Blog: Leonie BarrieRetailers brace for higher sourcing costs

Leonie Barrie | 28 June 2010

Sri Lanka's government last week rejected concessions from the European Union that would have led to the renewal of preferential trade benefits. The decision means the country will lose its GSP+ status from 15 August, and could lead to higher prices on some garments sourced from the Indian Ocean island.

But local garment makers say the loss of the duty-free access will not be catastrophic, pointing out that just one-third of total exports will be affected. The end of preferences would mean exports revert to a duty of up to 9.6% - effectively a 9.6% price hike - as they fall back to GSP levels.

The European Commission (EC) had been willing to allow the GSP+ to continue for a further six months provided the Sri Lankan government agreed to 15 conditions - including a written commitment to improving the country's human rights record. But these were rejected for "infringing national sovereignty."

The loss of the GSP+ concession comes as retailers brace against higher sourcing costs in the coming months from a range of issues that include the weakening Euro and increased labour costs in China - as well as last week's decision to allow the Chinese yuan to appreciate against the dollar.

While a combination of high stock levels and increased production costs in Asia did not prevent Swedish fashion retailer H&M posting a 30% hike in first-half profit, it says it is closely monitoring cost inflation and demand for spare capacity.

While probably more of a political gesture than a major reassessment of the currency's value, any hike in the yuan (and consequent rise in ex-China prices for textiles, clothing and footwear) will benefit other Asian suppliers. And US T-shirt and underwear maker Hanesbrands has played down the impact, saying its balanced global supply chain allows it to offset a range of manufacturing variables.

The likely effects of yuan appreciation could also see the Chinese market becoming more enticing to western companies if a stronger currency gives consumers there more purchasing power.

US clothing retailer Gap Inc is the latest to tap into the Chinese market, after finally revealing plans to open four Gap brand stores and an online shopping site later this year. The company says the move is the "cornerstone" of its global expansion, with more stores proposed in major regions, including Hong Kong.

For UK retailer Marks & Spencer, the focus of its overseas expansion is India, where it is committed to doubling its retail presence. The company currently operates 17 stores in India in conjunction with Reliance Retail, but wants to increase that number to more than 50 over the next three years.

Revenue surges from emerging markets have also been key to a 28% hike in full-year profit at Nike, although futures orders for the June to November period reflect a mixed picture. The fast-changing dollar/euro rate transformed future order rises in Europe into a 2% decline, while escalating oil, labour and freight costs also weigh heavily on its short-term outlook.


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