The elimination of quotas on China in 2005 means one thing for retailers: lower prices. However, among factors, companies that take on responsibility for a firm’s receivables for a fee, the full impact of this change remains unclear.
For David Milberg, president of Milberg Factors, the elimination of quotas simply means the continuation of an ongoing struggle between retailer and manufacturer.
“Retailers are constantly pressuring manufacturers to lower price,” said Milberg. Once quotas are lifted, continued Milberg, he expects retailers to continue clamoring “to get as much of that benefit as possible, especially in the lower and middle market retailers, where price is really important.”
Michael Stanley, executive vice president of Rosenthal & Rosenthal, also sees mass market retailers reaping the greatest benefit. “I would say, for volume merchandise, certainly price will go down,” said Stanley. “If you have luxury goods, you can get a premium. But for discounters and mass markets, there’s no question. We’re seeing deflation right now, and the quality of those goods is the same or better.”
Expectations of price drops may be running too high, said Mark Bienstock, executive vice president of DCD Capital, who believes retailers are looking for a reduction in production costs of between 10 and 15 percent. According to Bienstock, much of that benefit may have already been eaten up as factories, anticipating receiving larger orders once quotas disappear, committed their resources to upgrading their technology and expanding operations.
As for lower prices, “It’s wishful thinking,” for retailers and consumers alike, said Bienstock. “I think there might be a small adjustment, but I don’t think it’s going to be material.”
The greatest change occurring, said Bienstock, can be found in how retailers are conducting their sourcing business. “A lot of retailers are buying offices in these countries to monitor production,” said Bienstock, citing Target Corp. as an example.
In 1998, Target acquired Associated Merchandising Corporation, a global sourcing specialist founded in 1916 that now has more than 50 locations around the world. According to Salomon Smith Barney analyst Deborah Weinswig, AMC has one of the most sophisticated networks of Asian factories of any mass retailer, allowing Target to chase down new products or quickly create private label versions of high-end products.
This proximity to the factories, said Bienstock, has allowed retailers to better negotiate prices and monitor production.
As to whether consumers will reap the benefits of any reduction in production costs, in the form of lower prices on the rack, some factors are skeptical.
From a macroeconomic standpoint, said Stanley Officina, president of Sterling Factors, there is little evidence to suggest drastic changes are in sight. “Our economy and consumerism is virtually unchanged after every one of these things,” said Officina. “Your kids are still gonna want a $120 pair of sneakers because all the other kids have ’em. Nothing changes, except the date.” Any cost reductions, said Officina, will be lost somewhere else in the supply chain.
Tom Pizzo, president and chief executive officer of Wells Fargo Century, contends the disappearance of quotas will spur competitive pricing among manufacturers, forcing retail prices to fall. “The consumer will have more advantageous buying ability,” said Pizzo. However, according to Pizzo, some of these discounts may already have been factored into current pricing.
Richard Hayne, chairman and president of Urban Outfitters, agrees, but he sees the fall in price as part of a longer evolutionary cycle, rather than an occurrence triggered by a single event.
“I think over time you’re going to see what’s already been happening over the last 15 to 20 years, which is deflation in categories,” said Hayne. “If you average all retail prices out for one particular item or group of items, absolutely it will become cheaper.” For denim pants in particular, Hayne believes there will be a noticeable price reduction.
Working to the naysayers’ benefit is the fact that even after Jan. 1, 2005, the U.S. will have the option of unilaterally imposing quotas on certain categories for up to three years. Given that it is also an election year, the reappearance of quotas seems a certainty.
“I think it’s a real political issue,” said Milberg. “China has become such a dominant force, and there’s a lot of fear out there about what happens once the gloves come off.”
Officina characterizes it as a melody that has yet to be filled in. “[Quotas] will be tinkered with as it progresses,” said Officina. “As specific areas of our economy are affected, lobbyists will have our political leaders fine-tune the grand structure.”
As Hayne points out, this tinkering creates difficulties in operating a business, making long-term planning impossible. For Urban, Hayne plans to gradually increase its dependence on China for sourcing while maintaining its other sourcing locations. “As late in the game as possible we’ll be assigning where we will actually commit to production,” said Hayne, “and that will be based on our latest information.”