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Apparel Makers Face Profit Squeeze as Prices Drop and Labor Costs Rise

Low inflation might be a good thing for economic growth, but it could result in another round of elimination for marginal apparel players who find it increasingly difficult to turn a profit.

The March consumer price index rose by only 1.5%, its smallest monthly increase in eight months, according to just-released U.S. government data. Much of the tempering of inflation was brought about by declines at the gas pump and stable prices at grocery stores. The core rate, which excludes food and energy, rose by 1.9%.

Economy-watchers applauded the fact that overall inflation seems under control, and that the Fed’s monetary policy has been effective, paving the way for steady. albeit slow,  economic growth.

For the soft goods industry, however, the news is a bit more complicated. Apparel and footwear prices rose by a collective rate of only .8% compared to March of 2013, well below the overall inflation rate.

Shoes seem to be faring quite a bit better than apparel. Footwear prices shot up 3.8% in March compared to a year ago, its lowest increase in seven months, but still well above that of clothing. Men’s footwear enjoyed the biggest increase (4.8%), while children’s shoe prices rose by only 3%.

However, apparel makers, who have all but given up trying to raise prices in the highly competitive retail environment, were dealt the biggest blow, as apparel price index remained essentially flat compared to a year ago, their smallest monthly increase in almost two years.

Prices for children’s apparel, particularly in the girl’s category, took the biggest hit. Infants’ and children’s clothing prices fell by 1.9%, with girls’ apparel prices plunging 7.1%. Womenswear prices rose by 1.7%, and menswear gained 1.6%.

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Even more sobering than the hard government data is the fact that it might actually be sugarcoating reality. The data collection is done via a comprehensive monthly survey in which stores report prices on individual items in a variety of product categories. However, it fails to take into account coupons that discount entire transactions, buy-one-get-one and other volume discounts, loyalty programs, and cash rebates on credit card purchases — all of which end up impacting the ultimate price paid for a given item.

Tremendous downward price pressure is coming from the all-powerful consumer, who is increasingly cautious with her hard-earned money, less optimistic about the economy and job market of late, and demanding lower prices and increased value at every turn. Concurrently, labor shortages in China and other countries are resulting in rising manufacturing costs.

So as time goes on, and these forces converge, it will become increasingly difficult for smaller players without a strong brand to sustain profitability.

From the big players, we can expect more belt tightening in the way of shedding under-performing businesses, cutting headcount, and slashing marketing budgets.