COTTON LIFESTYLE MONITOR  FAST FACTS

Supply Chain Insights - Rising Prices: Will Consumers Pay?

Consumers are facing rising prices in all aspects of their life including food, gas and healthcare. Now potentially for the first time in fifteen years, clothing prices at retail may raise in response to increasing raw material costs. World cotton prices, as described by the A Index, increased 150% between August 2010 and March 2011. However, cotton prices are not the only fiber prices to have seen increases in the past several months. Polyester prices tend to follow movement in cotton prices, and have risen 60% since August. As lower cost sourcing options became increasingly available over the last fifteen years, apparel prices have fallen. The U.S. apparel CPI in 2010 was 12.4% lower than it was in 1995. With the recent increases in all fiber prices, however, the prospect of the first significant increase in retail apparel prices in more than a decade seems likely in 2011.

With limited income, consumers face the challenge of how to allocate the money they have across the products that they need and want. Higher retail apparel prices could affect consumer apparel spending and higher prices for necessities like food and energy could affect consumers� ability to buy clothing. Given that it has been such a long time since U.S. consumers have faced any increases in clothing prices, there are many questions regarding how they will react. Results from Cotton Incorporated Lifestyle Monitor™ survey investigated this question, and found that most consumers do not want to sacrifice quality and product longevity for a lower price.

THE CONDITIONED CONSUMER

U.S. consumers continue to deal with stagnant incomes and persistent economic insecurity. In response, they are being more cautious in their spending and saving more. In order to find the best value for their apparel dollar, consumers shifted where they shop, moving more of their apparel dollars to mass merchants and off-price retailers and shopping multiple retail channels. More consumers are comparison shopping either online or in-store and looking for discounts by either using store coupons or waiting to buy on sale. Just three years ago, only 64% of consumers surveyed by NCH Marketing Services indicated that they regularly used coupons. As savings rates climbed from levels near 2% prior to the recession to nearly 6% in 2010, the percentage of respondents indicating that they regularly used coupons grew to 78%. Over the last ten years, the percentage of consumers who buy clothing on sale rose from 67% in 2001 to 78% in 2011. As discounting increased markedly during this period, consumers were conditioned to expect low prices and sales. Correspondingly, retailers have come to rely on pricing as a sales strategy.

EXPECTATIONS FOR QUALITY

According to Cotton Incorporated Retail Monitor™ survey, 74% of clothing at retail is made of cotton. The reason why retailers are offering so much cotton is because it is the consumers’ preference. Consumers consider cotton to be a comfortable, soft, durable and quality fiber, and quality is one of the most important factors in their buying decisions regardless of where they shop. In fact, 91% say that quality is important to their apparel purchases and 75% of consumers consider natural fibers better quality than synthetic fibers. Not only do they want quality, they want the best price, and these factors combined equal value for the consumer.

Research indicates that some retailers may switch their raw material choices to save in production costs. However, these changes may sacrifice the quality of the product and consumer expectations of how the product feels, wears, and washes. More than half of those surveyed responded that they would be dissatisfied if cotton was substituted for synthetic fibers in their favorite cotton clothing items such as denim and t-shirts. If price increases are inevitable, consumers are willing to pay an average of 25% more for t-shirts and 20% more for jeans, if necessary, to ensure that their apparel stays cotton-rich. For example, consumers responded that they paid an average of $9.56 for their last t-shirt and would be willing to pay up to $2.42 more for that same t-shirt. Likewise, consumers paid an average of $27.35 for their last pair of jeans and would be willing to pay up to $5.43 more for that same pair of jeans.

MANAGING PRICE PRESSURES AT RETAIL

Although consumers have changed their buying habits, they continue to expect quality in the products that they buy. If shoppers are dissatisfied with the quality of products, they likely will look for other places to shop. As a result, there are limits to the amount of quality that can be engineered out of products to lower costs without affecting the reputation of the brand. Consumers indicate that they are willing to pay for qualities often associated with cotton, and an emphasis on quality with a good, better, best strategy in mind may add value and be a way to alleviate the higher prices passed on to consumers.

Another factor to remember when addressing fiber decisions is that cotton prices are cyclical. This year�s record prices are expected to motivate farmers to produce a record harvest next fall. With increased cotton supply available, the expected decrease in prices suggests that current pressures on price stemming from cotton will eventually ease. Given expectations of easing prices, short-term strategies that may damage long-term reputations may be risky. While it may be necessary for retailers to raise prices, they cannot forget how and why consumers shop; to look for the best value for their money.

ABOUT THE SURVEY
Cotton Incorporated Lifestyle Monitor™ survey is a monthly on-line research study that gauges the attitudes and behavior of U.S. consumers regarding clothing, appearance, fashion, home furnishings, fiber selection, and other topics. Each year, 6,000 consumers are surveyed, 60% female and 40% male, aged 13 to 70, and representative of the U.S. population based on ethnicity, income, education, and geography.