Where Are They Headed?
Apparel Trends For 2013
A Counselor investigation looks into the volatile nature of apparel prices and analyzes how raw materials and manufacturing costs will affect industry prices in the future.
What a difference a year makes. Distributors who flip through Edwards Garment's (asi/51752) 2013 catalog will notice that 43 styles have dropped in price, some by as much as 5%. One example is the Cotton Blend Long Sleeve Oxford Dress Shirt, which, for both men and women, has a price point 4% cheaper than last year.
"This was done because we received some price relief from our suppliers on cotton prices," says Taraynn Lloyd, the director of the Kalamazoo, MI-based company.
Lloyd is referring to the spike in cotton prices the industry saw about two years ago (which hit this market mostly in 2011 prices of supplier goods) While that price spike was relatively easy to spot ("there was a huge shortfall in cotton crops, everyone saw it coming, so they bought futures in it and depleted the supply and it doubled the cost," says Mike Pereyo, co-founder and co-CEO of OOBE (asi/75110), based in Greenville, SC), other price shifts can catch both suppliers and distributors by surprise.
In a market that's had volatile pricing issues in the past few years, thanks to rising raw materials, freight and labor costs, 2013 may bring some much needed relief to distributors. Even so, while most suppliers we talked to say they're planning on maintaining 2012 prices in the coming year, they advise caution, since they're doing so in a continually shifting market that requires constant juggling of manufacturers and suppliers to stay ahead of pricing hiccups.
For the most part, suppliers say, raw material costs have stabilized from their highs a year-and-a-half to two years ago. That environment has allowed most suppliers to keep prices lower, or at least not raise them from previous buying cycles, for 2013.
However, there are other equally influential pricing factors in place. Namely, an industry-wide push to change the location of where products are made. Some apparel manufacturers are looking for alternate countries to produce their goods, as labor costs in China become increasingly volatile and exchange rates on products coming out of China become more unfavorable.
"Definitely the prices will rise as we head through 2013 as suppliers move out of China and into other countries such as Cambodia, Vietnam, Bangladesh and Africa, searching" for cheaper production facilities, says Garry Hurvitz, founder of Ash City Worldwide (asi/37127).
In fact, manufacturing centers overseas, particularly in China and the Pacific Rim, continue to pose the biggest challenges as labor rates rise in those places that are seeing a burgeoning middle class. The real problem, suppliers say, is that manufacturing hubs that used to focus so intently on suppliers' business are no longer the apparel epicenters that they once were. In China, for example, many factories are keen to replace apparel manufacturing with electronics – manufacturing opportunities that offer factory owners higher margins and wages for employees.
"Throughout Asia, manufacturing prices are all going up," says Will Andrew, president of Richmond Hill, Ontario-based Trimark Sportswear Group Inc. (asi/92122).
Aside from a rising Chinese middle class demanding higher wages, and a push by the Chinese government to support other manufacturing areas, such as those in technology, Andrew points to additional intervening factors such as Europe's declining economy.
"They're dramatically offsetting China's demand," Andrew says. Combined with declining American demand for production, it's making manufacturing costs more uncertain. "You have some latitude if you're a bigger supplier to negotiate on pricing," Andrew says. But many suppliers are being forced to look elsewhere, a problem for companies like Trimark, whose performance apparel with unique features requires a more sophisticated manufacturing facility.
New Manufacturing Hubs
Nearly every supplier interviewed for this story that is currently manufacturing in China said their company was searching for other places to make clothing, in large part to cut production costs. Sourcing, in fact, seemed to be the industry's top priority for 2013.
"The Chinese government obviously decides what industries they want to promote and apparel has fallen off of the priority list," says Gary Schultz, president and CEO of Edwards Garment. "So there are not as many government subsidies going to apparel factories" in China. Many of "those that have been running apparel factories have closed, and those remaining are trying to offset those declining subsidies and higher labor costs by raising their prices to people like us."
In response, Edwards, like many apparel suppliers, is looking to source products elsewhere. Common outlets are Cambodia and Bangladesh and even Africa, which has been responsible for $2 billion worth of apparel products exported to the U.S., according to the American Apparel and Footwear Association. But, those countries often don't have the production infrastructure to handle sophisticated fabrics and high-performance gear. And, they can have social compliance issues – as evidenced by the recent apparel factory fire in Bangladesh that killed more than 100 workers (see page 63 for the news story).
"The Chinese government has an immense amount of infrastructure and the ability to move up the scale from manufacturing basic commodities to technology, whereas Bangladesh, Cambodia and India would have a difficult time building an infrastructure for that," says Andrew.
What those countries do offer, however, are perhaps more stable labor costs. In places like China, Andrew says, workers travel home for, say, the Chinese New Year and as many as 40% simply don't return to a factory after the holiday. "Two years ago 45% of the labor force just disappeared" after a Chinese holiday, says Andrew. "Now it's probably in the order of 25%. Naturally, the people that do come back, stand there and say, ‘That factory's going to offer me $5 more over there.' Suddenly the factories in different areas are haggling to get labor. That's what's driving labor costs, and it's having a real impact."
In places like Bangladesh those labor wars simply aren't in effect, Andrew says, mostly because there, wages are still controlled more as a minimum wage set forth by the government.
For many suppliers it makes more sense to find factories closer to home, looking to regions such as Central and South America, where labor costs are more stable and shipping is quicker. The infrastructure of those countries may still not be as sophisticated as China's, but they at least offer logistical advantages. Still, moving anywhere is a daunting task, Schultz says.
"It takes a long time. It's not something you just decide today and 90 days later you're somewhere else," he says. In today's quality-consicous and safety-sensitive market, suppliers need to make sure any factory they work with complies with safety and social manufacturing requirements.
"It oftentimes is a nine-to-12-month process," says Schultz.
But even then, moving production to reduce sewing costs can bring other production challenges and costs. A supplier may move production to South America to reduce labor costs, but the company will still likely have to order fabrics and parts (like zippers and other features) from China or Taiwan. By the time those items are purchased and shipped, they haven't saved much on time or manufacturing costs by taking production out of China.
It's for that reason that suppliers don't see apparel costs dropping next year – even while cotton and other fabric prices are, indeed, dropping – and why they're struggling to keep them the same as they were in 2012.
Stability – This Year
Despite factors like new manufacturing hubs and increased costs from China that suppliers say will impact prices in the future, the current climate actually looks relatively stable. In fact, Gildan, the largest seller of shirts in the world, says it thrived in 2012 on lower selling costs of cotton shirts. Gildan reported net earnings of $89 million for its fiscal fourth quarter ended September 30, 2012, compared with net earnings of $48.5 million during the same time period in 2011. The company partially attributed the 84% profit increase to the benefit of significantly lower cotton costs in the time period. And, Gildan is projecting those lower cotton costs to help its profits in 2013, as well.
"The projected growth in earnings in fiscal 2013 compared to the current year is based on the assumptions of lower cotton costs, which are assumed to continue to decline during the course of fiscal 2013," says Laurence Sellyn, Gildan's CFO. "We generated approximately $300 million of free cash flow in the second half of fiscal 2012 due to the recovery in our operating earnings and the declining cost of cotton in our inventories."
With these lower cotton costs, Gildan said it lowered prices on many of its cotton-based SKUs in the beginning of 2012 and will continue to do so if cotton prices fall further. Industry experts believe the cost of cotton will remain essentially flat throughout 2013, enabling suppliers to offer prices in line with 2012 or even less in some cases.
"I'd expect that the cotton market in 2013 will experience relative stability compared to the instability of the past few years," says Joseph McMillan, an apparel and cotton market analyst for RBC Capital Markets. "This should allow prices to be essentially flat. But, I'd also say that many suppliers probably have cotton inventories that would allow them to lower their apparel prices."
Suppliers warn, though, that increased labor, shipping and fuel costs will also impact the market in the years ahead, if not in 2013. "Generally the trend is that fuel and shipping only continues to go up, but not hugely enough that it would trigger us to raise our prices now," Schultz says. Most suppliers say they try to absorb continued shipping costs into existing prices, taking a hit on their margins if possible.
To combat those kinds of costs, suppliers say they're trying to get smarter with inventory in 2013 by buying greater quantities of products they know will move and reducing orders for those that likely won't. That can be tricky for suppliers fulfilling uniform orders, says Richard Lerman, president of the North American Association of Uniform Manufacturers and Distributors, based in Syosset, NY. In fact, in that category, Lerman predicts that prices will likely rise in 2013 and beyond as the impact of higher oil costs is felt throughout the industry.
For example, the cost of "rayons and polyesters are becoming more and more difficult because they're oil-based and the pricing on them has risen steadily. Who could anticipate them going down?" Lerman asks. "On the cost side, we do foresee and continue to see some increases coming out of places like China, and that's driven by shifts going on within their economy in the sense that labor costs continue to go up, driven largely by a scarcity of workers."
It's an issue the entire industry is facing, and as a result, costs have risen by as much as 5% for companies like Edwards Garment – even if their catalog doesn't reflect those changes. "And it isn't being fueled by the run-up of any of the commodities like cotton we were dealing with a couple of years ago," says Edwards' Schultz. "It's just on the basis of labor." For now, suppliers faced with rising costs are trying to absorb that in their margins.
Like other industry suppliers, Schultz says, they're being hit by a rapidly shifting manufacturing market for apparel. And, while cotton costs have been nearly cut in half from the historic highs of two years ago, apparel suppliers are watching a labor market they say will look drastically different in just a few years' time.
And ultimately, it's that operational landscape that is keeping current prices in place for this year – with a caveat. That changing manufacturing environment will lead to increased prices in the relatively near future. – E-Mail: email@example.com