Say goodbye to discounts

Just as recession battered
consumers are trickling back to malls, clothes makers in the United States face
a tough choice.

Squeezed by ballooning raw
material, labour and freight costs, manufacturers from Nike Inc and VF Corp to
Hanesbrands Inc and Levi Strauss & Co are fretting they might have to raise
prices in fragile markets to maintain margins.

Price tags on everything from jeans
to jumpsuits are likely to rise next year, ending about three years of serious

“It’s sort of the worst time
possible,” said Nate Herman, Vice President of International Trade with
the American Apparel and Footwear Association (AAFA), which represents over 700
apparel companies, brands and suppliers.

“As the economy is showing
signs of resurgence and people are more willing to come out and buy, we have
this huge cost pressure from the back-ends,” Herman said, noting the last
time the U.S. apparel industry saw such broad-based hikes was in the mid-1990s.

During the recession, many factories
in China shut down as demand dropped. Now, decreased production capacity
coupled with lower cotton output and higher prices of oil and labour are
pressuring production costs.

Bob Shearer, Chief Financial
Officer at VF Corp, the world’s largest apparel company with brands such as
Lee, Wrangler and Jansport, said “It’s clearly not just us … costs
overall in apparel are going up.”

“Cotton-based products might
be pressured more than other types, but it’s an overall trend,” he said.

Both the AAFA and Perry Ellis
International Inc CEO George Feldenkreis expect prices to increase by around 5
per cent starting next year.

“I think price increases will
be felt around the Christmas season and going forward,” Feldenkreis said.

With consumers now conditioned to
buying at discount, the stage could be set for a war of wills between retailers
and their customers.

Some specialty retailers such as
Abercrombie & Fitch Co and Aeropostale Inc, which have better margin
buffers, are likely to begin passing on the pricing pressure by trimming
discounts, followed by eventual price increases.

“The mass stores, like a
Wal-Mart (Stores Inc) for example, don’t have that space and margin. So you’re
going to see small price increases start from them,” Kurt Salmon’s Rubman said.