One of the big question marks for the apparel industry in 2019 is: Will clothing prices go up?
The answer seems to lie somewhere in the tug of war between long-term deflationary trends driven by retailers abhorrence to raise prices and the ability to keep them down by low-cost imports, versus the short-term threat of tariffs on Chinese imports and volatile raw material markets.
As holiday price-cutting sales set in, retail apparel prices fell a seasonally adjusted 0.9 percent in November following two months of price hikes, according to the U.S. Bureau of Labor Statistics. Compared to year earlier, retail apparel prices were down an unadjusted 0.4 percent.
Some had associated price increases with a spike in cotton prices in June, which saw increases above $1 per pound only to level off at around a current 75 cents a pound. According to Cotton Incorporated, average import prices for cotton-dominant apparel increased 0.9 percent month-over-month in October. Year-over-year, cotton-dominant apparel import prices were 2.7 percent higher.
Glenn J. Chamandy, president and CEO of Gildan Activewear, said on a recent conference call with analysts that cotton and polyester prices have gone up during the year, as have other costs across the supply chain.
“There’s definitely pressure on fiber, there’s pressure on labor, there’s pressure on dyes, chemicals, transportation,” Chamandy said. “So inflation is a factor and I think that all that together will support price increases as we go into 2019, not just with us, but I think that’s an industry phenomenon at this point.”
In a recent report, Moody’s Investor Services said apparel companies continue to face input cost inflation from things like labor and cotton.
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“Continued increases in the cost of labor and freight will also lead to higher input costs,” Moody’s said. “After a short period of easing, currency pressures have once again become a headwind as the U.S. dollar has strengthened since February.”
Gerald W. Evans Jr., CEO at Hanesbrands Inc., said his company has instituted price increases in the 4 percent to 5 percent range in its innerwear business due to higher raw material costs.
But it’s the U.S.-China trade war and threats of stiff tariffs on the industry that poses the biggest dilemma. The uncertainty has already caused importers to make major changes to their sourcing strategies, while increases in labor and other costs in Asia and elsewhere have made it more challenging than ever to chase the cheapest needle.
“Companies have been rushing to find alternatives to Chinese manufacturing, leading to increased demand, and thus price increases for goods made in Vietnam, Bangladesh and Indonesia,” said Gail Strickler, president of global trade for Brookfield Associates. “Even if the tariffs are never put in place, we are already feeling pricing pressure in the apparel sector as a result. Chinese companies are accelerating their investments in Vietnam and elsewhere outside of China in order to provide their products without a ‘Made in China’ label. This will provide some relief, but will not be fast enough or sufficient to mitigate the damage.”
A tariff survey from the Purchasing Manager’s Index by IHS Markit revealed that U.S. manufacturers expect tariffs to push prices upward over the next two years. In the survey, conducted in second half of October, 44 percent of respondents expect tariffs and trade wars to lead to higher domestic prices for their goods in the U.S. over the next two years.
“Although input prices are expected to rise further, firms foresee greater opportunities to increase output charges to help alleviate pressures on margins,” said Siân Jones, an economist at IHS Markit, referencing feedback from many of the survey respondents.
Nicole Bivens Collinson, president of international trade and government relations at Sandler, Travis & Rosenberg, said she sees the tariffs and their threat “as a long-term, multiyear trend…I think we’re looking at a new reality and folks just have to face it. The results will be an overall rise in global prices.”
President Trump first imposed $50 billion worth of tariffs aimed at China that left the apparel industry largely unscathed. The next 10 percent tranche came in the form of an additional $200 billion in tariffs, hitting certain apparel items, some leather, and hats and handbags. Now a threatened 25 percent tariff–first set for January but postponed for 90 days–would likely hit apparel, textiles and footwear.
Rick Helfenbein, president and CEO of the American Apparel & Footwear Association, said at a recent talk on the politics of tariffs and trade, “Prices will still go up because people are scared. And when people are scared they leave [places they’re sourcing, like China]. And when they leave, prices go up, so I think there’s no turning around at this point.”
Harold M. Grunfeld, partner at customs and trade law firm Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, said at the same roundtable, “I don’t think that the retailers, for all of the leverage that they have, will be able to avoid big price increases. They may force some of it back to their vendors—and that would be part of the natural process—and the vendors will try to force some of it back to their factories. But at the end of the day, there will be increased prices.”