California Apparel News

Climbing cotton prices, which have nearly doubled in the last year, are leaving local apparel manufacturers and textile factories in a quandary about how to keep the lid on prices without gouging their profits.

“Cotton price increases sort of took us by surprise,” said Ron Kaufman, sales executive with fabric importer Robert Kaufman Fabrics of Los Angeles. “The question is how much can we pass along to our customers based on the market conditions right now. We are just waiting to see how things affect us.”

Two years ago, cotton sold for 27 cents to 32 cents per pound as world demand declined and production ramped up. This summer, cotton prices began to inch up from 50 cents per pound. In late October, they hit more than 80 cents per pound—a price not seen since 1998. Prices have since settled back into the low to mid 70s, still higher than the 50- to 60- cents-per-pound cost considered reasonable for cotton during more prosperous times.

Basic economics

The rise in prices is a matter of simple supply and demand. This year, countries such as China and Australia have seen a decline in cotton production.

Because of excessive rains, China, the world’s largest cotton producer, is expected to harvest 22 million bales this year, down from 22.6 million bales last year.

Australia has been hard hit with a drought that has dwindled its cotton production to 1.2 million bales this year, off from 1.7 million last year and down drastically from 3.7 million in 2000. The 2004 crop in Australia is expected to be half of this year’s.

Meanwhile, world consumption of cotton is climbing to 97.7 million bales this year, up from 95 million last year.

The biggest user of cotton in the world is China, which is expected to consume 30 million bales of cotton this year. This Asian powerhouse has been ramping up apparel and textile production to meet increased demand from developed countries looking for bargain-basement prices.

“China has always had a big impact on cotton prices going up or down,” said Sharon Johnson, a cotton expert at Frank Schneider and Co. Inc., an Atlanta company specializing in commodity futures. “They have been a big buyer on the world market in the last several months.”

China is purchasing about twothirds of the United States’ 18.2 million bales of cotton this year.

Bad timing

The rise in cotton prices is just another blow to apparel manufacturers who have been squeezed by retailers to keep their costs down. In many areas, apparel has actually experienced a price deflation.

Those who buy cotton fabric on short-term contracts have been the first to experience the cost increase. “This caught us off guard,” said John Inn, co-founder of Los Angeles juniors apparel company Bubblegum USA. “We are going to our retailers and telling them that we can’t absorb all these costs.”

Inn’s clients include big chain stores such as Dillard’s Inc., Kohl’s Corp., J.C. Penney Corp. and Macy’s, as well as financially struggling chains such as The Wet Seal Inc., Charlotte Russe Holding Inc. and Gadzooks Inc.

Inn has been trying to raise his prices 25 cents to 75 cents per item, but he has seen some resistance. “I don’t think they can absorb all that,” he noted.

Some of the hardest hit will be blue jeans manufacturers who feel they can only use cotton in their goods.

“Hopefully we can pass [the increases] on,” said Gerard Guez, chairman and chief executive of Los Angeles–based Tarrant Apparel Group, the $347 million private-label company that makes blue jeans for Limited Brands Inc., JCPenney and other retailers.

“Cotton is something we buy in long-term contracts, about six months out,” he said, noting that retailers might see price increases starting with the Spring and Fall collections. “We are expecting to pay 20 to 25 percent more for cotton in our next contract, which will impact by 5 to 7 percent the cost of fabric, which will make a 2 to 3 percent increase on the final product.”

Other denim manufacturers, such as Los Angeles–based Blue Cult, a small but high-end jeans maker, are hoping to defray the cotton price increases.

“Our [denim] suppliers will have to start increasing their costs in January or February,” said Blue Cult cofounder Caroline Athias. “We might need to slightly increase our prices, and we might be able to work with the sewing contractor to have them absorb the cost.”

Textile mills are also under the gun to absorb costs.

“This is a dilemma right now,” said Jay Chon, research and development director for Popular Textile Corp., a Vernon, Calif., company that supplies primarily the juniors apparel market. Popular Textile, which is expecting its cotton fabric prices to go up 10 cents to 20 cents a yard in January, is seeing various reactions from its clients. They are struggling with the idea of paying more, delaying their fabric purchases, or using fabrics with some polyester or other synthetic yarns.

Song H. Kim, chief executive of Popular Textile, noted that manufacturers’ short-term strategy has been to temporarily reduce their cotton fabric orders.

Cotton price increases have made a big dent in production costs at National Textiles LLC, one of the country’s largest mills. The mill, located in Winston-Salem, N.C., is a major supplier to the T-shirt and sweatshirt industries. It has been struggling like many textile mills. In 2002, its revenues were $700 million, a 12.5 percent decline from 2001.

“Last year we were paying in the low 40s for cotton, and right now we are paying around 76 to 77 cents,” said Jerry Rowland, National Textiles’ chief executive and president. “To me that 34 cents increase is a $136 million annualized increase in costs.... At the present, there isn’t the ability to pass the increase in cost to the consumer. But over the next six months, there will be an ability to pass the increases on because cotton mills all over the world are in the same situation. Everybody can’t lose money. We would all have to close down.”

Towing the bottom line

Retailers are reluctant to pay higher prices as they struggle to keep their profits up and do what they can to delay the inevitable. Cincinnatibased Federated Department Stores Inc.—parent company of Macy’s, Bloomingdale’s and other major department store chains—said in a written statement, “Cotton prices are up, and in anticipation we have been working farther out in placing our orders to secure the best deals possible.”

But that won’t hold forever.

“Retailers’ ability to pass on price increases immediately is not good,” said Richard Giss, retail expert at Deloitte & Touche in Los Angeles. “It’s a very competitive environment out there. They have to be careful how they raise their prices. But surely but slowly price increases will find their way into the cost stream.”