Projections vary, though virtually all industry experts agree that production costs including raw materials, labor, duties and freight, as well as costs associated with the re- valuation of the Chinese renminbi, are set to rise steeply in the New Year.
“People are calling it the perfect storm,” said Deckers Outdoor Corp. COO Zohar Ziv. “It’s unusual [for it all to be happening at the same time]. When we’re coming out of a global recession, you would think there would be more labor availability, but the contrary has happened.”
Matt Priest, president of the Footwear Distributors & Retailers of America, said his members are bracing for an increase ranging from 8 percent to 20 percent.
The looming question is what this will mean for wholesale costs. So far — in the midst of a still uncertain economy — few have proposed across-the-board wholesale price increases. Instead, many have said they will mitigate any increase with operating efficiencies.
“Managing [sourcing cost increases] and not having some [wholesale] cost increase will be difficult but it is manageable,” Priest said.
Ziv said Deckers was exploring alternative sourcing areas such as northern China, and next year will begin some production in Vietnam.
He added that the company also would examine its design process to look for efficiencies. “We’re never going to compromise quality, but maybe there are ways to do it [cheaper],” he said. In addition, the firm is converting some of its international distributorships to subsidiaries, which is expected to help maintain margins.
Peter Charles, chief supply chain officer at Kenneth Cole Productions Inc., said the company would consolidate its factory base to become a more meaningful partner with fewer suppliers to secure better deals. Also, he said, the firm would review product specifications to see if a different material or process could offer a cost savings. “We believe we have efficiencies that will offset some of those real price increases,” he said. “And we’ll be looking at it on a shoe-by-shoe basis.”
But some industry observers warn that executives have not yet fully faced the new realities of prolonged sourcing cost hikes.
“A lot of the true impact of [the increases] hasn’t hit the top of these companies yet,” said Sam Poser, an analyst at Sterne Agee. “Some people don’t want to hear bad news. In some of these larger companies, you have a sourcing guy way down the totem pole, and the guys [at the top], until now, saw costs rising and said ‘fix it.’ Now, this isn’t something that can really be fixed.”
Pat Devaney, SVP at Stella International Holdings Ltd., which owns eight factories and produces shoes for Merrell, Prada, Timberland, Louis Vuitton and Marc Jacobs, agreed that many companies have not accepted that wholesale prices and, ultimately, retail prices will have to rise to accommodate the increase in sourcing costs.
“It’s very wishful thinking [to expect they won’t],” said Devaney. “Bottom line is there is no reversal of these new increases coming. The reality is that prices are going up and they’re not going back. That is the future. If a brand is going to hold prices, it will be a margin erosion.”
And as difficult as it may be to raise wholesale prices, it could be even more challenging to raise retail.
Nate Herman, VP of international trade at The American Apparel & Footwear Association, said that would mean reversing more than a decade of pricing strategies. “Even selling a low- to single-digit increase [to consumers] could be very difficult,” he said. “Retail prices have been on a downward trend since 1998, and to all of a sudden do a price increase in this economy is going to be very difficult to sell.”
Devaney said product costs will force companies to re-think how many pairs of shoes they will be able to sell in the New Year, and at what price. “What will have to be discussed with brands and retailers is how many pairs will the consumer buy because of the price increase,” he said. “That is something we don’t know.”