Consumers Willing to Pay Over Price Increases for Cotton
Raw cotton’s volatile price increases have made many in the industry jittery, too. Yet new research from Cotton Incorporated shows that consumers are actually willing to pay more than what a potential fiber price increase would entail.
Jon Devine, Economist with Cotton Incorporated, says that up until recently, the idea that cotton prices could double in five to six months would have been largely hypothetical.
“The recent movement in prices is unprecedented,” Devine says. “There have not been any increases in cotton prices of a similar magnitude that we can look at, in order to get an idea about how prices in the supply chain might react.”
Devine says that retail prices can be expected to rise about 10% or more given the amount of cotton fiber in apparel – the first increase in more than a decade, leaving many with questions about how consumers might respond higher prices. To address these questions, the Cotton Incorporated Lifestyle MonitorTM Survey asked consumers how much more they would be willing to pay. The results are promising; consumers said they are willing to pay up to 25% more for quality items.
Dr. Steven R. Cunningham, director of research and education at the American Institute for Economic Research, explains that quality – whether real or perceived – has an impact on consumers’ threshold for price increases.
“It might be that their quality focus would lead consumers to pay, say, 15% more for apparel that has a 5% increase in cotton costs and a 5% increase in costs associated with improved quality,” Cunningham says. “In other words, perceived quality counts.”
Cunningham’s assertion is echoed by Monitor data, which reveal that 74% of female consumers agree better quality garments are made from all natural fibers like cotton.
Additionally, more than half (55%) maintain they are willing to pay more for natural fibers like cotton.
Melissa Bastos, manager, market research at Cotton Incorporated, found that consumers are actually willing to pay more for their cotton garments than a fiber price increase would entail. In a recent podcast, which can be found at facebook.com/cottoninc, Bastos explains that for denim jeans, consumers had paid, on average, $27.35 per pair. A potential cotton price increase would raise the cost to $30.29, but consumers said they are willing to pay an average of up to $32.78.
This flexibility on price may be due in part to consumers’ own optimism about their economic situation. Almost half (48%) of women say they are very or somewhat optimistic about their personal financial situations, according to Monitor data. Among women earning $50,000 or more, 75% report feeling the same.
Others in the industry believe that this price flexibility comes at a cost: consumers will simply buy less product. According to Cunningham, though, it is not that simple.
“Studies of price responses indicate that with all else equal, consumers will cut back on their purchases in the face of a price increase,” Cunningham says. “But this assumes the product has not changed at all – the only thing that has changed is the price. It is also reasonable that cotton apparel is what we call a ‘normal good,’ which means that if personal disposable income continues to grow, then consumers will buy more of it. So quality improvements and increases in income from a recovering economy could outweigh the price increases.”
Some retailers and manufacturers are examining increasingly creative ways to cut costs. In a recent Boston Globe article, clothing chain Aeropostale Inc. said it is looking at less expensive graphics techniques and shrinking the amount of fabric it uses in tags — a move that will save the company 5 cents on every garment.
“A lot of retailers are passing all of the cost on to consumers,” said Kenneth Ohashi, a spokesman for Aeropostale. “We just don’t think that’s realistic. We will pass on some, but we are looking very carefully at ways to gain efficiencies without taking the quality out.’’
Cotton’s price increases may eventually stabilize as growers set aside more acreage for the crop in response to its high prices. Devine, of Cotton Incorporated, says the early consensus for the 2011/2012 crop year is an increase in production of about 10%. “If such an increase is realized, it will result in the largest cotton harvest ever recorded,” resulting in production about 5% larger than the previous record set in 2006/07.
“Lower prices over the past several years led to lower cotton acreage,” Devine says. “The current record high prices are expected to result in record cotton production, though the question now is what kind of a decrease in cotton prices can be expected from this increase in production. Only time will tell.”