Beyond the Catwalk: The Fashion Biz in Flux
Business + Economy

Beyond the Catwalk: The Fashion Biz in Flux

Tullio M. Puglia/Getty Images

When the economy goes south, so do hemlines, according to the highly disputed theory first perpetuated in the 1920s. What isn’t in dispute is that today, the relationship between the economy and the fashion industry has become a bit more complicated than skirt lengths. Behind the flawless frocks streaming down the runway at New York’s recent Fashion Week (featuring skirts, incidentally, that reached for the floor) is an industry in the throes of some sweeping fundamental shifts.

The fashion trade has been on pins and needles ever since it got caught in a deflationary cycle in the early 1990s. According to Catherine Moellering, executive vice president of Tobe, a leading retail fashion consultancy, wholesale prices became so low that “retailers have been able to put in way too much inventory because they’ve been able to just clear it out at promotions.” Back then, a piece of clothing could go through three rounds of discounting and retailers would still make their margins.

But now, that system has been thrown into upheaval as three major factors — cotton prices, China, and the continuing impact of the global recession — ripple through the fashion business. “And then when you layer on the increase in fuel prices,” says Moellering, “it’s a real doozy.”

The impact, according to a range of manufacturers and retailers, is that retail prices are likely to rise a staggering 10 to 20 percent this year.

The (Pricier) Fabric of Our Lives
A classic case of increased demand and decreased supply caused cotton prices to rise a whopping 160 percent over the past year, and to double since last August, according to Jon Devine, an economist at Cotton Inc., the industry’s trade group. Crops that compete with cotton for farm acres, like corn and soybeans, were yielding higher prices than corn, prompting farmers to make the switch. This resulted in an overall lower crop yield last year. On the demand side, developing economies like China are creating a bigger market for clothing made from cotton. And a recovering economy has the potential to compound that increase in demand.

Cotton production is rising this year, but Devine still expects the market to remain tight. Ultimately, those higher prices will be passed on to consumers. So far, many major retailers have been reluctant to say whether they plan price hikes, although Hanesbrands Inc. said recently that it will raise prices as much as 30 percent on its cotton-heavy products, and The Jones Group, Esprit Holdings and Polo Ralph Lauren Corp. have all acknowledged they are considering passing price hikes on to the consumer, according to a report by Women’s Wear Daily. In his announcement of Levi Strauss & Co.’s 2010 results, CEO John Anderson said, “We have taken selective price increases for 2011, but the uncertainty around the cotton markets could impact longer-term pricing.”

Some manufacturers are turning to other fabrics in an effort to control costs, but that increased demand has pushed prices up across the commodities board: Wool is up 40 percent over the past year, and even polyester prices have risen almost 18 percent during the same period.

A Worker Shortage in China
These days China seems to have a hand in nearly every economic trend around the world, and fashion is no different. As its economy develops, so does its wage structure. The once-reliable center for inexpensive, quality apparel manufacturing is being forced to pay higher wages for workers. “China is under a lot of pressure from rising wages, as well as inflation more generally. They’re starting to have some worker shortages in apparel manufacturing,” says Pietra Rivoli, author of The Travels of a T-Shirt in the Global Economy. In addition, the culture of China is changing in a way that makes younger workers less attracted to traditional factory work.

These changes are leaving manufacturers with three choices: Make factory jobs more appealing to Chinese workers, find another low-wage country, or stay in the U.S. and see if they can sell a T-shirt at Wal-Mart for $50. In the short term, it’s not likely that manufacturers will find a quick fix. “It’s not [an issue] that’s resolved immediately because the quality and the workmanship of the products being made in China are not something that can just immediately be shifted to a different country,” says Moellering.

At a panel discussion of footwear executives earlier this month, Rick Muskat, executive vice president of men’s shoe company Deer Stags, echoed that opinion. For now, he said, there is no choice but to stay in China and come up with creative solutions. “We don’t have options of other places to go for sourcing,” he said. “The infrastructure is not there yet in other [countries].”

The Post-Recession Shopper
The decade or so leading up to the Great Recession gave rise to the so-called aspirational shopper — the young woman buying thousand-dollar purses and $600 Manolos on an entry-level salary. (Thanks, Carrie Bradshaw!) Now, high-heeled heroines have gone the way of the petticoat and those who remain are more prudent in their shopping habits. “People keep talking about the good old days. The good old days were fake!” says Teri Agins, a longtime fashion industry journalist and columnist for The Wall Street Journal. “People just threw caution to the wind and bought a lot of this stuff on credit.” Now, consumers have a better understanding of what it means to live within a budget.

And yet, there is a tentative rebound under way. After a robust holiday season for retailers, the rebound continues, with January clothing sales the “star performers” of the retail industry, according to The Washington Post, up 7.3 percent from a year ago. That rise in sales was led by the mid- and high-end retailers. But it remains doubtful that shoppers will become the spendthrifts that they were before. “The recession definitely taught us a lot of lessons,” Moellering says.

“I would venture to say that’s a kind of permanent shift,” says Agins. A $150 t-shirt might not seem like such a wise move anymore, even as the economy slowly improves. “They’re still going to buy fashion, but their attitude is, the $18 [shirt] is good enough.”

On the Bright Side…
But it’s not all doom and gloom for the fashion industry. The emergent global middle class, especially in China, is creating new markets for retailers. So much so that 10 years from now, China will be the largest luxury goods market in the world. This puts the industry in a good position for growth in multiple areas. “The really savvy people have taken the time to engage with salespeople who have brought their merchandise to this market,” says Magda Berliner, an LA-based fashion designer whose clothing is sold in Barneys New York, among other stores.

“It used to be everybody was worried about doing business with Saks and Macy’s — and they’re still interested in that, because we’re a big consumer market,” says Agins. “But a lot of the growth is in some of these developing countries.”

And then there is the rise of what the industry terms “purposeful purchasing” — buying by consumers who have proven that they are willing to pay a premium for products with a social conscience. Global “fair trade” sales reached $3.6 billion in 2010.

But for the moment, the focus is on hemming in all of the imminent challenges to the industry. As the dust settles, says Moellering, “retailers are trying to adjust to this, but it’s not easy.”

Related Links:
Soaring Cotton Prices May Doom the Era of Cheap Fashion (NBC New York) 
Defying Global Slump, China Has Labor Shortage (The New York Times) 
For the Wealthy, a Return to Luxury Spending (USA Today)