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Retailers in a bind over cotton prices

Unstable raw material costs and rising wages overseas are forcing retailers to rethink their supply chains to improve efficiency and remain competitive.

Fashion brands and retailers are searching for ways to tackle inflated costs within supply chains, which have been adversely affected by volatile raw material prices and rising labour costs in manufacturing countries such as China.

The increased need to manage cost within the supply chain was the overwhelming message from representatives from every stage of the supply chain when Drapers attended The Cotton USA Supply Chain Conference, held in Prague last month.

The price of cotton has fallen from a peak of $2.40 (£1.50) per pound in late 2010, when the price tripled after a series of factors – including increasing demand from China and poor cotton crops – limited supply as demand spiked. At the time of going to press it was down to $0.95 (60p).

However, Jerry Marshall, owner of the Yiyang Company, which manages private cotton trading accounts, says this is still high by historical standards.

Despite stocks now building back up, he expects prices to remain high due to increasing demand from emerging markets, and as cotton loses ground to more profitable competing crops such as corn and soybean. “These factors are going to force the price of cotton to stay higher than it would,” says Marshall. “Cotton is still profitable but it’s the worst of the options.”

Rising labour costs in traditional manufacturing countries have further inflated supply chain costs. On average, raw cotton represents 10% of the cost of producing a garment, but when labour costs are added this raises the cost to 30%. This means that any inflation within the supply chain has an immediate effect on margins.

The rise of blends

Businesses are reluctant to pass costs on to their consumers via price increases, and many are adopting price-stable man-made fibres such as polyester “Once prices went over $1.80 (£1.14) per pound the cotton market did start to fade. All over the world people hit the brakes really hard in March and April and completely slowed down the rate of cotton usage. They started switching over to polyester because it was over a dollar a pound cheaper than cotton,” says Marshall.

However, research by Cotton Council International and Cotton Incorporated’s 2010 Global Lifestyle Monitor Survey found that fibre content was a major purchase driver for more than 50% of respondents, and many retailers are still reluctant to introduce blends and cheaper fibres into their collections in a significant way.

Nicola Panciera, head of garment materials sourcing at retailer Benetton, is opposed to using polyester blends in its clothing. “Last year I think brands panicked when cotton was in short supply and many switched to polyester. We didn’t choose to go down the route of mixing polyester with cotton because the quality isn’t the same. Benetton is recognised as being a cotton brand, and we plan to stay that way,” he says.

Lucy Shaw, responsible sourcing manager at John Lewis, says the department store chain does consider fibre mix when developing new products, but admits that because of the superior quality of cotton it can be difficult to replicate its properties with a blend or alternative fibres. “This commitment to quality has meant we have absorbed some of the increase in cost of raw material and labour in 2011, rather than pass it on to customers,” she says.

However, while retailers are hesitant about increasing entry-level prices, consultant Kurt Salmon says 50% are planning strategic increases, which are often on more expensive items.

Nicolas Thibault, business manager at French sportswear chain Intersport, says price rises are inevitable. “It’s easier to increase prices on more premium products, but consumers only want to pay so much for things like T-shirts,” he says.

Manufacturing migration

Rising labour costs in manufacturing countries such as China have led retailers to look further afield to countries such as Bangladesh and Mexico and parts of Southeast Asia and Africa. “We are seeing a slow migration away from China and businesses shifting to lower-wage Asian countries,” says Peter McGrath, chief executive of consultancy McGrath International.

“What is changing rapidly are efforts for productivity improvement. For years, solid efficiency in low-wage countries was rarely found. Today we see factories striving for improvement,” he says.

Sue Butler, director at Kurt Salmon, agrees. She says countries like Mexico and Turkey have won favour by improving their service, design and technology capabilities and are becoming known for their short lead times for the US and EU markets.

“The other place that’s quite interesting is where some of the Chinese manufactures are going. They are also looking for the next lower cost place to manufacture, often taking their workforce with them. They are looking in Bangladesh and Cambodia, and we’ve seen some of the first moves towards central Africa,” says Butler.

However, China remains the number one manufacturing destination and just under 50% of respondents in Kurt Salmon’s survey said they planned to continue sourcing in the country.

To control costs, Benetton has begun sourcing some of its manufacturing from Bangladesh and Southeast Asia, but Panciera says this hasn’t been without its challenges. “Southeast Asia, Bangladesh and parts of India are fine for producing T-shirts, but you can’t move all your production out of China because the Chinese specialise in garments like jackets,” he says.

Partnership approach

While many are looking at migrating their manufacturing to lower-wage countries or introducing blends to keep costs down, the consensus at the conference was that businesses need to work with their supply chain partners to help improve efficiencies right down to the factory floor. “The business models that we’ve seen succeed in the past year have been those that focus on cost and excel in supply chain management across their whole organisation,” says Butler.

This trend was evident in Kurt Salmon’s survey research, which found that 35% of retailers are looking to reduce costs by working with factories to achieve manufacturing efficiencies.

McGrath says this movement has led to improvements on the factory floor. “This has happened because there is little price left to take out and margins are tight throughout the supply chain. This is one of the few areas that we have left to leverage pricing down,” he says.

Shaw agrees that working with supply chain partners is essential. “Creating efficiencies in the supply chain is the best way to create a long-term, sustainable business for us and our suppliers. We are looking for ways to improve our supplier efficiency to help realise this,” she says.

Benetton is working more closely with its suppliers and has revised its product offering by dropping 20 denim options. The retailer locked its suppliers into two-year deals to take advantage of economies of scale and fixed prices, but then found that this backfired on them when the cotton price fell. “We had to go back and renegotiate with our suppliers. It was a difficult moment for us,” says Panciera.

High cotton prices look set to stay, and in the future global sourcing will be marked by a slow migration towards countries with cheaper manufacturing and by retailers working closely with their supply chain partners as they attempt to limit the rising costs. 

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