- The double whammy. The cost differential in manufacturing a garment is about 15 to 1 domestic/offshore. This was a clear boom for the US apparel industry. But people often look past the impact on existing import prices during an excess capacity/deflationary input cost environment. Factory owners locked up multi-year deals with US brands and retailers at fire-sale rates to ensure factories did not run idle. The bottom line is that 2-3% annual import price reductions combined with a 3-point average annual increase in the import ratio resulted in unprecedented cost savings for the industry. Our math suggests about $4-5bn, or about 3 points of margin per year.
- Where'd the money go?? About 70% of the cash was passed through to consumers to stimulate demand. The other portion padded industry margins. The key call-out here is that pricing came down, per capita consumption rose dramatically, and margins went UP. We can't find many examples in other industries where pricing comes down and margins go up. This industry had lots of cake and ate it all.
- Now what? 1) The import ratio just hit 99%. Ouch! Not much room to go there. 2) Apparel import costs are rising at the greatest rate since 1992. Unless oil is going back to $50, this industry has a lasting problem. Ouch again!
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