Retailers Cut Corners -- and Fabrics -- to Avoid Apparel Price Hikes


Expect your T-shirts to get a little bit thinner next year -- and maybe even a little more expensive as well. As apparel retailers try to cope with rising costs, "cutting corners" could take on a new meaning in the clothing department.

Merchants are facing higher cotton prices, labor costs and other rising expenses to produce apparel, but they know shoppers are still cash-strapped and won't stand for moves to pass on wholesale price increases. This time last year, retailers were warning that clothing prices would go up, but with unemployment still high and incomes stuck in neutral, merchants have found little room to maneuver.

So, retailers are asking their vendors to perform some manufacturing sleight-of-hand to keep unit prices down. You may see more of the same fabrics interpreted in different pieces -- which lets manufacturers buy fabric in bulk -- as well as designs that use less fabric per piece and more cotton blends in some pieces. Most retailers have already bought their inventory for spring and summer, so it could be fall before you notice a change.

Cotton prices are up about 80% and synthetic fabrics by about 50%, says Cathy Tesija, executive vice president of merchandising at Target (TGT). And while there are options for mitigating the increases -- by shifting manufacturing to countries with lower labor costs and making more efficient use of fabric -- some of those costs will have to be passed on, she says.

"We don't want to get to the point where we redesign the garments to the point where they're not appealing," Tesija says.

Fewer Fabrics, but Not Lower Quality

In fact, tweaking cotton blends by adding more of cheaper fabrics can backfire: "The U.S. consumer loves cotton," warns Christian Callieri, principal at consulting firm AT Kearney. Given the small difference in price between cotton and other fibers, switching from a 90% or 95% cotton blend to 80% or something lower will barely budge the price and can affect the quality of the garment in customers' eyes, he says.

A more significant advantage could come from reducing the number of fabrics used, such as making 10 styles in five different fabrics instead of eight, says Callieri. That can reduce costs by double-digit percentages, depending on the prices the retailer can negotiate with the mills, he says. It also gives the retailer flexibility to shift the fabrics to another design, if one design doesn't sell.

That's a strategy both Gap (GPS) and Abercrombie & Fitch (ANF) are using to cut costs. If the manufacturer is careful, says Callieri, it can be done without being visible to the shopper. It works best with basics such as jeans or on the less visible parts of more complex pieces, such as the linings in outerwear, he says.

Fabric prices "have obviously escalated, and that's a problem," says Abercrombie CEO Mike Jeffries. But he claims the teen apparel retailer, which has been nursing sales back to health during the last year, won't lower its quality lest it risk losing sales. Abercrombie will try buying fabric in bulk across its chains -- including Abercrombie & Fitch, Hollister and Abercrombie Kids -- but "if cost pressures remain significant, we will keep an open mind to pricing" says Chief Financial Officer Jonathan Ramsden.

Room for Some Price Increases

That can be a tough question for retailers still struggling to come back from the recession. During their third-quarter report, executives at Bon-Ton Stores (BONT) said they had doubts about their ability to raise prices, remarks that could be a "canary in the coal mine event," according to Michael Exstein, retail analyst at Credit Suisse First Boston.

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"This is the first company that we have heard say that customers will not be willing to accept price increases, and we don't think they will be the last," he wrote in a note to investors. Indeed, Doug Scovanner, chief financial officer of Target, hinted at similar doubts when asked if the company could handle the return of inflation that some expect next year. The competitive marketplace doesn't allow for much passing down of costs, he told analysts.

However, economic conditions have improved to the point where sales could hold up to some price increases, barring increases in unemployment or other bad news, says Michael Niemira, chief economist of the International Council of Shopping Centers. But he acknowledges that moves to offset costs are also necessary nowadays.

"The market can't absorb a huge price hit," he says, "but to the extent that some of that can be passed through, we're in in a much better place."

Reeducating the American Consumer

Still, retailers are struggling with how far they can tweak the merchandise without turning off shoppers. Gap, which is struggling to turn around its flagship chain, has been concentrating its production in fewer fabrics and manufacturers to hold down costs.

"We have too many fabrics in the company," says CEO Glenn Murphy. He notes that Gap is also working with mills and manufacturers, moving production to lower-cost regions and looking for other places to cut costs without sacrificing looks. "You can't take out your quality. You have to be true to your customer," he says. "You have to deliver product that you can feel good about."

Several years of low prices have spoiled U.S. consumers, says Callieri, and the industry is reaching a point where manufacturers can't absorb any more rising costs. Retailers will need to educate consumers about why it's worth to pay more for a higher-quality garment, he says.

"You have to consider the trade-offs between cost and design, and impact to the consumer," he says. "Some will be stuck in this tug of war about what they absorb and what they can pass on to the consumers."

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