Richard Lowe: The days of ever-cheaper clothing could be numbered
Raw materials account for around half the total cost of clothing, and the price of cotton has risen 50 per cent in the past year, to its highest level in 14 years
Wednesday 15 September 2010
Casual observers will have some fun with the more eccentric designs paraded at London Fashion Week, starting on Friday, but retail buyers will be watching as closely as ever. Their challenge is to deliver high-end style to consumers at high-street prices.
However, after a decade of deflation, which has seen the supermarkets and value retailers such as Primark and New Look lowering prices, the cost of clothing is now likely to rise. A number of factors are conspiring to push up prices on the high street.
Raw materials account for around half the total cost of clothing with cotton accounting for 50 to 70 per cent of this. According to Barclays Capital, the price of cotton has risen around 50 per cent during the past year and is trading at its highest level in 14 years. This is a result of a decline in cotton prices in recent years which made it a less attractive commodity to plant for farmers.
While high prices are an incentive to farmers to plant more now, supply will remain tight and will continue to be an issue into next year. With designers and retailers working with six- to eight-month lead times (from the time a retailer orders goods to when the product hits the rails), the fashions inspired by this week's shows will be the first to be affected by recent rises in the cost of cotton.
Coupled with this, the weakness of sterling has made buying clothes in US dollars from Asia more expensive. Until recently, retailer buyers and wholesalers have been able to offset the high costs of currency by driving harder bargains with suppliers keen to keep orders ticking over as demand from the US has trailed off. But for how much longer?
In China, the world's largest cotton supplier, producing 28 per cent of global output, manufacturing wages have increased by 14 per cent over the past year as workers strive for better terms. This will continue to constrain suppliers' leeway to negotiate deals with British retail customers.
Back home, the Government's decision to bring VAT into line with the European average from January will, for most British businesses, improve crucial cashflows, but the benefits will be offset, to some extent, by the VAT that retailers and wholesalers are required to pay for goods and services in the first place. Additional cost headwinds include the cost of shipping, which has become significantly more expensive this year.
Simply passing on higher costs, including the VAT rise, to the consumer is not straightforward. The British consumer remains price-point conscious and the psychological draw of products for sale at £9.99 and so on remains a powerful tool for retailers.
Management teams will need to assess whether, and for how long, they can afford to absorb the increases or pass them on to the customer in the form of higher price tags – or whether to look to hedge exposure with sensible risk- management strategies.
Richard Lowe is head of retail and wholesale at Barclays Corporate
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