No need to do a double take. I didn’t make a editorial blunder. Clothes and cereal have much more in common than having a relational power to hearken you back to special moments in your childhood (Kix cereal anyone? That smocked pink dress you wore everyday for a month?). In fact, what they are soon to share is nothing romantic or heartwarming, but rather, the opposite: volatile and increased prices.
Tell me if this scene sounds familiar: You’re in the cereal aisle, grab a box of Special K and come to find out at the checkout that the $3.99 price is now $4.39. How can a box of cereal jump $.40 in one week? Although pricing is a complex equation, a major reason is the increase cost of the raw ingredients, which in the case of most cereals is wheat. If you recall from high school economics class, supply and demand is the ruler of all commerce. When high demand and low supply (say bad weather results in a low crop production) meet, the export price increases, as wheat has (close to 70% in less than a year) and one of two things happen. Either Kelloggs and its cohorts pass the increased cost onto consumers via a higher retail price, or they shrink the amount of cereal in each box by an ounce or two.
Most likely, they are doing both marginally and hoping you (the consumer) doesn’t notice. Which of course you do, but what choice do you have? You gotta eat breakfast so you eat the increased cost right along with those magical apple O’s.
Now, why doesn’t the same thing happen when you go to The Gap and buy a pair of jeans? Yes there may be different price points based on the type/treatment of denim, but you pretty much know how much you are going to pay. Well my friends, say goodbye because price stability is a concept soon to be considered vintage. Working in apparel production world has provided an up-close and very personal view of the soaring raw material prices, especially cotton.
Last year, cotton was selling at $.68 per pound and now producers are charging well over $1.35. Why the massive increase? Its simple: cotton consumption has exceeded production. With a rapidly growing middle class in developing countries such as China and India, demand for cotton is so strong that China has had to pull from its stockpile (I’m totally serious, they stockpile the stuff!). Bad weather and increased costs of production (oil anyone?) have resulted in a decreased crop yield and so like any other wanted commodity, the price increases as the goods go to the highest bidder. Are you still wondering what this has to do with you? Here is your answer. If the average pair of jeans has a consumption of 1.5 pounds of cotton, simple math tell us that the cost of the cotton alone has gone from $.90 to $.1.50. Someone has to pay that increase, but who? Up until this point, manufacturers and retailers have gone to drastic measures to avoid raising prices as consumers are still recession minded in their spending an even a small increase in cost may drive them out of the store. So, as an alternative, they may downgrade the quality of cotton used, or switch to a blended fabric such as poly-cotton, (trust me, you will notice a difference in the hand (feel) of the fabric)), but it is a much cheaper option. However, as the cost of crude oil skyrockets and demand has increased as manufacturers look for an alternative to cotton, polyester is now 25% more expensive. So, that won’t work. Shifting production to countries with less expensive labor costs (turns out middle class Chinese workers refuse to do slave labor.. the gull) isn’t the best option either as unstable political and social infrastructure in third world countries can result in not having goods shipped and God knows, a store without merchandise is the quickest way to go out of business. You can see the conundrum; raise prices and risk losing business to the competition, or, maintain prices and face even skinner margins and profits.
Alas, it seems the days of exporting inflation to other countries has indeed come to an end. Retailers such as Hanes, J.C.Penney, Patagonia and Nine West have all gone on record that they will be forced to increase prices and focus on adding innate value to the product so the consumer doesn’t focus only on cost/price. This strategy has worked with heritage and luxury brands for decades. The consumer willing to spend $1500.00 on a Louis Vuitton handbag will still most likely buy it for $1625.00. The love for the “LV” logo is simply that strong. But does The Gap, Theory or even a cult denim brands such as JBrand have die-hard loyal customers? Time, and the balance sheet, will tell.