Clothing Start-ups Seek Solutions as Cotton Prices Climb
BY Eric Markowitz
Soaring cotton prices continue to present retailers with tough decisions: cut margins and risk profitability, or raise prices and risk sales?
Supply and Demand: Severe weather conditions in China and Pakistan stymied the plants' growth. At the same time, a rise in global demand for cotton drove the crop's price even higher.
Threadless Store/Wikimedia Commons
Threadless has adopted its own set of strategies; the company is tightening purchase quantities, offering more targeted markdowns, and absorbing some of the increases in the margin.
Cotton has officially earned its nickname as North America's "white gold."
Over the summer, severe weather conditions in China and Pakistan—the world's two biggest producers of cotton—stymied the plants' growth. At the same time, a rise in global demand for cotton, especially in China, drove the crop's price even higher.
While domestic producers of cotton are enjoying the windfall of a higher price for their commodity, clothing retailers, buyers, and fashion start-ups, many of whose products are 100 percent cotton, are beginning to feel the burden of higher prices for the fabric. They are adjusting their strategies accordingly.
"The majority of our product are made in cotton—either a chief cotton or a blend of cotton," says Lisa Lazarus, head of production for Brooklyn Industries, which is based in New York City. "We have seen an increase over the last year—the cotton raw-material price has doubled."
In fact, the price of cotton has risen from about $0.84 per pound in July, to a peak of more than $1.50 in November. Today, prices hover around $1.30. Anticipating the global price increase, Brooklyn Industries, as well as other retailers, have developed strategies to reduce the effect on their bottom line. Some companies have even switched to cheaper materials like acryclic and polyester, but to retain the feel of the "fabric of our lives," retailers beed to make smart, if not sometimes difficult, decisions.
"Recently, what we're doing is we're booking a lot more fabric and a lot more yarn up front to carry it through several seasons instead of booking to the specific season," Lazarus says. "The objective there is to lock in the best price possible. Even though the price has increased, it could possibly increase another 30 percent going into next year. At least we've covered ourselves over the next six months of orders."
Threadless, the Chicago-based retailer of crowd-designed, 100 percent cotton T-shirts, has adopted its own set of strategies. A company representative says the company is tightening purchase quantities, offering more targeted markdowns, and absorbing some of the increases in the margin.
On December 25, the company noted on its blog that the rise in the cost of cotton has indeed affected the company, and prices for new T-shirts will be $20. Injecting a bit of humor into the situation, the post stated "We're hoping you still support the artists and folks within this amazing community despite the realities of...well, reality."
In a recession, consumers tend to become acutely aware of price changes. According to Lazarus, Brooklyn Industries' strategy has been to reduce internal costs, as to not pass them down to consumers. "We're taking slimmer margins right now because we understand the importance of maintaining our prices to our customers," Lazarus says. "So we've gotten a little bit smarter about how we budget things internally, and we're tightening our belts so we don't have to pass those increases on to our customer."
Online clothing start-ups, too, are seeing this rise firsthand. Fan Bi, a founder of Blank Label, a start-up based in Boston that offers custom men's shirts, has been surprised by how much—and how quickly—the rise has affected his business.
"We only started buying fabrics on inventory a few months back, and there have been three price increases, almost once per month, usually 10 percent each time," Bi says. "When you think everything is negotiable in China—at the moment, cotton prices are not. We haven't yet passed the cost increases onto the consumer, but if they soon increase, our unit economics will start looking pretty bad."
As with all commodities, fluctuation in price is inevitable. Some forecasts put cotton prices back under one dollar this time next year, and retailers can only hope that is true.
"Our anticipation is come September 2011, some of this will stabilize and price will go down," Lazarus says. "We believe the end is near."