Innerwear executives at the November market said fast-rising production costs are a growing strategic challenge after tepid September retail sales and persistent worries about the strength of the economic recovery.
The higher overhead costs are being led by cotton, which rose to $1.02 a pound in October compared with 59.2 cents a year earlier, according to the WWD Fiber Price Sheet. The price is climbing almost daily, and cotton futures last week advanced to record highs in New York after the U.S. government cut its estimate on global production and inventories, citing a shortage in China, the world’s biggest buyer and consumer. The March delivery contract gained as much as 3.3 percent to $1.5195 a pound on ICE Futures in New York.
Vendors are being forced to reassess strategies for spring as demand increases and production lags because of the floods in Pakistan and bad weather in India, both of which are major cotton producers.
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Many executives, fearful of passing on increased expenses to consumers, said they are looking at ways to absorb higher costs of raw materials, labor and shipping as they also contend with inequities in currency exchange rates, particularly the U.S. dollar against the Chinese yuan.
Others have chosen not to pass on costs to clients or are exploring new sourcing strategies in countries such as Vietnam and Bangladesh, where worker pay is lower.
Sharen Turney, chief executive officer of Victoria’s Secret, summed up her company’s strategy this way: “You make your money on the retailing side, not the buying side. Victoria’s Secret is an emotional brand, and we do not see our retail prices going up.”
Jockey International is “looking at the whole supply chain, and we’ve already made some strategic moves to Vietnam and India,” said Bob Nolan, president of North America wholesale and licensing operations. “Is this a bubble? You have got to be careful because everybody is buying futures in the cotton market. But as the laws of supply and demand come in to play, the prices could start to come down and you can get stuck for first and second quarter next year.”
Victor Vega, senior vice president of inventory, production and sales management at Wacoal America, said a key problem is a shortage of yarns from China.
“Major factories in China have been consolidating yarns, so there is less of a supply and the overall supply is limited,” he said. “There’s also an increase in labor costs, especially in southern China where the bulk of raw materials are, and there is an increase of utilities in China.”
Vega said average prices for bra foam pads, elastics and piece goods have increased 3 to 5 percent from a year ago. For example, if an average piece goods price was $8, it is now $8.24 to $8.40, and elastics that sold at 15 cents a yard last year now average 15.4 to 15.7 cents. Bra foam cups are $1.75 to $1.78 compared with $1.70 a year ago.
“My feeling is the Chinese will wait until the end of the Chinese New Year [which begins Feb. 3] to make a decision on whether they will increase [raw materials and labor costs], by how much and when,” Vega said. Factories in China are typically closed for one week or longer during the holiday.
The Carole Hochman Design Group, which is being acquired by The Komar Co., is trying to minimize the impact of rising expenses on customers. “The costs are rising every day,” said Seth Morris, president. “The volatility is such that we have no choice. We tried to be strategic and pick our [cost-cutting] spots as intelligently as we could…when the price of cotton hit $1.05 last month, we scratched our heads wondering where will this go. But no one knows when it will end.”
Zvi Ertel, president and ceo of Dana-co Apparel Group, which produces designer foundations by Natori and Josie under license, said in the last year prices have gone up 10 percent for foam cups for bras as well as for microfibers.
“But we are showing product at the same prices for the moment…the question is how can we sustain those prices in the future?” Ertel said.
Greg Holland, vice president of sales at Komar and president of the licensed Donna Karan Intimates and DKNY sleepwear collections, does not foresee a lessening of price pressures.
“We are trying to minimize increased costs from the factories by absorbing some of this internally,” he said. “Some of this pressure will be passed on to the consumer in slightly higher retails. It appears that inflation in our industry is something we will have to face for the first time in decades.”
The Age Group Ltd., which produces better-price sleepwear by Flora Nikrooz, is preparing to pass on the increased costs for spring 2011, which it did not do for spring 2010, said Richard Adjmi, vice president. “In May 2010, futures brokers were quoting 72 cents for a pound of cotton, and today [Friday] it’s over $1.40…there’s a lot of talk about how high the costs can go, but in the end it will depend on supply and demand…if the supply beefs up, the costs will go down.”
Marcia Leeds, ceo of Richard Leeds International, said her company has been “taking a position” of six-to-eight months ahead on greige goods at a fixed price since last year. But brokers for raw materials now “demand” commitments immediately.
“They tell us buy now or the price will even be higher,” Leeds said. “It’s insanity.”
Another concern that is rattling executives is the increasing demand for chargeback and markdown money from retailers on a quarterly basis, a practice that used to be year-end. Vendors said demand for quarterly distributions is coming primarily from major stores that sought markdown money in October, before announcing third-quarter results.
“Retailers have been asking for chargeback money earlier than usual…they need the cash now because nobody is sure what the fourth-quarter will be like,” said Guido Campello, vice president of marketing, sales and innovation at Cosabella. “The optimism level is high, and there’s been a flurry of activity over the past couple of weeks, but few people [retailers] did well in September compared to last year.”
Addressing the earlier demands for markdown money, one vendor, who did not want to be identified, said, “We try to project our entire season to make sure we’re not paying too much in to retailers…we’re trying to negotiate a settlement for third quarter we can both live with. It used to be seasonal, but if the retailer is really in a hole, we can come to an understanding,” the executive said.