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New Sourcing Survey: Expect Rising Costs and Narrowing Margins

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A new survey indicates that sourcing executives should expect flat average unit costs to rise and, in 2014, will have to contend with rapidly narrowing gross margins.

The survey, “Sourcing Survey Volume 3: The Merch Margin Environment Remains Perilous,” issued by the Cowen Group, questioned fifteen top sourcing executives in the apparel industry. Of the respondents, 67 percent believe that “unit costs may rise at a low to mid-single digit rate” in the second-half of 2014. The increasing costs of labor, according to the survey, will be the principal culprit behind the uptick in freight-on-board (FOB) costs and average unit costs. In 2014, the minimum wage is set to skyrocket 17 percent in Vietnam, nearly 80 percent in Bangladesh and jump at a “double-digit pace” in China.

Additionally, significant price pressure is coming from the irrepressible march of fast-fashion and the emerging dominance of e-commerce retailers like Amazon, which continues to set its sights on apparel sales. Retailers like H&M and Forever 21 have “altered the way the consumer perceives and shops for value,” compelling others in the same competitive space to follow suit and find ways to lowers prices, cut costs and streamline their supply chains. Amazon has become too powerful to ignore; the Cowen Group estimates that it is poised to generate $8 billion in apparel sales. Also, according to the Cowen Consumer Tracker, the number of consumers who shop Amazon specifically for apparel has grown approximately 40 percent.

The downward price pressures exerted by both Amazon and fast-fashion retailers translates into winnowing gross margins. The Cowen Group calculates an adjusted gross margin, which “eliminates rent and licensing income from gross profit,” for the purpose of devising a metric that applies comparably across diverse retail outfits. The Cowen Group calls this metric the “merchandise margin.” Generally, the merchandise margins in the apparel retail industry have declined significantly and the current data suggests a continuation of this trend through 2014.

The sum result of these worrisome tends is that retail earnings per share are likely to take a big hit in 2014 given the “likelihood of higher promotions,” the “high probability of a difficult unit cost environment” and “lack of a relevant traffic driving fashion trend.”

The Cowen Group, Inc., is a financial services firm that provides alternative investment management, investment banking, research, and sales and trading services. It is headquartered in New York City.

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