnerships, and the Quick Response systems that link the more advanced companies with one another, are informal versions of vertical integration. Is it such a great leap to the next level?
While the shaking out of the weak and the restructuring has been going on for some time, the price increases will further accentuate and accelerate the process.

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