Cotton prices: off the rails?

ANALYSIS:Retailers may face backlash if they pass on rising material costs to price-sensitive shoppers, writes LAURA SLATTERY

ARE WE heading back to the 1970s? In style terms, yes: lightweight synthetic fabrics, billowing bell-bottoms and a renewed fondness for polyester are all set for a comeback. But the content of the spring-summer clothing racks will be dictated as much by economics as aesthetic whimsy thanks to the soaring cost of cotton on global commodity markets.

Cotton prices have doubled over the last year, reaching record highs in November. As a result, the price tags on those denim flares is set to climb, while retailers that cannot or do not want to pass on their higher input costs to consumers may discover that cheaper blend fabrics and minimalist designs are suddenly the on-trend choice.

As with most price spikes, the dramatic rise in cotton costs is largely a question of an imbalance between supply and demand, with a hint of a speculative bubble thrown in. A ban on Indian exports of cotton, the massive floods in Pakistan, cold weather in China and storms in the US have depleted world cotton crops at the same time as demand for clothes from China and other emerging markets has climbed.

According to industry experts Cotlook, global cotton production will reach 24.78 million tons for the 2010-11 season, but this will fall shy of demand by 525,000 tons.

“You’ve got two classic things: lack of supply and increased demand, so the price goes up,” says Stuart Rose, who as chairman of Marks & Spencer, is one of Britain’s leading shopkeepers. Rose was in Dublin recently where he was speaking at a Business in the Community event on ethical business.

Cotton, one of the biggest commodities used in clothing, is “a pretty filthy crop”, says Rose. “It’s very water-hungry, it’s very chemical-hungry, it’s grown in a huge number of diverse locations. And there are some practices in cotton which are, frankly, practices that we would like to be able to change over time.”

Indeed, as higher clothing prices are often a reflection of more ethical practices by retailers, it is difficult for western consumers to complain too much about higher prices or for western businesses to rue lower margins.

The list of retailers to announce they will pass on rising input costs to customers is growing. UK clothing chain Next has warned that its prices could rise by more than 8 per cent, although chief executive Lord Wolfson is convinced that prices will come off eventually as the speculation subsides.

Iconic jeans brand Levi’s, whose denim products are made almost entirely from cotton, says it is introducing selective price increases for spring 2011, partly as a result of the higher crop costs. Mark Newton-Jones, chief executive of web retailer Shop Direct, this week joined in the price warnings, citing “extraordinary inflation” in raw materials such as cotton.

However, low-end retailer Primark, which trades as Penneys in Ireland, said it would absorb the higher cotton costs rather than pass them on. Its chief executive, George Weston, declared it would “not surrender” its price-leading position in the market, even if it meant margins were dampened in the short term.

“I think it will be easier for the mid-market retailers than the value retailers to pass it on,” says Zaena Miller, clothing analyst at market research company Euromonitor. And even in the mid-market, consumers are likely to notice steady increases over a period of years rather than a dramatic jump, Miller believes.

This is partly because raw material inflation is only one cost pressure that clothing companies face. The minimum wages of millions of garment workers in important manufacturing countries like Bangladesh and Sri Lanka have been increased this year, while there have been strikes in Vietnam and Cambodia.

Retailers do not often draw attention to the labour costs issue, Miller notes, as it puts a potentially unflattering spotlight on the wages they pay and indeed might be interpreted as being “unsupportive” of cotton producers.

While some retailers such as US design house Liz Claiborne, owner of the Juicy Couture label, have suggested they will play with the materials they use to mitigate the cost increases, this can be a risky strategy, according to Miller.

“I think retailers need to be careful about it,” she says. The recession has already increased consumer tendencies to invest in good quality, durable “investment” items, rather than cheaper fast fashion. Some chains will blend fabrics with synthetic materials, but on “staple products” like denim jeans, the extent to which manmade fibres such as lycra or elastane can be added is limited.

“Cotton, you know it’s not silk, but it’s a pretty durable fabric,” says Miller. “I think there could be a bit of a backlash if cheaper materials are used.”

In any case, the escalation in cotton prices is leading to knock-on price rises for polyester, so the fashion industry’s spin of a 1970s style revival won’t necessarily be full of bargains either. “Businesses always look to be more innovative, to be more creative,” says Rose, when asked if Marks Spencer will be shifting its cotton percentages downwards.

Like Miller, he believes that the trend over the next decade will be towards higher quality at higher prices, as the industry makes inch-by-inch progress on its sustainability and ethical record.

“Retailers are incredibly efficient organisations, but there will come a point in time that you have to pass it on somewhere. And it may be a good thing that, because it might mean that the consumers says ‘instead of buying five of those T-shirts and throwing them away after a month, maybe I can only afford to buy three, but I’ll buy the better quality ones’.”