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Pricing Power: Why Raw Material Costs Are Turning in Fashion’s Favor

After months of low demand and high supply, the tide looks like it’s slowly turning along the apparel and textile supply chain, from fiber and fabric manufacturers to brand wholesalers and retailers.

The result is finally some pricing power that could lead to profitability following devastating losses throughout the fashion world.

The Institute for Supply Management (ISM) Prices Index for August registered 59.5 percent, a jump of 6.3 percent compared with the July reading of 53.2 percent, indicating raw materials prices increased for the third consecutive month. The 17 industries reporting paying higher prices for raw materials in August were led by textile mills, and apparel, leather and allied products.

“Price growth reflects a power shift toward sellers, as increased costs to produce input materials are being passed on to…companies,” Timothy R. Fiore, chair of the ISM manufacturing business survey committee, said.

U.S. spot cotton prices averaged 58.37 cents per pound for the week ended Sept. 10, according to the Department of Agriculture (DOA). This was down from 58.92 per pound the prior week, but up from 55.97 cents a year earlier, DOA reported.

There is still plenty of volatility and uncertainty surrounding the economy and a jittery consumer. This comes along with global issues that affect production in myriad ways. For example, Cotton Incorporated said Monday that a U.S. ban on Xinjiang cotton may require traceability for fiber-based inputs passing through China. The sourcing cost increases associated with that process, as well as those relating to the movement of supply chains and general uncertainty, can be expected to weigh on order volumes and to have some effect on cotton consumption, Cotton Inc. said.

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The synthetic fiber Producer Price Index (PPI) dropped 0.5 percent in August from July, when it had risen 0.6 percent, Bureau of Labor Statistics (BLS) data showed. The synthetic fiber PPI was down 3.9 percent from August 2019, according to BLS.

While these key indicators seem to signal some stability and a shift in the right direction, executives feel it could take some time to get there.

Fiber makers pinched

Craig Creaturo, executive vice president and chief financial officer at yarn and fiber spinner Unifi Inc., said the polyester segment experienced a revenue decline of 46.2 percent in is fourth quarter ended June 28, with the primary factor being lower volume, including a price and sales mix decline of 16 percent.

“The average selling price decline primarily follows the year-over-year decline in polyester raw material costs,” Creaturo said.

However, CEO Edmund Ingle said, “We have actually not had a lot of pricing pressure right now.”

“People have been really, really supportive of each other in this environment,” Ingle said. “Everybody’s focused on making sure that they get the product they need, when they need it more than anything else. And we’ve been there to support them. But the pricing pressure has not been an issue right now.”

The Lenzing Group, makers of such fibers as Tencel and Modal, said last month that it faced a “historically difficult market environment” in the first half of the year, with increased pressure on prices and volumes resulting from the pandemic.

“The Covid-19 crisis has an impact on the entire textile and apparel industry and further increased the price and volume pressure on the global fiber market,” said Stefan Doboczky, CEO of the Lenzing Group.

As a countermeasure, the company said it intensified its cooperation with supply-chain partners and adjusted its production volume and sale prices to be in line with market realities. The focus on specialty fibers continued to have a positive impact.

Managing margins

For brands often caught in the middle of price crunches, the recent second quarter found them benefiting somewhat from the first-quarter chaos after the onset of Covid-19. That’s because after they canceled or curtailed production orders, they were able sit on inventory that was now available to be sold as consumers returned to stores and pumped up online sales.

“Our gross margin for the second quarter benefited from the favorable mix of business, as our international businesses were a larger portion of our total revenue versus the prior year and generally carry higher gross margins in our North American businesses,” Mike Shaffer, chief operating officer and CFO for PVH Corp, said. “Additionally, earnings in the second quarter had the benefit of expense reduction initiatives, including salary reductions, temporary furloughs and lower discretionary spending, including marketing travel, consultant and creative and design costs, as well as one-time benefits from Covid-related government payroll subsidy programs in our international jurisdictions and renovating and slowly negotiating with certain of our landlords.”

For PVH, there are still problems to encounter and overcome.

“When we think about gross margin, we expect that our second-half gross margin will be relatively flat compared to the first half as we project heavy promotional activity across the industry in order to clear inventory, particularly in the United States,” he said. “When we think about second-half expenses and when you compare it to the second quarter, we expect our expenses as a percentage of revenue to be slightly higher in the second half than in the second quarter.”

Raw Material Costs for Apparel, Textiles
Guess, which recently tapped singer and actor Michele Morrone as the new face of its men’s wear line, has become very “strategic” with pricing lately, says CEO Carlos Alberini. Courtesy

Carlos Alberini, CEO of Guess Inc., said this month that the company has been “very strategic with our pricing and in some cases if we felt that the perceived value of either the [garment] or the accessory or any product that we may be looking at, if we felt that it deserved to be at a higher price, we increased prices.”

“Frankly, we haven’t seen deceleration in demand as we did this,” Alberini said. “So, we are being careful and it all starts with the perceived values, not about ‘OK, let’s go and try to get more margin,’ it’s not like that. It’s more about how much is this worth based on what we are doing and the quality, and then based on that we set the price.”

Sourcing’s effect

Morris Goldfarb, chairman and CEO of G-III Apparel Group, said last week that raw materials prices have not been a problem, mainly due to shifting production.

“We’ve done a great job of moving a good deal of our production from China to other countries,” Goldfarb said. “Vietnam has become incredibly important. Indonesia is important. Jordan is very important for our athleisure and our denim areas of business…Our focus became the countries that were most competitive and most appropriate for producing these products. Jordan is duty free. That helped us a good deal.

“We became a dominant player in Jordan literally overnight. We’ve deployed about 10 managers from our Chinese office to live and oversee our production in Jordan and it’s worked out quite seamlessly,” Goldfarb added.

The CEO said G-III has moved handbag production from China to Vietnam and the company now produces “an incredible amount of coats in Vietnam, and that was a key solution for Chinese production.”

While many companies shifted production out of China during the U.S.-China trade war to avert high import punitive tariffs imposed by the Trump administration, rising prices in China over the longer term had begun the process of sourcing diversification, particularly to low-cost Asian suppliers, but also to closer-to-market and duty-free options in the Western Hemisphere.

Wages and prices

Last week, Cambodia’s Ministry of Labor announced that garment workers will be receiving two extra dollars per month beginning Jan. 1, bumping up the minimum wage by 1.05 percent to $192, after negotiations between the ministry, factory owners and trade unions came to an impasse. The extra $2, the ministry said, amounted to an annual “gift” from the government. Depending on their seniority in the workplace, workers may also receive compensation for rent, transportation and food that could tip their monthly earnings to between $209 and $220 a month, it added.

In September 2019, Cambodia has increased its minimum wage for textile workers by 4.4 percent to $190 per month.

Similar incremental wage increases have came to bear in recent years in countries such as Bangladesh, up 51 percent in 2019, but still make production costs relatively cheap compared to key production spots like Italy or Mexico, where wages were raised 20 percent to $6.53. This comes on the heels of a 16 percent hike that took effect in 2019.

In May, Bangladesh’s minimum wage board filed recommendations that could raise the minimum monthly wage for leather and footwear workers to $84. Last year, Vietnam raised its minimum monthly wage 5.3 percent to $125 to $180, depending on the region.

The myriad of factors led retail apparel prices to tick up a seasonally adjusted 0.6 percent in August–the third consecutive monthly increase–but were down an unadjusted 5.9 percent compared to a year earlier, the BLS reported last week in its Consumer Price Index.

Leading the price hike was men’s apparel, which was up 2 percent last month, with seasonal and lifestyle demands seeming to have an impact on category price swings. The same pattern followed in women’s wear, which posted a 0.5 percent increase in August.