The American apparel industry is facing a double whammy: rising import costs for clothes and a consecutive decline in consumer confidence. This trend, reported by Cotton Incorporated in their ‘Executive Cotton Update: U.S. Macroeconomic Indicators & the Cotton Supply Chain - May 2024’, could have significant implications for businesses.

Rising import costs, a challenge

Import costs for apparel, particularly cotton-based items, have seen a significant increase compared to pre-pandemic levels. Cotton Inc. reports a 6.2 per cent rise in sourcing costs compared to 2019. This can be attributed to several factors:

Disrupted supply chains: The global pandemic caused major disruptions in global supply chains, leading to increased transportation costs and port congestion. These issues persist even as economies reopen. "The global supply chain disruptions caused by the pandemic haven't fully resolved," explains Dr Kayla Harrison, a textile economist at the University of North Carolina. "This, coupled with rising fuel costs and ongoing geopolitical issues, is pushing production costs higher for apparel manufacturers overseas, which gets passed on to US importers."

Rising cotton prices: Cotton prices have been volatile in recent years, impacted by factors like weather events and geopolitical tensions.

Increased demand: As consumer demand for apparel rebounds post-pandemic, pressure is placed on already strained supply chains, pushing prices up.

Falling consumer confidence and spending squeeze

The Conference Board's Consumer Confidence Index has seen a worrying trend. It has dropped for three consecutive months, reaching a low not seen since July 2022. This decline in confidence indicates that consumers are feeling cautious about their finances and may be less likely to spend on non-essential items like apparel.

“Consumers are feeling the pinch of inflation across the board," says Mary Peterson, a retail analyst at Bain & Company. "Rising grocery prices, gas prices, and interest rates are all putting a strain on household budgets. This leads to a shift in spending priorities, with apparel likely taking a backseat for many." Cautious spending attitude among consumers, likely due to factors like:

Inflationary pressures: Rising prices across various sectors, including food and energy, are putting a strain on household budgets, leaving less discretionary income for apparel purchases.

Interest rate hikes: The Federal Reserve's decision to raise interest rates could further dampen consumer spending power, as borrowing becomes more expensive.

Economic uncertainty: Geopolitical tensions and concerns about a potential recession are contributing to a sense of unease among consumers.

Impact on businesses

Apparel businesses are caught between rising import costs and declining consumer confidence. With import prices rising, businesses face the challenge of absorbing the additional cost or passing it on to consumers through higher prices. Meanwhile some businesses might choose to reduce inventory levels to manage costs, which could lead to stockouts and lost sales. Businesses might also resort to increased promotions and discounts to attract price-conscious consumers, further impacting profit margins. "We're seeing a lot of companies struggling to find the right balance," says John Lee, CEO of ABC Clothing, a major US apparel retailer. "If we raise prices too much, it could deter customers. But if we don't raise them at all, it could eat into our profits."

According to a recent article in Retailing Today, a major US clothing retailer reported a decline in sales of non-essential items like apparel in their latest quarter. The company attributed this to rising costs and a shift in consumer spending towards necessities.

In fact, some companies are opting for strategic discounts and promotions to entice cost-conscious consumers. Others are focusing on innovation, developing more affordable product lines or using alternative materials with lower costs. For example, XYZ Apparel, another major retailer, recently launched a new line of ‘essential’ clothing items made with recycled materials at a competitive price point. This strategy aims to cater to budget-conscious consumers while maintaining profitability.

Adapting to the new landscape

To move ahead in tough times, the apparel industry needs to adapt to the new economic landscape. For this, they need to diversify their sourcing strategies to reduce dependence on specific regions and mitigate risks associated with supply chain disruptions. Focus on efficiency as optimizing operations and logistics can help businesses manage costs and improve profitability. Highlighting the value proposition of products and focusing on quality and sustainability can resonate with cost-conscious consumers.