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Sourcing Summit: Here’s Why Costs Will Go Up, Up and Away

There’s still much uncertainty in the world as the coronavirus marches on to what appears to be a second wave of infections, but one thing seems certain and that’s an expected rise in costs.

Signs pointing to increased costs are everywhere, from tariffs to higher labor expenses to rising shipping fees and price inflations.

Experts debated these topics Thursday at the Sourcing Journal Summit 2020 during the panel discussion on “Economic Outlook: The State of Prices, Spending and Market Conditions.”

How we got to where we are now

The coronavirus pandemic has crippled apparel, as millions of consumers are now working from home and largely choosing to buy loungewear and comfy staples, if any clothing at all.

“The good news is that U.S. total apparel imports have gone up one percent in September compared with a year earlier. That’s the first increased since over a year ago,” said Chris Rogers, research director at Panjiva, the supply chain research unit of S&P Global Market Intelligence. Working from home evolved what people are buying, and imports have shifted towards leisure wear items such as tank tops,” he added.

Rogers was surprise that even kids clothing was down in the second quarter and hadn’t recovered by the third quarter. That may have been due to an uneven back-to-school season, with companies debating whether to delay bringing in goods, he said. Textiles firms have also shifted gears to home goods instead of apparel.

“Blankets and drapes are doing better than sweaters and capes,” Rogers quipped.

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Economic recovery could see inflation ahead

Sarah House, director, senior economist, Wells Fargo Securities, expects a slow second-half recovery, despite a robust but short-lived uptick earlier this year.

“Once the economy began to reopen, that led to a pretty solid bounce back, up 30 percent on an annualized rate. That was a huge bounce back, but it doesn’t get us to before Covid,” House said.

“Where we go from here depends on how comfortable consumers are with moving about with the virus,” she added. “There’s no solution for that”.

The fiscal stimulus and additional unemployment benefit have since faded to the background, and additional support doesn’t seem to be forthcoming. House said whatever gains the economy makes will be based on how businesses adjust to the new environment.

Compounding the problem is what House calls a bifurcated recession and recovery. Business that rely on face-to-face contact and can’t enforce social distance tend to pay the lowest wages and have laid off millions. Higher-paying sectors have better withstood the economic turmoil and cut fewer jobs, with many employed professionals able to seamlessly transition to working from home. The types of jobs consumers have are “impacting the types of things consumers are buying [and] how much they are willing to spend,” she said.

While Covid-19 was a severe shock to the economy, “what matters as we look forward is how quickly can we recover,” House noted. The Federal Reserve moved quickly to inject liquidity into the financial system and unlike 2008’s Great Recession, households this time weren’t over-leveraged. “Household contraction was in good shape heading into this,” House said, noting that “many households have money to spend, they just choose not to spend it.”

Much of the near-term economic outlook hinges on the arrival of a vaccine or therapeutic advancements and how consumers respond, House said, adding that pharmaceuticals capable of controlling Covid-19 are likely to encourage a return to restaurants, shopping malls, airports and hotel resorts.

House expects consumers will acclimate to inflation. “We don’t have many disinflationary forces. Higher labor costs overseas will raise costs for apparel,” she said. Moreover, the Fed has changed the way it looks at inflation, stating that it will let inflation go higher. “Consumers will get used to seeing prices go up in general,” she noted.

How companies can create demand

The possibility that the apparel sector could see years of stagflation isn’t that far-fetched, according to Kearney partner Michael Brown.

“That’s hard to disagree with [following] years of price deflation, which gave rise to off-price and fragmentation in the market. Casualization is in every element in our life, and that’s driving sales of apparel down,” Brown said, explaining that those trends will continue barring some unforeseen development.

“The market lacks innovation,” he said, noting that “companies can stem the tide as they change their engagement model with consumers.” Nike and Lululemon, for example, operate “platforms that do a lot more than just selling to consumers. They’re engaging them too,” Brown said.

Fashion companies have their work cut out for them at a time when shoppers need less clothing and shoes.

“The bounce back for apparel firms will be when [they] figure out how to address [consumers’ lifestyle] changes and give them what they need,” Brown said.

He also sees opportunities for online startups, either because they’ll need to open stores or find ways to differentiate from competitors.

What about tariffs and the election?

Rogers expects to “see more of the same” if President Trump is re-elected to a second term.

Vietnam has found itself in the Trump administration’s crosshairs and could find itself embroiled in a trade war. Rogers pointed out that Malaysia could end up on the short list too, as well as any country with a sizeable trade deficit.

However, a win by Democratic challenger Joe Biden wouldn’t clear the way for an easy pass on trade. “A Biden presidency could be less hostile,” Rogers said, noting that the industry shouldn’t expect any changes to trade policy. “He has talked about jobs and re-shoring [of production]. He has said he wants to sort out jobs at home before sorting out trade deals overseas.”

Supply chain issues and related costs

Rogers expects oil prices to continue to stay down, while there’s some uncertainty over the price of weather-dependent cotton. However, apparel firms should expect to see higher wages on the labor front. “Labor costs are way too low in many labor markets [and the] costs will go up. It could go up quite a lot,” Rogers said, though a wage hike in Bangladesh would still be far more attractive that the minimum U.S. wage.

The sustainability movement remains a big unknown, driving up supply-chain costs as companies overhaul products and processes with the environment in mind.

“Costs have to go up because if you want to do the right thing, you have to buy the right thing,” Rogers said.

Higher shipping costs will eventually getting passed on to consumers, said Rogers. That was also echoed by Brown who noted that “last-mile delivery has decimated every retailer’s gross margin. The additional shipping costs this Christmas will be a tremendous hit to their gross margin.” Retailer need to adjust their overall operating model to offset the added costs, he said, or reduce margin-draining e-commerce returns.

Another areas where companies will see an increase in spending will be on supply-chain technology. Companies that struggled to pinpoint their goods at the start of Covid-19 are now spending on data science to better track operations, Rogers said.

“Having a lot of data helps you make the right decisions,” he noted.

All the session’s from this year’s Sourcing Journal Summit, R/Evolution, are available on-demand. Follow this link for more information on how to watch this session and all others from the event.