Change On Horizon in 2005
Forecast Cloudy on Pricing Impact of Quota Elimination
By Staff -- Home Textiles Today, 11/29/2004 8:12:00 AM
New York — Home textiles insiders, faced with the elimination of protective quotas in January, vary from cautious optimism to qualified concern in their prognostications for business in 2005.
"From a pure industry business standpoint, quota elimination will set up a wild, wild West scenario whereby all forms of entities will be vying for business in the strongest consumer market in the world — the United States," said Keith Sorgellos, president and CEO of Home Source International.
"Increased supply bases, overseas suppliers trying to set up shop in the United States, trading companies wanting a piece of the action, importers trying to set themselves apart, U.S. mills trying to figure out next steps" will all be key components in that scenario, he added.
Not everyone, however, sees such calamitous change on the horizon.
Jeff Hollander, president and chief operating officer of Hollander Home Fashions, said, "We don't believe there will be any impact from quota elimination on pricing. While there will be some benefit from quota — because of increased costs on labor, shipping, land freight, fuel and raw materials — prices will continue to be the same if not increase at some point."
Ted Matthews, vice president of corporate communications at Springs Industries, also said that any quota-removal trepidation is unwarranted.
"The doom and gloom that some people predict reminds me of the build-up to 1999 and the whole Y2K crisis that wasn't. Do things explode on Jan. 2? No. Will things be different? Yes, but by how much and what exactly, no one knows yet … . What we're expecting in 2005 is a different marketplace, because we anticipate there will be an increased level of imports that's going to have a negative impact on pricing, meaning increased pricing pressures on the business," he said.
Others feel that price adjustments have been factored in by suppliers. "I think we have already seen the elimination of quota being priced into the products at between an 8 and 15 percent decrease in price in the last six to nine months. We actually think that we will see prices stabilize into 2005," said Jeff Jacobs, executive vice president of sales and marketing at Keeco.
Overall, most agree that the elimination of quota will result in lower cost goods and some price deflation. The question remains: Who will reap the benefits — the manufacturer, retailer or consumer?
Pavan Uttam, vice president of Milli Home By Marsha Cutler, said the buck will probably stop with the buyer. "If holiday sales go well, prices will be at the same levels or marginally lower. If the buyers get any cost benefits from the quotas they'll use it to bolster their own margins."
Sorgeloos also says any savings probably won't find its way to store shelves. He predicted "about a 3 percent average decline, which most retailers will pocket — with the exception of the mass channel."
Providing some confirmation, Bruce Morel, Saks Inc. vice president of product development for textiles and housewares, said retailers would be smart to hold any newfound post-quota cash.
"We need to see this as an opportunity for us — and I mean all (home textiles) retailers — to shore up, take the cost enrichment and take it as a margin rather than a chance just to lower retails. If not, it will start a downward spiral. … what will happen is that if we don't keep the retails, we'll lose again. We need to take those cost concessions and just put them into the margins," he said.
Jim Whitehead, chief merchant with The Great Indoors, predicts quota elimination will result in lower prices to the tune of 10 to 15 percent. "Our goal is that, yes, we will have selective price breaks, and we'll be passing some of that savings on to the consumer. But we'll also be trying to keep something in our pocket as well."
Fritz Kruger, vice president of marketing at Pacific Coast Feather Co., said that suppliers can only handle increases in raw materials costs to a certain point. "We are seeing lots of upwards price pressures in raw materials and finished goods costs. It's been hitting the wholesalers for a while now, and so negative price increases in the first half will be a pretty heavy activity. The price increases have to be passed along at this point because margins are so thin in this industry that costs can no longer be absorbed."
Retailers are also having difficulty absorbing the level of promotional selling that seems necessary to move merchandise today. Most think promotional activity is higher than it should be.
Scott Walter, director of product development at Louisville Bedding Company, said, "I think the amount of promotional activity will remain pretty much the same as now, which is probably an unhealthy focus on promotions. We need to innovate our way out of our reliance on promotions, give the end customer compelling merchandise with real benefits, not just features."
As prices go down and margins get squeezed, it is clear that suppliers and retailers must run their businesses as efficiently as possible, cutting cost out of the equation wherever it can be found. A large part of keeping costs in line is minimizing inventories while always staying in-stock and replenishing shelves with new merchandise — not an easy task when a large quantity of product is being shipped from halfway around the world.
Doug Kahn, chief operating officer of Croscill Home, said that tight inventory management is key to remaining competitive. "We are working hard on supply chain issues to collapse the supply chain and get deliveries to retailers quicker and quicker. You don't have the room to be left holding excess goods anymore. Back room issues will become more and more important."
According to Saks' Morel, keeping things fresh can be challenging when dealing with supply lines that span many time zones. "The only reality is that China can't turn around and ship in the next 30 days without a little upfront time," he said.
Uttam adds that retailers will continue to ask a lot of their suppliers. "(Retailers) are putting more pressure on vendors to turn around the goods much more quickly, and they are also asking vendors to hold goods in warehouses and replenish them quickly."
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