Apparel Retailers Must Get Creative To Combat Rising Costs

Rising costs, including the surging price of cotton, are forcing apparel retailers to get creative in how to limit the higher expenses' impact on their profits and what they charge customers.

Retailers like J.C. Penney Co. (JCP) and Macy's Inc. (M) are trying to cut costs by negotiating with suppliers and seeking cheaper areas for production. The goal is to find internal ways of absorbing rising commodity expenses and to avoid raising prices too much for the still-fragile U.S. consumer.

Strategies at play for retailers include increasing price on items that are already more expensive. This would allow retailers to hold the line on lower-priced goods, so the price increases wouldn't be as obvious to shoppers.

The overall challenge, though, is difficult, J.C. Penney Chief Executive Myron "Mike" Ullman told Dow Jones Newswires, because there is a "stress in the system" that hasn't been seen in close to 20 years.

"The fact is, apparel prices are going up," Ullman said. Most retailers were able to book orders as they saw cotton prices beginning to rise last year, which is keeping apparel prices pretty static early this year, but increases are seen as inevitable starting around mid-year.

With the price of cotton, a chief component of clothing including high-end dresses and every-day jeans, having more than doubled over the past year, along with higher labor prices for manufacturing and increased transportation costs, 2011 will be a year for retailers to try to buffer themselves from inevitably higher costs.

At Macy's Inc. (M), Chief Executive Terry J. Lundgren said some retailers "will take the quality down so they have the price they can hit, others will negotiate" with suppliers. "It's all being worked on."

It may also be difficult to look for other blends, because "all of the fibers are going to face inflationary challenges," Lundgren told Dow Jones Newswires.

Despite retailers' efforts to avoid passing all the costs to consumers, many still see price tags rising by mid-single-digit percentages and even more, depending on the product, and the timing couldn't be worse. The economy is still sluggish, and even though U.S. consumers turned out for the holidays, their enthusiasm waned as the season progressed.

Now, faced with higher prices after decades of lower costs for apparel, there could be a return to consumer timidity. Any reluctance would be difficult to deal with, since the recession and continued soft economy has forced retailers to wring out just about all excess costs, leaving them with little wiggle room to absorb another sales decline. Inventory management has taken on even more importance, with retailers not wanting to be left with unsold, higher-costing goods.

J.C. Penney, like other large retailers, is using its worldwide merchandise procurement, or sourcing, system to look at locations other than the outer fringes of China, the world's main apparel producer, to try to mitigate costs. As China's economy has grown, so has the wealth of many of its residents, and they are now consumers instead of low-wage apparel producers.

Some retailers are moving their production to other spots, like further into China, where it is more rural, as well as establishing a presence or stepping up operations in countries like India and Vietnam, where costs are cheaper. The danger, though, is that some areas are not as adept as China had become, and quality and logistical problems could develop.

J.C. Penney feels it is among the better-positioned retailers because it has had its own overseas sourcing operation for decades and has a good handle on what is coming down the pike.

Ullman said J.C. Penney will still hold its popular promotional sales, but not for as long. He added the company has the advantage of being lower-priced than its nearest competitor, and flexibility as a result. The company can also "re-engineer product without compromising quality."

Between materials, labor and freight, retailers are looking at a 10% to 15% increase in apparel costs in the second half of this year, said Richard Jaffe, retailer analyst at Stifel Nicolaus.

Retailers that will do best as prices rise will have "unique, highly differentiated product, because consumers are much less price-resistant when the product is compelling," Jaffe said. "It's going to be the retailer's challenge to inspire consumers and motivate them" because they will not be able to rely on cheap prices.

Jaffe feels Kohl's Corp. (KSS), Urban Outfitters Inc. (URBN), Gap Inc. (GPS), Men's Wearhouse Inc. (MW) and TJX Cos. (TJX) each have certain attributes, like unique products, exclusive brands and a general cache to do well in the escalating cost environment.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

Kohls (NYSE:KSS)
Historical Stock Chart
From Jun 2024 to Jul 2024