Factory Outlet Insiders: Former Gap exec now COO at Children's Place

Factory Outlet Insiders: Former Gap exec now COO at Children's Place

Very expensive clothing for all

Cotton prices have skyrocketed over the past year and a half and have more than doubled in the past 12 months.  Let’s look at three key questions

1. Why is this and what affect has it had (and is it having) on the price of your clothes?

2. What can makers of cotton based products do to handle this?

3. Is it rational?  Some people believe cotton has been irrationally over-inflated in price and are looking at shorting.

The Why

According to the article in Textiles Intelligence… “the main cause is a massive hike in the price of raw cotton. In the 18 months between March 2009 and the end of September 2010 this rose by 127%, from 51 cents/lb to almost 116 cents/lb.  Cotton is in short supply because farmers cut back on plantings when cotton prices were low. Also, cotton usage is rising in response to strong retail demand growth in China and India. And a further blow to cotton prices has been struck by the devastating floods in Pakistan.” 

Pakistan is a major producer of cotton but growth has been tricky and cotton is a complicated crop to tend to.  Flooding in the region and other bad weather affecting crops in China and Australia certainly put a dent in the price and it hit demand (driving prices up). Buyers of raw cotton have to scramble to other regions in the world such as in India (which is growing in it’s cotton production) and then we have the classic example of supply and demand dictating prices.

Four ideas to manage the situation if you make cotton clothing.

• Add other materials into your cotton based products.  Instead of 100% cotton shirts for example, maybe you redesign them to be 10% polyester or some other materials.

• Work more closely with your suppliers to see what is possible to negotiate.  Perhaps consolidating 10 suppliers down to 6 or 7 and filling those 6 or 7 up with the additional orders could help mitigate on the other side the price pressure felt on the cotton products.  Give them more volume ask for better overall pricing.

• Rethink your 30 or 40 percent of your line – does everything need to be cotton?  What alternative materials could you use for 2012/2013?  Adapt the line to the times.

• Re-source apparel production to suppliers that perhaps you never used before but have larger production runs that can allow you to piggyback on the raw materials buy.

Is it Rational?

People tend to panic at times and that can also lead to irrational pricing but if you look at the graphic at the top of this piece, you’ll see that Cotton has been high in the past as well as in the early nineties and then came back down over the next 10 years.

If you take a look at the chart on this page it shows cottons has risen almost 4x that of gold and the case could be made that cotton is simply overpriced by a longshot and will come down.  There’s no doubt that the factors of high demand for cotton products coupled with China’s consumption of cotton and add in a buzz in the world about how cotton is going up up up, maybe we simply end up with a self fulfilling prophecy that pushes the price of cotton too high compared to what it should be based on real supply and demand.

We’ll find out in the next 1-2 years but in the meantime I expect that consumers will be holding on to their jeans a little while longer than they used to and retailers will be closely watching how many units they buy.  Better to sell out than get stuck with dead and perishable inventory.

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