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Denim Industry Feels the Weight of Surging Cotton Prices

To say times have been challenging of late for the fashion industry would be an understatement. Congested ports, factory shutdowns and tight shipping capacity have created logistical and financial troubles for partners throughout a denim supply chain already scrambling to recover from the Covid-19 pandemic. And now, with cotton prices reaching record-breaking levels, companies are once again being forced to reconsider the ways in which they operate.

Mark Ix, director of marketing, North America at Advance Denim, calls it the perfect storm. “Rising prices adds a layer of difficulty in an already challenging market,” he told Rivet.

Retail intelligence platform Edited identified denim as being the category most affected by the price inflation, as cotton makes up over 90 percent of the raw materials used in production. As a result, Kontoor Brands, the parent of Wrangler and Lee, has seen its stock fall 6 percent as investors worry over margin erosion.

Gary You, House of Gold’s director of strategy and product development, said his job has changed drastically as a result of the constant fluctuation, noting that he feels “more like a stock/commodities broker than a denim person.”

Cotton is traded globally and the price is shifting every day. After trading near $1.03 per pound for much of September, the A Index, an average of global cotton prices, dipped below $1.00 on Sept. 21. Since then, it has climbed to levels as high as $1.20. According to the U.S. Department of Agriculture (USDA), U.S. spot cotton prices averaged $1.05 cents per pound for the week ended Oct. 7, making it the highest weekly average since the week ended Sept. 15, 2011, when the average was $1.08.

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“It would be understandable if the cotton price was derived from simple supply and demand, but in today’s case we see speculation creating a more dramatic rise in cotton and certainly upsetting the traditional market dynamics,” You said.

And it’s not just cotton that’s experiencing unprecedented inflation. Ix noted that the cost of dyes is up 80 percent, and all other costs are similarly “out of control.” In response to the surging prices, the China-based denim mill negotiates rates with suppliers on current order positions to keep costs low. However, with each new order, the mill gets quotes from spinning mills based on the current cotton prices.

A price increase of this scope is especially unsustainable for larger brands whose sizable orders make them most affected by even the slightest increase. In a Q3 2021 earnings call, Levi Strauss & Co. president and CEO Chip Bergh explained that the team is working closely with brand partners to make purchases at the optimal time for both parties.

“We have negotiated most of our product costs through the first half of 2022 at very low single-digit inflation,” Bergh said during the call. “And for the second half, we are anticipating a mid-single-digit increase in cost of goods sold (COGS), which we will offset with pricing actions we’ve already taken.” He added that he has a plan in the event that prices increase further—and that plan is to cross that bridge when it gets there. “If the inflation issues and/or cotton and/or cost of goods gets worse than what we’ve got built into our model right now, we’ll figure out where and how to do that,” he said.

However, Ix explained that anticipating a dip in pricing is especially challenging in the current climate.

“It is important to understand that in the post-Covid world, all inputs are in an inflationary mode. Add to this the supply chain disruption and it makes market timing of purchases very difficult, if not impossible,” he said.

But Levi’s 168-year track record indicates it’s more than capable of making it through uncertain times. Despite its size, the brand remains nimble—and its quick acting at the start of the pandemic is what helped it emerge from the year stronger than ever. During the early days of the pandemic, Levi’s re-fashioned stores into mini distribution centers, allowing the brand to ship from retail locations. Accompanied by the launch of curbside pickup, BOPIS and virtual stylist appointment scheduling, the quick and strategic pivot helped the company remain engaged with consumers during a time when many retailers were reporting a major disconnect.

In fact, the brand was able to reduce its markdowns and increase pricing by about 5 percent in Q2 across all geographies and channels, which accounted for a gross margin increase of about one point. Harmit Singh, Levi Strauss & Co. executive vice president and CFO, explained that it’s best to increase pricing when the company is doing well—not when it’s in need of a win.

Other brands have followed suit and slowed discounting, and as a result may be able to indirectly offset cotton’s price increase. Guess and Lee have announced a reduction in promotions to maintain the integrity of the brands and benefit their bottom lines.

Further down the supply chain, mills may be able to compensate for cotton’s increased pricing with strategic pivots. For Advance Denim, which endured a cotton price surge more than decade ago, the solution involved tapping into lower-cost fibers.

“In 2010, we had a spike in cotton prices that lead to the development of styles with large percentages of polyester or rayon to hedge against the high cotton price. It really ushered in tri-blends as the new normal in value denim styles,” he said, adding that today’s challenges could dampen the strategy. “The difference today is that there are inflationary pressures on all inputs, so there might not be as much relief from adding rayon or poly.”

Incorporating lower-cost fibers may also be a step backward in terms of sustainability. Cotton—specifically organic—is a common choice for companies looking to reduce their environmental impact.

Despite the cost fluctuation, denim may still come out on top—if companies continue to prioritize sustainability. According to a 2020 study organized by trend forecasting company WGSN, 84 percent of respondents aged 18-25 are willing to spend more for sustainable products.

According to retail intelligence platform Edited, the rise in material costs has actually unveiled opportunities for enhanced sustainability, as cotton prices are now more aligned with the cost of environmentally friendlier fibers like hemp, Lyocell and Tencel. As a result, denim consultant Salli Deighton noted that denim’s long dependence on cotton may be coming to an end.

“Whilst I completely understand the situation with cotton prices rocketing by almost a third, it really has shown the need to rethink our reliance on cotton,” she said. “For quite a few years now, many mills have been looking into blends with recycled and alternative fibers which will reduce some of the impact of the cotton increases.”

Mohsin Sajid, owner and creative director at denim brand Endrime, agrees. “The tipping point has been with us for some time. Covid-19 help encourage a generation of designers and product developers to start thinking differently,” he said.

Pakistan-based Naveena Denim Mills is one of many widening its menu of fibers, with an emphasis on hemp, Tencel and Lycra EcoMade as well as post-consumer waste and post-industrial waste. However, Aman Tata, the mill’s director, noted that cotton will always be important.

“Cotton still has a central role to play in denim fabric production,” he said. “It is impossible to replace it totally with alternatives.”