After the recession debacle, the surge in cotton prices is now posing a significant threat to the apparel industry. Retailers and consumers alike are feeling the impact of the escalating cotton prices.

Over the past year, cotton prices have surged by 55%, leading to a corresponding increase in other costs related to cotton. The apparel industry, unable to escape the repercussions, is now grappling with the consequences. Retailers, still recovering from the scars of the recession, are facing renewed turmoil. Industry analysts anticipate that retailers may transfer some of this pressure to apparel shoppers, resulting in higher prices for consumers, particularly during the festive season.

The driving force behind the price hike in cotton is multifaceted. Cotton prices have reached a 15-year high since 1995, influenced by natural disasters in major cotton-producing countries and a growing demand for cotton. The market is experiencing a bullish trend, with China being the largest producer and importer of cotton. Heavy rains in China have contributed to a global shortage. India, the second-largest producer, has imposed a ban on cotton exports, exacerbating global supply issues. Export quotas in Brazil have yielded similar outcomes. Pakistan, the fourth-largest cotton producer, has been severely impacted by floods, while Russia, another top producer, is grappling with drought and fires. Additionally, there is an upward trend in global consumption, further fueling the surge in cotton prices.

While increasing prices may benefit farmers, retailers and consumers are under increasing pressure. Michael Jeffries, Chief Executive of Abercrombie & Fitch Co., acknowledges, "We are facing a very serious problem in terms of increased cotton prices" (Source: The Wall Street Journal). The rising cost of cotton adds an additional burden to retailers still recovering from the recession, making it challenging to restore profit margins that experienced a markdown during the recent economic turmoil. Apparel retailers may attempt to offset the price increase by marginally raising the prices of their garments. Discount fashion retailers, with their already slim profit margins, will be more significantly affected and may need to maintain their low prices by selling larger quantities.

The plausible effects of rising cotton prices have prompted apparel makers to consider alternative artificial fibers. Retailers are working to keep entry-level prices accessible while safeguarding profit margins. Recognizing that customers may limit their shopping budgets, apparel retailers are capping the prices of entry-level products and planning to shift the price increase to premium apparel.

Customers might also consider trimming their spending spree. When the apparel shoppers realize that discount sales are hard to find, they will be prepared to shell out more money for their apparel requirements. Or, they might seek substitute options. They may go in for purchasing apparels made from other synthetic fibres, as a replacement of cotton apparels. A rise is fuel prices are also speculated, which is likely to impact the price of petroleum based synthetic materials.

Retailers like Gildan Activewear Inc that manufacture all cotton products like socks and T-shirts will have less room in their cost structure. For companies like Hanesbrands Inc, cotton constitutes 10% of its cost price. They will have to increase prices by 2-3% to counterbalance the rising costs. On the other hand, manufacturers like Warnaco Group Inc, which uses a blend of man made fibres (MMF), will face less pressure.


A successful apparel manufacturer should consider the customer, employees, and the suppliers. Time will tell one way or the other.


References:


Investmentu.com

Bloomberg.com

Nasdaq.com

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