As the cost of cotton more than doubled in price over the past year, clothing manufacturers have been forced to raise prices. Even the price of synthetic fabrics has gone up about 50 percent because of the demand for alternatives to cotton. As a result, clothing prices will rise about 10 percent in the coming months with a larger increase in prices following in the second half of the year.
Cotton prices rose to a 150-year high, hitting $1.90 per pound this month. That is more than double the price of a year ago. Cotton prices began to rise in August 2010 after bad weather reduced harvests in the major cotton producing countries including China, Australia, Pakistan and the U.S. Restrictions on exports from India, the world’s second-largest cotton exporter behind China, also contributes to cotton shortages. And of course, worldwide demand for cotton is up as the economy gets better.
Raw materials account for 25 to 50 percent of the cost of producing a garment. Labor ranges from 20 to 40 percent, depending on garment complexity. On the production side, many of the Chinese factories that shut down temporarily because of the recession are not yet producing to capacity. As they ramp up, they are finding they must pay workers more because of labor shortages.
Until now, retailers have been shifting production to lower-cost regions like Vietnam, and using different materials to absorb cost increases. But they are reaching the limit, and small retailers will be hard pressed not to increase prices in order to make a profit. The Gap, JC Penney and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs.
Cotton futures in China have surged over 70 percent this year. Prices were at a record before the global economy started emerging from recession, which allowed consumers to spend more on clothes. The U.S. Department of Agriculture reports the production of cotton in China, the world’s largest user and importer, is forecast to fall behind demand for a 12th year, resulting in its smallest cotton stockpile since 1995.
Actually, clothing prices had been dropping for a decade because of low inflation and cheap overseas labor. During the recession, retailers and clothing manufacturers cut frills and experimented with fabric blends to keep prices down.
As the world economy recovers and the demand for goods rises, the increased demand for raw materials and labor is causing prices to rise, impacting clothing retailers and manufacturers as they run out of ways to keep expenses down. For example, a wrinkle-free men’s dress shirt at Brooks Brothers just went up to $88 from $79.50. Manufacturers like Levi Strauss and Wrangler Jeans plan increases. All brands will be increasing in price, and the higher costs will also affect how clothing is made. Clothing manufacturers are using more synthetics like rayon. They are designing jeans with fewer beads and other ornamentation. Shoppers will also have fewer choices in color.
As prices rise, retailers are wondering if the consumer demand that provided strong holiday sales will last. The fear is that higher prices will slow demand. Stores that cater to low and middle income shoppers will have the most difficult time passing along price increases. Mom and pop stores are most vulnerable because they don’t have the power to negotiate better prices by buying in volume.
Clothing manufacturers are bracing for the worst and attempting to find creative solutions for the cotton shortage problem. On the heels of the biggest financial meltdown of our time, and during what appears to be a weak economic recovery, clothing manufacturers face a dual challenge in the high cost of raw materials and increasing costs of labor.
