Higher cotton prices and rising labour costs in China will leave US retailers facing wholesale clothes prices this year that are up to 15 per cent higher than those in 2010, according to Fitch.
The credit rating agency said that US consumers, already confronting rising food and fuel prices, would probably face an increase in the price of apparel as retailers grapple with the first prolonged bout of cotton inflation since the 1990s.
The price rises, which will affect brands ranging from North Face to Levi’s, are signalling the end of a two-decade era in which clothing costs declined as western manufacturers shifted more production to low-cost emerging markets.
Monica Aggarwal, a senior director at Fitch, told the Financial Times that by the final quarter of this year US retailers would face wholesale clothes prices that were 10 to 15 per cent higher than at the end of 2010.
Retailers and manufacturers have been agonising over passing increased costs to consumers. Ms Aggarwal said many were in uncharted territory “given a lack of data on apparel inflation for nearly two decades and a lack of data on how consumers respond to a rise in prices”.
Mike Ullman, chief executive of JC Penney, a mid-range department store that sells brands including Liz Claiborne and Dockers, predicted last week that clothing prices across the sector would rise by between 5 and 20 per cent in the second half of this year alone.
Levi Strauss, whose Levi’s jeans are often 90 per cent cotton, warned this month of “double-digit price increases”. It said the response of consumers was “unpredictable” and warned that the increases could reduce sales volumes.
Cotton prices have risen 120 per cent in the past year, peaking above $2 per pound in early March as growing demand from emerging market consumers has pushed up commodity prices, and this in turn is stoking inflation in the west. Wage bills are also rising in Chinese apparel factories as workers demand more compensation to cope with higher living costs and secure middle-class comforts.
Ms Aggarwal predicted that higher costs would reduce gross profit margins by 0.3 to 0.5 per cent at US clothes retailers, where they typically stand at between 38 and 40 per cent.
VF Corporation, whose brands include North Face outdoor wear and Lee denim, said in February that its costs would rise 4 per cent in the first half of this year and 10 per cent in the second half. It said it would raise prices, but warned that they “will not entirely offset the pressure from higher product costs”.
Ms Aggarwal said companies would hesitate to raise prices of basic apparel such as T-shirts because consumers have expectations about what they should cost, but it would be easier to for more fashionable items.
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