Apparel Market Update
From: Michael Benstock
Chief Executive Officer
To our Valued Partners,
In an effort to continue to provide you with the best possible service, we feel it is necessary to share our outlook on current apparel market conditions with you. We all operate in a rapidly changing and fragile global economy and because of this, there are number of factors contributing to what we currently see in the apparel marketplace. We also understand that our partners face pricing pressures from their customers, and so it becomes even more important for us as a trusted supplier and partner to prepare you for what may come and keep you informed of market conditions that may affect the cost of apparel and accessories. While we continue to do whatever is necessary to mitigate cost increases while providing you with quality garments, current market conditions are driving costs up.
Early 2018 brought rising oil prices and a reduced cotton harvest, and because of this many concluded that raw materials would steadily begin to increase. However, due to reduced raw material demand in China, raw material pricing remained virtually unchanged for the first half of 2018. Over the last three months however, we have seen an upward trend in the cost of cotton, and polyester prices in China are now 10% higher than in January of 2018.
Over the last twenty years, manufacturers have been able to offset most cost increases by moving apparel manufacturing to lower cost countries and factories. It now seems we have exhausted most of our options and our ability to move manufacturing to alternative countries is more limited. While we have experienced a more stable market over the last three years, suppliers in every part of the supply chain are now looking to raise prices.
A great deal has changed over the past decade in the apparel market. There are, however, two large-scale events that have occurred in 2018 in addition to a number of economic pressures that have been building for some time that will all contribute to apparel pricing increases over the next two years.
The first event is the current administration’s endeavor to correct the trade imbalance with China. The tariffs the United States have enacted this year do not (other than for headwear and accessory items) specifically target finished apparel, they do however target textiles imported into the United States. However, the President has discussed applying tariffs on up to $267B of additional Chinese imports. If this level is achieved, then apparel will certainly be affected. Factories and mills are both hedging prices to cover themselves in case this does happen.
While the American Tariffs have not affected apparel imported to the United States, the retaliatory tariffs put in place by China have affected the price of cotton. China is a large importer of American Cotton and has traditionally applied a 10% tariff on that cotton; however, they have now placed a 25% tariff on American cotton. What may be surprising to many of our customers is that 25% of the cotton used in our China made fabrics is actually cotton sourced from the United States.
The second event, which may perhaps have a larger impact on textile pricing, is a result of new Chinese environmental regulations that aim to significantly reduce air and water pollution, something that is long overdue in China. Many textile mills have closed over the last year because of their inability to comply with these new environmental requirements. Chemical and dye costs have increased by 30-50%, as many of these supplies are now purchased outside of China at a premium. Energy costs are also increasing worldwide which will further add to the cost of textiles and finished garments. At this time, there are simply significantly less compliant suppliers in China, which will also drive pricing up.
Given the tariffs and the environmental regulations, we almost certainly will see additional cost increases before the end of this year. Our sourcing teams are constantly looking for alternative suppliers for both fabric and finished garments; however, options are more limited than ever. We currently manufacture a large portion of our garments in duty free countries, but manufacturing garments in these locations comes with a certain amount of risk. Moving manufacturing to lower cost duty free options like Ethiopia, Egypt, Kenya, Madagascar, Central America and Haiti over the past decade has helped to mitigate most cost increases. However, each of these countries receives duty free treatment from the United States because they all carry high risk for political instability, worker strikes as well as being a high risk for natural disasters. Our redundant manufacturing strategies have helped us mitigate many of these inherent risks over the years in order to guarantee a continuous source of supply to our customers.
When it makes sense, we are now more than ever looking to source garments outside of China; however, in most instances the fabric will still originate from China because of the availability of raw materials and fabric mill capacity. It would take many years and a very large investment to dislodge China from being the textile mill to the world. Because of the higher risk, we must limit the amount of product made in each of these locations and must continue to retain redundancy in our supply chain. Without commenting on the pros or cons of our current administrations trade strategy, the free trade agreements that exist today are clearly being threatened making the manufacturing of our products in many of these countries an even riskier proposition.
The apparel industry has always been directly aligned with lower labor cost regions due to the nature of the labor involved with sewing apparel. Apparel manufacturing, in most cases, requires limited education and skills can easily be taught on the job. It is therefore a perfect industry to bring to developing nations as they seek to increase employment for their citizens. We have seen large labor increases in Bangladesh, Cambodia, El Salvador and Haiti as well as others where governments are all under pressure from the workers to increase wages.
While wages in the United States are increasing at less than 3% each year, the wages in the lower cost apparel producing countries are drastically increasing. Bangladeshi wages increased nearly 100% in 2013 and a new minimum wage increase of 51% was enacted this month. In 2015 a 43% wage increase was provided to workers in El Salvador and in 2016 Haitian workers received a 33% wage increase. With more manufacturing moving away from China, workers in countries on the receiving end of this manufacturing understand their importance in this global economy and will all seek out further wage increases. Importers and their manufacturing partners cannot continue to absorb these large wage increases and therefore we expect there will be price increases.
In the United States today there is also a great deal of competition over quality employees. It is therefore necessary for employers to offer better salaries and benefits packages to attract and retain top talent, increasing our overheads.
We are also currently faced with freight increases both internationally and domestically. Freight costs revolve around the cost of fuel and capacity. With the cost of oil increasing this year and more limited capacity, shipping costs have most definitely increased. Last year capacity was reduced as a large ocean freight carrier filed for bankruptcy. Now ocean freight companies have reduced the number of vessels they sail in an effort to cut capacity and increase pricing.
We have seen freight costs increase within the Unites States as well. Truck drivers are now subject to electronic monitoring of their driving hours. This has made our roads safer, but has contributed to a large shortage of truck drivers. It is estimated that in order to keep up with demand, 90,000 truck drivers will need to be hired each year through 2026. Drivers today are also able to find better paying jobs that do not require them to constantly be on the road. Trucking costs have and will continue to increase along with creating logistical issues due to the lack of drivers. We are expecting larger than usual increases from UPS and Federal Express this year as well.
Many of our suppliers have started to submit price increases. We feel it is incumbent upon us as your partner to, at the very least prepare you. We will continue to do what we can to limit any price increases; however, you can clearly see the challenges we, and all of our competitors face as this is really the perfect storm and combination of a number of global issues. As this situation evolves, we will continue to provide you with relevant updates. We look forward to continuing to service you and greatly appreciate your business.