Australian clothing brands are expected to come under increased pressure
in 2011, as garment costs rise due to record-high cotton prices and wage increases in China. IBISWorld industry analyst Rachel Lohan crunches the numbers – and the implications for local ragtraders.
Perhaps it was a sign of the times, but there was no denying the $1546 cotton t-shirt had pulling power, attracting column inches in leading fashion magazines and premium stockists such as Net-A-Porter. This was the asking price last year for an olive hued, distressed t-shirt from French It-designer Christophe Decarnin of Balmain.
With cotton prices shooting up in recent times due to tighter supply conditions and increased demand, perhaps Monsieur Decarnin was on to something.
Cotton prices have more than doubled over the past 12 months to their highest levels in the 141-year history of the New York Cotton Exchange, to reach nearly US$2 per pound. According to the International Cotton Advisory Committee, the Cotlook A Index increased by 25.5 cents to 197.5 cents per pound between December 31, 2010 and January 28, 2011.
There are several factors behind this rise – and it doesn’t come down to sheer fashionability. Demand for cotton has increased significantly over the past year as the world has started to recover from the impact of the global financial crisis. China’s demand for cotton imports over 2010 jumped by 86 per cent year on year.
Cotton crop damage in countries such as Australia, Pakistan and China (due to major floods) and a cap of cotton exports from the world’s second largest supplier, India, is further restricting global supply and pushing prices higher.
So what is the impact of this on fashion brands and retailers? Higher cotton prices are anticipated to increase the average price of a garment by 30 per cent. Low-cost clothing manufacturers are most likely to experience difficulties with rising raw material costs.
For example, global retail giant H&M attributed a 10 per cent decrease in net profit to rising input costs, highlighting the recent increase in cotton prices.
This is not a single battle front either. In addition to surging cotton prices, wage pressures across the clothing manufacturing industry in China are also pushing up production prices.
IBISWorld estimates average wages in the apparel manufacturing industry have increased 42 per cent since 2006. China has experienced growing wage pressures over the past five years as its supply of cheap labour has started to fall due to steady changes in population demographics, inflation and the rising cost of living.
As China’s economy has grown in recent times, so too has the wealth of many residents, and they are emerging as consumers rather than low-wage apparel producers.
These higher wage costs are estimated to add a further 20 per cent to the cost of garments. For example, China-based manufacturer Unitedtex, which produces garments for US retail giant GAP, reportedly plans to increase prices by between five and 30 per cent for products available this April.
Mid-market retailers such as GAP are known for producing mass cotton basics such as t-shirts, chinos and smart jackets. Couple the rising cost of fabric with wage increases, and the year ahead could have a substantial impact on margins.
US department stores like JC Penney and Macy’s are already attempting to cut costs by negotiating with suppliers and seeking cheaper areas for production.
Australian retailers will also come under growing pressure to increase prices in order to protect profit margins. As yet, retailers have resisted any pressure to increase prices.
Rather, prices have actually fallen as retailers turn to discounting as a way to entice consumers.
The consumer price index for clothing and footwear fell to 106.9 in the December 2010 quarter, down by 4.8 per cent from 112.3 a year earlier.
Many retailers went against the grain last year, holding substantial sales in the lead up to Christmas and continuing to slash prices with very generous post-Christmas bargain bonanzas. In other words, consumers have come to expect discounts, particularly within the current retail climate.
Australian consumers have remained cautious over the post-global financial crisis period and spending has remained flat in recent months. The latest Australian Bureau of Statistics data suggests retail trade increased by a marginal 0.2 per cent in seasonally adjusted terms in December 2010. Under the current trading conditions it would be difficult for retailers to increase prices.
With retailers across the country now affected by natural disasters, already frugal customers will be tightening purse strings in the wake of flood levies and increased costs of essential food items.
The high Australian dollar may help protect margins at present; however, as cotton prices and wage costs continue to rise, domestic retailers will come under greater pressure to protect margins.
This may involve relocating manufacturing operations or sourcing goods from other, more competitive, low-cost countries such as Vietnam, Pakistan and India; and as a last resort, increasing the price of goods on shop floors nationally.
The cost of Chinese workers is around 20 per cent higher than workers in India and Sri Lanka, 40 per cent higher than in Indonesia, 100 per cent higher than in Pakistan, and 180 per cent greater than in Bangladesh.
The danger, though, is that some regions are not as adept as China has become, and quality and logistical problems could develop. China continues to be the biggest player by far to the US and European retailers, as well as an important sourcing destination for Australian fashion brands and chain stores.
As it currently stands, the country has a stronghold on the Australian market. The majority of clothing sold in Australia is sourced from Chinese-based manufacturers with, for example, over 70 per cent of men’s apparel imported from this region.
Compare this with a broader outlook of the two countries’ trading ties. China is the 18th largest export market for Australian clothing players. It accounts for less than one per cent of total clothing exports, and this has been consistent over the last three years to 2009/10.