Production Costs Rise - Who will pay in this tough economy?

Retailers have been plagued by issues; some have suffered from product misses, others from deep discounts, and everyone has been hurt by the decline in consumer spending. But one factor that has actually been a positive for the sector may now begin to put pressure on retailers.

After a decade of a favorable sourcing environment, the cost of production is rising. Prices for cotton have nearly doubled over the last year, capacity in China is drying up and freight costs are expected to rise. And retailers, who have finally begun to regain their footing, will now be forced to up their prices to pass along some of the costs to consumers.

All of this comes at a particularly bad time, as retailers are looking to rebuild inventory levels after last year's drastic cuts.


For those retailers that offer unique and compelling merchandise, this might not be an issue. "[Higher costs] will likely impact the undifferentiated, low-cost providers most significantly," Jaffe said. "A retailer, competing primarily on price, will be challenged as its main point of differentiation will be undermined."

In other words, while a $2 increase may not be a big deal for a $180 Anthropologie dress, it could well sway shoppers from buying a $10 t-shirt that is now $12.

Soucre: The Street