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Add clothing retailers and manufacturers to the list, along with Consumer Packaged (CP) companies and Industrial Manufacturers, of organizations that are having operating margins squeezed by rising and volatile raw material prices.
It’s become crystal clear that the commodity bull market is negatively affecting the bottom line of all companies that produce, process, transport (energy costs) or sell a physical product. The exception, of course, are the companies that own the raw material in the ground – now their bottom lines are being affected but not in a way that would make management or investors unhappy.
The rapid rise in cotton prices is causing major disruption for clothing retailers and manufacturers. Cotton prices rose 91% in 2010 (see graph below); towards the end of last year, cotton surpassed its highest price in the 141-year history of the New York cotton exchange. It’s a familiar refrain we’ve witnessed with energy and other commodities. Supply has not grown fast enough to meet rising demand from China. “World cotton production is unlikely to catch up with consumption for at least two years,” said Sharon Johnson, senior cotton analyst with the First Capital Group.
It’s created a tough choice for clothing retailers and manufacturers of whether to “eat margin” or try to pass along cost increases to consumers. Remember we are coming off a tough couple of economic years for consumers and it’s unclear how much prices can rise before there is demand destruction.
A quick scan of the news says it all:
“Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices” – Bloomberg News, Nov 15, 2010
“H&M (3rd largest fashion retailer) Q4 Profit Drops 11 Pct Amid High Cotton Prices” – CBS News, Jan. 27, 2011
“It’s really a no-choice situation…Prices have to come up” – Wesley R. Card, president and chief executive of the Jones Group, the company behind Anne Klein, Nine West and other brands discussing cotton prices
“Levi Strauss said their prices are expected to increase by spring 2011 due to the dramatic rise in the price of cotton around the world” – CBS San Francisco, January 18, 2011
And it’s not just rising prices but volatility that needs to be managed. Textile manufacturers are reporting that cotton suppliers will no longer quote firm prices in advance for new collections. “Some manufacturers aren’t taking orders for next year because of fluctuating cotton prices,” J.C. Penney Chief Executive Officer Myron Ullman said Nov. 12.
It appears the entire value chain, growers, producers, textile manufacturers and retailers don’t have the risk management processes and tools in place to manage rising and volatile raw material prices.