Speaking with style: Aidan O'Meara, president, VF Asia Pacific
O'Meara is responsibile for overseeing the growth of VF's brands across Asia and the Pacific
The easing of cotton costs this year has lifted the price pressure on major brands, according to VF Asia Pacific president Aidan O'Meara. And he tells just-style that the stellar growth of VF's brands across the region is continuing apace, offsetting headwinds that include increased competition, rising wages, inflation, and a more challenging Chinese economic outlook.
Hong Kong-based O'Meara, who oversees 30 brands in the region including Wrangler, Lee and The North Face, says it was the first time in 19 years at VF that he had seen inflation of production costs. Before then, "costs had always been on a downward slope."
Rising cotton prices have been a key problem for emerging market industries built on cost efficiencies. China's textiles makers were last year hit with prices per-tonne climbing from US$2,000 to more than US$4,000 on the Zhengzhou Commodity Exchange, China's key cotton trading exchange, between September and November.
Crucially for China, which imports 40% of its cotton, the key Cotlook A index, a key signal of global cotton prices, surged from US$0.86 to US$1.86 per pound between early August and mid-December 2010 before hitting a record 233.5 cents per pound in February this year.
In an interview with just-style, O'Meara says he believes prices have since slipped back due to "increased supply" and a pull-back by commodities traders who had been speculating and hoarding. Data published by the International Cotton Advisory Committee (ICAC) shows cotton production rose from 21.8m tonnes in 2009/2010 season to a projected 27.3m tonnes in the 2011/12 season.
VF responded to record cotton costs by lifting prices while also blending materials and shifting some production to cheaper manufacturing bases like Bangladesh and Indonesia, says O'Meara.
China currently accounts for 50% of VF's total sourcing operations in Asia. Globally however, Asia makes up less than half the company's sourcing supply says O'Meara, with other emerging locations such as Latin America, the Caribbean and Turkey supplying the bulk of the rest.
O'Meara sees a long-term shift in garment making out of China "due to the country's demographics" - by that he means a dry-up in cheap labour supply as the country ages.
But he also believes "superior infrastructure" and a vast knowledge base will continue to give China an advantage over alternative sourcing options where wage costs are lower.
Regional sales lift
The world number one jeans-maker by revenue - and growing through acquisitions (most recently of Timberland) - VF created a new role for O'Meara in 2007, heading its Asia operations. And he has delivered, most notably by lifting sales in the region, a new priority for the apparel conglomerate. "We had been running those businesses from afar," he explains.
Double digit GDP growth since O'Meara's relocation to Hong Kong has made China the number two market for Lee jeans - and O'Meara expects to make China a top-two source of sales for other brands at VF, which recorded US$7.7bn in sales last year.
O'Meara explains that VF has targeted Asia for US$1bn sales by 2015 and predicts his company will have opened 1,800 stand-alone stores in China by the end of 2011.
Tasked with finding local franchisees to introduce the company's brands to China, O'Meara has clearly had some success: Asia Pacific revenues have grown seven-fold between 2006 and 2011, "greater than we'd expected." He also stresses product customisation regionally within China, using research into body sizes and regional climates to tailor better fits in north and south China.
Clouds on the horizon
However, a more challenging Chinese economic outlook suggests clouds on the horizon. Inflation of between 4% and 5% a year remains a pressing worry for Chinese leaders, given the knock-on effects on the country's wages and competitiveness.
The consumer price index compiled by the National Bureau of Statistics shows a 3.3% rise for 2010. Inflation jumped over 5% in May this year. Meanwhile, manufacturers have also been hit by the inflation-fighting Beijing government scaling back bank lending, from US$114bn in April 2011 to US$85bn in May.
Chinese manufacturing wages, according to O'Meara, have inched well ahead of neighbouring Vietnam, India and thriving Indonesia. Partly prompted by rising prices, protests by workers seeking better wages and conditions have shaken factory bosses in China where VF jeans brands have competitors like Texwood Apple, which has aggressively pursued own-brand sales in China.
So, while it's good news for O'Meara that there will be less pressure coming from cotton prices in 2011, competition has increased. The world's top consumer of cotton, China's cotton consumption doubled to 11.5m tonnes a year since the country joined the World Trade Organisation in 2001, according to the China Cotton Association.
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