LONDON, United Kingdom — Apparel companies already grappling with a difficult retail environment face a new challenge: steep increases in the prices for the raw materials they need to make their clothes.
Wool prices have soared to record highs this year on booming demand, while a drought in Texas and rising Chinese imports have sent cotton futures to a nearly six-year peak in the US. The price of oil, used to make synthetic fabrics like polyester and rayon, is up over 50 percent from a year ago.
Retailers, including Abercrombie & Fitch and Ralph Lauren, have already flagged rising supply chain costs as a potential threat. But they have limited options beyond passing along prices to customers, an unappealing prospect for retailers facing declining mall traffic and increased competition from low-price competitors online. Some, including H&M, are planning steep discounts in the coming months to reduce inventories, and could now see rising prices for cotton and polyester squeeze already slim profits.
“The margins within the supply chain are incredibly tight,” said Adam Mansell, chief executive of not-for-profit organisation UK Fashion & Textile Association. “Unless you are supplying top-end luxury goods, it is a very difficult world to be in at the moment.”
The apparel industry can’t do much to control commodities prices when they rise.
Cotton is rising because bad weather is reducing global supplies. Cotlook, an independent analysis firm, forecasts a decline in the world’s stock of cotton by the end of this year.
Meanwhile, Chinese textile manufacturers have also begun drawing down massive government stockpiles, raising expectations they will need to import more of the fibre later this year. On the ICE Futures US exchange, prices hit about 95 cents a pound last month, their highest since early 2012.
Oil prices have risen steadily over the last year, as the Organisation of the Petroleum Exporting Countries as well as Russia have reduced production, and countries like Libya and Venezuela have seen supply outages. Brent crude, an international benchmark, traded at about $78 a barrel on Wednesday, compared to about $50 a barrel a year ago.
Unless you are supplying top-end luxury goods, it is a very difficult world to be in at the moment.
Analysts see wool prices taking the longest to come back down. The fashion industry’s demand for wool — which is being incorporated into everything from Allbirds shoes to Lululemon pants — is rising faster than farmers can handle. And while OPEC members can turn their wells back on in a day, and cotton farmers can increase next year’s plantings, breeding sheep is a slower process. Prices on the Australian Wool Exchange topped $15 per kilogram, higher than the previous spike in 2011.
“You have to have the breeds of sheep, and it takes 2-3 years to have any impact on the market,” said Wayne Gordon, commodities analyst at UBS Global Wealth Management Chief Investment Office. “It will put a pressure onto the fashion industry.”
Apparel companies have other ways to cope with higher commodities prices beyond raising prices, but some of those fail-safes aren’t as effective this year. For instance, they can respond to rising prices for one material by switching to another. When cotton prices spiked in 2011, many brands started selling more apparel made from rayon and other synthetic fabrics. But with raw materials prices rising across the board, changing the mix of fabrics won’t provide much relief.
In May, Ralph Lauren said increased commodities prices, along with higher wages and freight costs, would cut gross margins by up to half a percentage point (though the same factors worked in the company’s favour by about the same amount last year). The company is responding by leveraging its scale to negotiate lower prices with suppliers, and to raise prices, chief financial officer Jane Nielsen said in an earnings call.
Retailers face an inevitable choice: raise prices and lose customers, or keep the customers and accept lower profits.
At Abercrombie & Fitch, commodities are pushing expenses higher, though the company said transportation costs are a bigger threat right now.
"We're keeping our eyes on commodities,” said chief financial officer Scott Lipesky in a June earnings call. “So our sourcing teams are on top of that and doing whatever they can to offset any potential inflation we see in commodities in the back half."
If commodities prices don’t fall back, retailers face an inevitable choice: raise prices and lose customers or keep the customers and accept lower profits. That’s a tough pill to swallow at a time when 700 clothing stores shut down in the UK alone last year, according to data compiled by the Local Data Company for PwC.
“Things are going to get tougher, they are going to raise prices to offset [cost inflation],” said John Kernan, an analyst at Cowen. “It will be difficult. I think certain brands will struggle.”