Cotton prices will stabilize
Several factors combined to push up cotton prices this year, from China’s reserve program to Pakistan’s pest problems to India’s artificial shortage, but Cotton Incorporated senior economist Jon Devine said the outlook for the year ahead is positive.
“We only get one harvest per year, so that means when we’re in the summer months we’re completely dependent on what’s available and where at that time. What we saw this summer was some tightness emerge in terms of warehouses, particularly in India, which led to some cotton price increases not only in India but internationally,” he explained.
Luckily, however, the upcoming harvest in the world’s major cotton-producing countries have not been affected by any extreme weather conditions. According to Devine, Pakistan is expected to have a good crop, India should produce about the same as last year and the U.S. is anticipating a 25 percent boost, all of which should help to ease prices.
Trump could affect the currency market
Jing Wang, senior research associate at Fung Global Retail & Technology, said currency fluctuations will continue to impact the cost of goods in 2017. But Clothesource chief Mike Flanagan wagered that Republican presidential candidate Donald Trump will influence currency markets more than China’s yuan.
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“In about six weeks’ time it’s very possible that America might have a president elect who has got a genuinely revolutionary and quite extraordinary ambition for what he wants to do in the U.S.,” Flanagan said. “I think that freaks the currency markets and the interest rate markets astonishingly, and that’s exactly what we saw when Britain delivered a Brexit decision on June 23 and all hell broke loose.”
But, he pointed out, while Britain’s share of global trade is relatively unimportant, the U.S. influence is massive.
“I think you have to factor in the possibility that in six weeks’ time we’re going to see absolute earthquakes in currency markets,” he said.
Retail margins under even more pressure
Katie Smith, senior fashion and retail analyst at Edited, revealed that 33 percent of the U.S. apparel market today is discounted by an average of 34 percent, slashing prices in-season in an effort to entice consumers into their stores or onto their websites. In addition, the likes of H&M sells 69 percent of its wares for less than $20.
“Margins are being squeezed in every single direction—currency uncertainty, cost of production has increased, e-commerce and consumers being price savvy, demanding cost effectiveness that retailers really have to deliver,” Smith said.
She suggested retailers take a leaf out of Zara’s playbook and train people to purchase at full price, rather than wait for one of the retailer’s semi-annual sales, or embrace trends that optimize margin, like soft-cup bralettes that are cheaper to manufacture than other intimate apparel.
Promotions aren’t going away
According to Wang, not only will retailers be competing on price and discounts, but also on novelty.
“Whether that novelty is going to be games or activities or experience-driven, anything that will engage the customer, that’s where the promotion battlefield will be,” she said, citing Bloomingdale’s promotional text alerts and Kmart’s “Freebie Saturdays” event as good drivers of foot traffic.
Brexit: nothing to see here—yet
Flanagan described Britain’s vote to leave the European Union as the only big example of a small-scale nationalism campaign that worked, but said it will take at least three years for the break-up to actually materialize.
“The reason they [the British] voted to leave is quite unusual and misunderstood. It’s not just about immigration—it’s specifically about the privileging of certain European immigrants, way above the level most other immigrants are privileged, and that’s cause for resentment,” he said, noting that it also had to do with increased regulations relating to climate change laws. “Anyone who thinks Britain voting for Brexit is the beginning of the collapse of trade deals is wrong.”
Britain is now Europe’s largest importer of apparel, he said, so the country will likely form free trade agreements with most major manufacturing nations. But that process can’t begin until the U.K. leaves, which won’t be until at least 2019.
And then: “Life for people like me, who handles and imports garments from nearby Europe, will need to provide more documentation which is a nuisance and takes forever to fill in,” Flanagan said.
Amazon: cause for concern
“I think everyone in the retail industry is kind of quaking in their boots at the thought of what Amazon is bringing to the industry and it’s exciting! Why wouldn’t they get involved in [private-label] apparel?” Smith said. “They’re certainly good enough for the battle.”
Wang agreed. “As a pure-play e-tailer, Amazon has the advantage of the customer data of their preference feeding into their products in real time. That’s a huge advantage over traditional department stores and everybody else,” she said, but noted that marketing and merchandising on Amazon Fashion—where it already sells branded merchandise such as Calvin Klein and DKNY—will prove challenging. “How do they make their algorithm work in their favor so they can promote their own brands?”
Look to Primark for offline inspiration
It’s been a year since Primark, the budget Irish chain owned by Associated British Foods, officially landed on U.S. shores, but it remains to be seen whether the retailer can replicate its overseas success here. However, Flanagan said there’s a lot that U.S. retailers can learn from the Irish import.
“If you look at Primark’s two stores on Oxford Street in London, the place is awash with not just millennials but 40-year-olds and 50-year-olds who’ve got money in their pockets because they’re better off these days but they don’t want to spend money when they don’t have to,” he said, pointing out that it’s completely unfocused demographically. “What it’s focusing on is running a store that makes people want to buy stuff. And the thing that gets you when you stand outside the store on Oxford Street, it’s the number of people coming out, staggering with full shopping bags.”