As families tighten their belts, stores find their costs have gone up. Can they afford to pass the higher prices along to the consumer?
Retailers in the U.S. may be dreading the approach of the school year almost as much as kids, given a forecast for the worst back-to-school season in seven years.
Even with projections for almost no growth in purchases, stores have to make a tough decision. If they don’t raise prices, higher costs for everything from cotton to shipping to labor in China will eat away at their already narrow profit margins, says Burt Flickinger, managing director of Strategic Resource Group, a New York retail-consulting firm.
“It’s an absolute balancing act,” said Patricia Edwards, a Seattle-based portfolio manager and retail analyst with San Francisco-based investment firm Wentworth Hauser and Violich. “This is retail high-wire at its finest.”
As retailers such as J.C. Penney, Gymboree and Macy’s face the higher costs and a U.S. dollar worth 9 percent less than a year ago, their customers are up against similar economic realities. Americans are confronting $4-a-gallon gasoline and rising food prices as the housing market declines, asset values fall and jobs are lost.
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Shoppers “don’t have any more money in their pocket,” said Joseph Gromek, chief executive officer at Warnaco Group, which has still chosen to raise prices on its Calvin Klein jeans. “So to think that they’re going to pay more for the same is not going to happen. The consumer is not willing, and candidly today not able, to spend more on discretionary items.”
Purchases during the July through September back-to-school season — retailing’s second biggest after Christmas — may grow at the slowest pace since 2001 this year, climbing 1 percent to $38.5 billion, according to the International Council of Shopping Centers.
Almost 30 percent of U.S. parents plan to spend less money this year, according to a July 8-10 survey of 1,000 adults by America’s Research Group. Last year, that figure was 16 percent, said Chairman Britt Beemer.
Stores charging 8 percent to 9 percent more for some items are hoping to mask the inflated prices with well-promoted discounts and new merchandise, which is already priced higher, Strategic Resource’s Flickinger said.
“It’s a risky strategy, because people who are already buying less at full price will have even more sticker shock and be less inclined,” Flickinger said. “This is simply a matter of survival.”
One of the biggest contributors is inflation in China, where a quarter of all the clothes sold in the U.S. are made. China’s producer price index (PPI), a measure of inflation, climbed 8.8 percent in June, the biggest increase since Bloomberg data began in 1999. In May China’s PPI rose 8.2 percent.
That in turn helped push U.S. costs on goods from China up 4.8 percent in June, the biggest year-over-year gain since the Labor Department started tracking the data in 2003.
Footwear, one of the purchases parents can’t easily avoid each year, has felt the squeeze. Eighty-four percent of shoes sold in the U.S. are made in China.
“We’ll continue to look at sourcing some of our products from other countries such as Indonesia and Vietnam,” said Ron Fromm, the chief executive officer of Brown Shoe, the maker of Buster Brown and Dr. Scholl’s footwear. “But they could never build to the volume to offset the main production capability in China.”
Companies that have announced price increases include Collective Brands, owner of the Payless ShoeSource chain; Rebels Footwear, which supplies Macy’s with juniors’ shoes; and Brown Shoe.
For discounters like Wal-Mart and Target, the trend isn’t all bad news. Both order larger quantities than department stores, said Flickinger, which means they can negotiate better prices from suppliers. This may allow them to “selectively” raise prices 3 percent to 7 percent in the next month, he said.
Wal-Mart, the world’s largest retailer, and Target said they’re working with suppliers to absorb costs rather than pass on increases. Target will be “price-competitive” with Wal-Mart for back-to-school, spokeswoman Lena Michaud wrote in an e-mail.
They may also benefit from increased traffic, according to a survey by Brand Keys, a market-research firm. Eighty-five percent of parents said they would shop for back-to-school at discounters including Wal-Mart, up from 75 percent from 2007.
Some retailers are saying they will tough out the higher costs — at least until next year when the economy may bounce back. J.C. Penney, Children’s Place and American Eagle Outfitters said they weren’t raising prices for back to school.
“You can’t totally sacrifice sales, but you can’t sacrifice margins either,” said Wentworth Hauser’s Edwards. “Show me the margin, show me the earnings.”
Bloomberg News reporters Kyunghee Park in Hong Kong and Mark Clothier in Atlanta contributed to this article.