Cost Crisis Hits Shoe Firms

LOS ANGELES — Inflation is here.

For months, footwear manufacturers worried about the prospect of rising expenses for producing shoes. Now, thanks to big bumps in raw materials and labor costs, those fears are the new economic reality for the fall season.

“Everything is going up like crazy,” said designer Stuart Weitzman. “It’s really the biggest story of the season, more so than whether a platform [heel] is important or not.”

As previously reported in Footwear News, sourcing costs across the board, for labor, raw materials and shipping are slated to rise sharply in 2011.

“The material costs are up and the labor cost also is significantly up this season, at least 10 percent, and some are higher than that,” said Maxwell Harrel, president of Corso Como. “[In the past], factories would say costs were up, but you could negotiate your way back down to a reasonable price, but [not] now. This is the first year that you can really feel it.”

Why the rise? While the rapid evolution of China’s labor market — and the domestic demand for goods produced in their own country — are squeezing manufacturers’ profit margins, market watchers also are noting other economic drags, particularly unrest in several petroleum-producing countries.

“Oil could pose an unexpected danger from a footwear perspective as it’s a component in some of the raw materials,” said Steven Marotta, analyst at C.L. King & Associates. “There’s also a transportation factor. Certainly, there is a risk of oil price volatility getting worse if geopolitical problems continue.”

Equally troubling, said industry observers, is that there is less available leather, as well as increased demand from third-world countries for that material.

Matt Priest, president of the Footwear Distributors & Retailers of America, added that such factors appear especially severe because footwear costs haven’t risen in more than a decade. “The price of our goods [in the footwear industry] has remained flat for quite some time,” he said. “In fact, there has been deflation over the past decade.”

The association has tracked import costs since 1996 and found that the retail cost for footwear in 2009 was cheaper than a decade earlier.

“We’ve had this deflationary era — or at least a stagnation era — and that’s coming to an end,” Priest said. “That can be staggering for some people.”

From a manufacturing perspective, some products and manufacturers are more susceptible than others to cost increases.

Crocs, for example, relies heavily on petroleum-based products, which means fluctuations in the oil market can cause production issues. “Everyone has concerns dependent on the makeup of your products,” said CEO John McCarvel. “For us, it’s the Libyan crisis. It’s oil in general. We’re not heavy users of cotton, so we don’t have to deal with those skyrocketing prices, but energy-related costs are concerning to us.”

For Weitzman, leather is the key issue right now. “Animals are not raised for their leather; they are raised for their meat,” he said. “Leather, among other things, is a throwaway product. If there is not enough demand for meat, there will be fewer lambs, cows and goats, and therefore less leather available for the industries that use it. That’s a grave situation.”

To make matters worse, third-world countries are competing for leather, Weitzman said, and they are willing to pay more because their production fees are nominal. “They have very low labor costs and can afford to put in higher costs for materials,” he said. “That’s driving up prices, too.”

For fall ’11, Weitzman said his average costs have increased 15 percent. But they could have been higher, he added, if not for his stock of previously purchased leather that was bought at a lower price. “If we had no leather to carry over into the next season and we had to buy on the open market, our costs could be up as much as 20 percent to 25 percent,” he said.

In recent seasons, footwear vendors have — to a degree — avoided price increases by redesigning product, using cheaper materials and finding internal cost savings to offset higher expenses. But is that enough?

“Obviously, re-engineering alone is not going [to offset the increases],” Adidas CFO and Chief Accounting Officer Robin Stalker said during a recent earnings call with investors and analysts. “We are going to have to put out prices, which means our [retail] customers are going to share and the consumers also.”

Adidas Chairman and CEO Herbert Hainer added, “Raw material, labor and transportation costs have all gone up over the last 12 months, some quite excessively. Take cotton as an example: Prices almost doubled last year and are still rising sharply, up [more than] 30 percent already in 2011.”

Sterne Agee analyst Sam Poser wrote in a report last week that some factories are balking at filling prior orders as cotton rates have shot up. “With cotton prices up [about] 40 percent in merely six weeks, we’ve heard a number of instances of recently quoted prices on runs being voided,” he said.

But perhaps the most worrisome aspect of the cost increases is that footwear and apparel are not alone: Many consumer goods categories will be facing pressure in the coming year, including food and gasoline, causing uncertainty about how much discretionary income will be available, and how consumers will choose to spend it.

“We believe 2011 will be an interesting dilemma for companies selling to the lower-income consumer, as gasoline and food — both highly inflationary categories — and [other] nondiscretionary items represent significantly higher components of spending,” Poser said. “We believe that these systemic inflationary pressures, concurrent with stagnant wages and the higher absolute levels and structural nature of the unemployment in the lower-income consumer, present substantial spending headwinds.”

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