The falling yuan gives retailers another lever to negotiate favourable costs

The falling yuan gives retailers another lever to negotiate favourable costs

The falling value of the Chinese yuan is being seen as another lever for US brands and retailers to drive down product costs, with one analyst describing it as a “tailwind for those sourcing apparel from China.”

The Chinese currency is down 3.8% versus the dollar so far this year, effectively making imports from China cheaper for those retailers with dollar-denominated contracts.

Susan Anderson, analyst at FBR Capital Markets, believes that while many companies have shifted production away from China, those with an “above-average sourcing exposure” to the country include children's players, those with more intricate workmanship that lends to Chinese skilled labour, and select active/outdoor players.

She also points out that other Asian currencies have also moved similarly to the yuan as other supplier nations vie to remain competitive, implying potential FX benefits for other apparel-producing countries like Vietnam.

“Assuming a yuan devaluation of -3%, we estimate an annual gross margin benefit of [approximately] +15 bps on average” - rising to +35 bps for the players with higher exposure.

That said, given the apparel industry's six- to nine-month lead times, it could take some time before export prices could fall. Anderson believes the benefits could begin in the first half of 2016, “potentially earlier if contracts are renegotiated.”

And of course, apparel manufacturers are unlikely to pass through all of the currency benefits.

“But the broader picture is that this gives retailers another lever to negotiate favourable costs. We see a good runway for favourable sourcing costs over the next couple of years via lower cotton/oil prices, slack in apparel manufacturing, TPP optionality, and now favourable currency movements, though labour rates are expected to continue to increase.”

The analyst also sees the lower Chinese yuan likely to persist.

“With the potential for Chinese economic growth to decelerate, we expect the yuan to remain low relative to the US dollar: China may continue to pressure its currency to boost exports in an attempt to bolster economic growth; in addition, capital outflows may further pressure the currency.

“We see the yuan staying at –3% to –4% YOY relative to the US dollar, near term, as a high probability, with the potential for further declines.”