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Costing . . . Why this tsunami of cost increases?

Costing . . . Why this tsunami of cost increases?. 2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. O’Rourke. Recent Price Increases . . . . Unprecedented Limited relief in sight Global scale Regional implications. Key Drivers . . . . Increase in global fiber demand

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Costing . . . Why this tsunami of cost increases?

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  1. Costing . . .Why this tsunami of cost increases? 2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. O’Rourke O'Rourke Group Partners LLC

  2. Recent Price Increases . . . • Unprecedented • Limited relief in sight • Global scale • Regional implications O'Rourke Group Partners LLC

  3. Key Drivers . . . • Increase in global fiber demand • Recession interrupted / masked the trend • For example, China: • Per capita fiber consumption rises from 15 to 33 pounds over the last decade • Less arable land available for cotton • More needed to feed developing populations • Food equals 40 – 60% of household income • Widespread weather issues O'Rourke Group Partners LLC

  4. Fabric Prices . . . • Significant rise in raw material price inputs • Cotton fiber nearly triples over six months • Polyester staple fiber up 40% • Price per yard gap East/West narrows • Fabric cost component of garment increases • Disproportionately to other component costs O'Rourke Group Partners LLC

  5. Other Factors . . . • Fabric availability tighter, increasing lead times • Asian labor cost increases in key countries • Less available labor in China (for apparel) • Fuel increases drive up transport costs • Increasing energy demand and costs in Asia • New financing terms • Deposits and/or fabric pre-paid • More Letters of Credit • East/West garment price LDP narrowed and/or eliminated in various apparel categories O'Rourke Group Partners LLC

  6. Average Apparel Manufacturing Hourly Labor Costs – US $ Fully loaded, including social charges – Q4 2010/Q1 2011 O'Rourke Group Partners LLC

  7. Labor Productivity Matters . . . Some as high as 75% Inland factories at 55% -65%; Improvement emphasis. Some at 60-65% 35-45% more typical but targeting 50% + with USAID program. 40-45% not uncommon; improvements are slow. O'Rourke Group Partners LLC

  8. Comparative Lead Time – DaysOrder to US Distribution Center Some reporting 42 – 50 days. O'Rourke Group Partners LLC

  9. Basic Denim Pricing DifferentialsAsia v. Regional (February 2011) 10% Denim gap to Asia 15 – 20% Basic Cotton Twills 18 - 20% Cotton Knit Jersey 23 – 25% Woven Textured Poly O'Rourke Group Partners LLC

  10. Men’s Basic 100% Cotton Denim Jean CostJune 2010 v. February 2011 13.75 oz. OE/OE, medium 8.96 8.40 7.31 7.07 Garment: China NICARAGUA China NICARAGUA Fabric: China Mexico China Mexico O'Rourke Group Partners LLC

  11. Product Sourcing ImplicationsPoly/Cotton Twill Pant / $ 10.40 10.57 10.47 10.37 9.57 9.91 O'Rourke Group Partners LLC

  12. Selected Uniform MarketsEstimated % Regional Sourcing 85% 70% CBI/CAFTA 65% 60% 50% 45% MEXICO USA O'Rourke Group Partners LLC

  13. Regional opportunities abound. . • Everyone is re-evaluating costs and suppliers. • All cotton-dominant categories • Highest fabric yield-required categories • Jeans • Trousers • Greatest quality and highest in-stock program requirements • Uniforms O'Rourke Group Partners LLC

  14. Regional Competitiveness in Apparel Manufacturing • Degree of regional cost competitiveness takes many by surprise. • Synthetics getting another look regionally • Increased demand for speed to market. • Leaner inventories required at retail. • More replenishment program shifts. • More frequent, faster fashion deliveries. • Cycle compression in pre-production facilitating and providing more cost reduction. • Must improve sampling turnaround for basic fashion items. O'Rourke Group Partners LLC

  15. Other Important Trends • Big box retailers and major brand owners involved in fabric cost negotiation. • Asian garment shifts to West but trim and findings often remain Asian-sourced. • Buyers want to delay associated “new source” product testing and approval process. • Regional capacity limitations emerge. • Who will lead expansion? O'Rourke Group Partners LLC

  16. For further information: O’Rourke Group Partners, LLC Mary T. O’Rourke Managing Director morourke@ORourkeGroupPartners.com (917) 567-3540 www.ORourkeGroupPartners.com

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