Marks and Spencer chief executive Marc Bolland was in combative mood on Wednesday, insisting the UK retailer would hold the line on margins despite higher commodity costs and fragile consumer sentiment.

Increased cotton prices were having less of an impact on M&S than on the cheaper clothing retailers, he maintained. “We are trying to mitigate [the cost increases] by managing the supply base and getting efficiencies,” he said.

But his words highlight the dilemmas facing the global clothing industry as rising input costs – including record cotton prices– test the efficiency of supply chains across the retail sector.

Companies are agonising over how much – if any – of the increased cost they can pass on to their hard-pressed customers who have grown used to low-priced garments. They are also looking at a variety of strategies for squeezing more value out of their suppliers.

Many retailers are already placing orders earlier with suppliers to secure lower prices.

Gap, the biggest US fashion retailer, says it is making more long-term orders at a fixed price to even out costs. It has directed more orders to countries where it can benefit from free trade agreements to lower its cost of doing business.

Gap has also been experimenting with different fabric mixes at its Old Navy stores, where it is using more rayon and modal (a form of cellulose fibre) in some of its cotton knits. The company is offering more linen in some of its dresses.

Other retailers are also experimenting with lower-cost materials, including man-made fibres such as viscose, as a substitute for cotton. However, moves towards using more man-made fibres have already raised the price of synthetics.

UK discount fashion chain Primark has been absorbing the rising cost of cotton, which is eating into margins. Primark says it is determined to retain price leadership in its market, although people familiar with its business say they cannot rule out price increases.

Lord Wolfson, chief executive of Next, the UK fashion retailer, says prices in its shops have risen by about 8 per cent this season, yet says it would have been 18 per cent but for measures such as earlier ordering. “We have to be a little bit braver,” he says.

It is not just the rising cotton price that is testing retailers’ business models. Higher labour costs in China have ushered in “a new era in sourcing with higher prices”, Li & Fung, the Hong Kong-based consumer goods sourcing company, warned last month.

“Rising cotton prices are a more temporary phenomenon because suppliers can always plant more cotton, whereas rising labour costs in Asia are more structural,” saysCaroline Gulliver, analyst at Execution Noble.

Some retailers are moving from coastal and southern regions of China in search of cheaper labour to the west and north, although some analysts believe this differential is already being whittled away. Others are leaving China altogether in favour of Bangladesh and southern India.

Inditex and Hennes & Mauritz both helped pioneer the “fast fashion” era in which the latest catwalk designs are quickly mass-produced for the high street.

The strain of rising input costs have brought their contrasting business models into sharp focus.

Spain’s Inditex stands out from most rivals by sourcing about half its clothes production close to home in Spain, Portugal and north Africa and keeping all its warehouses in Iberia. This differs from H&M, which produces 75 per cent of its products in Asia.

Until recently, Inditex appeared to be taking a gamble by foregoing the benefits of cheap Asian labour, but analysts say its strategy is paying off as the company, best known for its Zara chain, appears to be coping with rising costs better than others.

Last week, H&M announced a 30 per cent drop in first-quarter net profits, compared with a year ago, as margins declined.

That contrasted with a 14 per cent increase in net profits reported by Inditex just days earlier.

In part, the difference reflects H&M’s refusal, like Primark, to pass on higher input costs to customers in a bid to defend its “cheap chic” image.

Karl-Johan Persson, H&M chief executive, says the company is “looking for improvements all the time” in its supply chain but insists Asia remains the most competitive place to produce clothes.

He argues that, while other retailers have raised prices or cut quality, H&M would be rewarded in the long run for not doing either.

Ms Gulliver says there is so far little evidence to support Mr Persson’s theory, noting that Inditex’s like-for-like sales have been growing faster than H&M’s.

“The risk is that consumers turn out to be not that price-sensitive and H&M ends up investing in lower prices without seeing a commensurate increase in volumes.”

Reporting by Andrew Ward in Stockholm, Miles Johnson in Madrid, Andrea Felsted in London and Barney Jopson in New York

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