By Nivedita Bhattacharjee
BANGALORE, Aug 9 (Reuters) - Just as recession battered
consumers are trickling back to malls, clothes makers in the
United States face a tough choice.
Squeezed by ballooning raw material, labor and freight
costs, manufacturers from Nike Inc and VF Corp to Hanesbrands
Inc and Levi Strauss & Co are fretting they might have to raise
prices in fragile markets to maintain margins.
Price tags on everything from jeans to jumpsuits are likely
to rise next year, ending about three years of serious
"It's sort of the worst time possible," said Nate Herman,
Vice President of International Trade with the American Apparel
and Footwear Association (AAFA), which represents over 700
apparel companies, brands and suppliers.
"As the economy is showing signs of resurgence and people
are more willing to come out and buy, we have this huge cost
pressure from the back-ends," Herman said, noting the last time
the U.S. apparel industry saw such broad-based hikes was in the
During the recession, many factories in China shut down as
demand dropped. Now, decreased production capacity coupled with
lower cotton output and higher prices of oil and labor are
pressuring production costs.
Bob Shearer, Chief Financial Officer at VF Corp, the
world's largest apparel company with brands such as Lee,
Wrangler and Jansport, said "It's clearly not just us ... costs
overall in apparel are going up."
"Cotton-based products might be pressured more than other
types, but it's an overall trend," he told Reuters.
Both the AAFA and Perry Ellis International Inc CEO George
Feldenkreis expect prices to increase by around 5 percent
starting next year.
"I think price increases will be felt around the Christmas
season and going forward," Feldenkreis told Reuters.
PROFIT OR PATRONS?
With consumer confidence still fragile -- latest retail
sales numbers were a damp squib -- companies are trying to
mitigate price rises by seeking cheaper inputs and suppliers,
but this may only be a short-term fix, said Jeremy Rubman,
strategist at retail consulting firm Kurt Salmon Associates.
"In the long term, I think we're looking at sustained
inflation in the apparel supply chain. Costs are going to go up
and the reality is that apparel companies don't have the
margins to absorb it," he said.
During the latest recession, apparel retailers took on
massive discounting to drive sales, and that trend has
continued, albeit more temperately.
With consumers now conditioned to buying at discount, the
stage could be set for a war of wills between retailers and
"Consumers focus more on what they're saving than they do
on what they're spending and so they get really fixated on
"this is a bargain", said Dr. Kit Yarrow, consumer psychologist
and professor at the Golden Gate University.
"It's a question whether or not they're going to just hold
out for a little longer until they realize prices will be
higher permanently because of higher costs of labor and
fabric," Yarrow said.
In the ICE Futures market, the U.S. benchmark December
contract for cotton -- traditionally the most important raw
material in apparel manufacturing -- rose to a 3-month high on
Friday amid supply concerns.
Company executives see no reason to believe cotton prices
will come down any time soon, and rising labor rates in China,
dubbed the world's factory, are an additional pressure.
"And layered on top of that, cargo prices are much higher
and factory capacity is down, meaning retailers are finding
they are having to pay a premium in order to get what they
want," Kurt Salmon's Rubman said.
Some specialty retailers such as Abercrombie & Fitch Co and
Aeropostale Inc, which have better margin buffers, are likely
to begin passing on the pricing pressure by trimming discounts,
followed by eventual price increases.
"The mass stores, like a Wal-Mart (Stores Inc) for example,
don't have that space and margin. So you're going to see small
price increases start from them," Rubman added.
(Editing by Ian Geoghegan)