Outdoor, sports apparel seeing first signs of inflation

Surging cotton prices are putting pressure on polyester and other man-made fibers used in the outdoor and fitness apparel industry. That’s leading to hints of higher wholesale and retail prices ahead as manufacturers fend off the increased input costs, along with higher labor and oil prices. Retailers aren’t surprised. Will their consumers take it?
Author:
Publish date:

As outdoor and fitness apparel companies report strong fourth-quarter 2010 earnings, many are still cautioning that future margins might be squeezed by rising labor, material and fuel costs.

Top executives of big-name brands such as Adidas, Puma, Nike and The North Face-parent VF Corp have all stated in their recent earning reports and conference calls that price increases of their products are likely ahead as a way to offset rising costs. Even European-based buying groups have said higher prices are a given going into the next year.

Retailers too have told SNEWS® they are expecting price increases, and that they’ll be a little more comfortable now – with the recovering economy – to pass them on to consumers.

Inflation – basically a situation of too much money chasing too few goods -- will become a key issue for most product categories, from textiles to footwear to hard goods, and SNEWS will track the trend throughout the year in a series of stories. This week, we take a look at apparel, which is facing most of its pressure from the rising demand for and cost of cotton, as well as increased labor and fuel costs.

Rising input costs

While cotton isn’t normally considered the fabric of choice for outdoor and fitness pursuits, the 170-percent price increase of the raw material during the past year to more than $2 per pound has put pressure on other more commonly used man-made textiles. The increases are due to increased global demand.

The Lenzing Group, which is a primary supplier of man-made cellulose fibers to the outdoor and fitness apparel industry and others, reported record results in 2010 with annual sales up 45 percent and profits up 76 percent.

“The reason for this is the increasing structural shortage of cotton on the global market, which leads textile manufacturers to increasingly turn to alternatives such as Lenzing fibers”, Lenzing CEO Peter Unterperger said in the company’s earnings release on Feb. 22.

Polyester prices have climbed about 50 percent during the past year, Brooks Running senior vice president of apparel, Hamish Stewart, told SNEWS.

“This is being driven by cotton, but also driven by rising oil prices, and the devaluation of the U.S. dollar,” Stewart said.

Rising oil and energy prices increased some production costs as well as the cost of freight. The falling dollar and rising Asian currencies are increasing labor costs overseas.

Stewart said Brooks Running (www.brooksrunning.com), which makes fitness apparel along with its running shoes, got in its fall 2011 product lines before the largest of recent input cost increases.

“Our prices will be steady in 2011,” he said. “But it looks as if spring 2012, there potentially could be a 10-percent increase.”

At VF Corp., Steve Rendle, president of the company’s outdoor and action sports Americas group, told SNEWS that cotton’s price surge hasn’t affected his brands, such as The North Face, as much as it has VF’s other apparel groups such as those in jeans and casual wear.

“You do see some impacts on polyester, but nothing we haven’t dealt with before, and we’re more heavily driven by nylon,” Rendle said.

And while VF Chairman and CEO Eric Wiseman has been quoted recently as saying that “every single brand” at VF “will take some price increases,” Rendle was more cautious with his words.

“Every season we’re delivering some price increases when we think we increase the value of the product,” he said. “This year is not significantly different for our outdoor business. We’re always looking at our input costs – labor, material and logistics.”

Global phenomenon

Karla Magruder, founder of Fabrikology International (www.fabrikology.com), a textile consulting firm, said that outdoor and fitness apparel manufacturers – even those that only sell in the United States – will have to adjust to the growing global market of supply and demand of raw materials.

“There is pressure coming from too many places,” she said. “Even if the U.S. economy is still struggling with unemployment, there are plenty of other places where the economy isn’t heading south. We have to get over the fact that demand isn’t just coming from the west anymore. It’s coming from large populations in China and India. More demand means higher prices.”

Of course, the story of inflation isn’t a new one. There was talk of price increases in the outdoor and fitness industry just before the financial crisis tanked demand and dropped raw material prices in 2008 and 2009.

As prices have crept back up over the past two years, manufacturers have eaten some of their increased costs, and retailers also took a hit to margins with discounting, to entice the beaten U.S. consumer to return.

Now that the U.S. economy seems to be slowly recovering, Magruder said he expected to see manufacturers increasing wholesale prices, and then retailers passing that on to consumers.

At Neptune Mountaineering, an outdoor retailer in Boulder, Colo., owner Gary Neptune said he has seen all his costs go up – wages, energy and shipping – so it’s no surprise to him that his wholesale purchase prices might soon rise as well.

“It’s a slightly negative sign, but as a retailer it’s also a good sign that the economy is recovering,” he said. By Neptune’s logic, rising prices mean manufacturers have stabilized their inventory levels and there won’t be a dump of products on the market and Internet, forcing heavy discounting and losses for specialty retailers.

“This year, they got their runs out earlier and their inventory was tighter – and that benefits everyone in the industry,” Neptune said. “Dirt cheap prices are not what makes people do sports – it’s the passion.”

Dirt cheap quality also isn’t the answer, Magruder said. She doesn’t think apparel makers should cut quality to keep prices stable.

“There are perhaps other ways they can lower costs, like bringing down water and energy use to become more efficient,” she said.

Stewart said he agreed, and added that Brooks Running never dared cutting quality.

“If you change quality, consumers will see it,” he said. “We want to maintain the integrity of the brand – be smart about what we do, such as a simpler design philosophy, but not take anything away from the quality of the product.”

Rendle said any future price increases will reflect added value and quality.

If the economy continues to recover, that strategy should work well. If the economy falters again, be forewarned, we were told. Buyers punished consumer product brands like PG&E two years ago when they tried to raise prices with the introduction of higher quality products in the midst of the recession. As the recession lingered, the companies ended up backpedaling and releasing lower-priced rudimentary products such as Tide Basic.

Another strategy being used by some companies is to hedge their bets that material prices will continue to rise and order more supply now rather than later when it’s expected to be more expensive.

“We’re doing it on some key styles like black shorts or some undyed garments,” Stewart said. “We bought more ahead. But we’re not overly committed, maybe three to four months out than we normally would.”

Rendle said his outdoor brands at VF aren’t hedging, but the overall company is leveraging its size and scale in orders to obtain competitive contracts.

Looking ahead

It’s tough for investors to predict the market a month or two ahead, even tougher for manufacturers to predict consumer buying power a year ahead – this summer most outdoor and fitness companies will be finalizing their fall 2012 lines. So what lies ahead?

“Prices will go up – it’s just a question what we think the market can bear,” Stewart said. “If everyone is growing, then prices will go up, but we’ll reach that point where consumer demand pulls back and then I think you’ll see textile prices pull back some…. Or demand could just keep growing.

“Everyone thinks prices are going to come back down,” Magruder said. But “I think they’re here to stay.”

-- David Clucas

Related