3 in 9 = Pain

Not sure if anyone is paying attention, but India's inflation rate has gone parabolic. India only represents 5% of US apparel, but is a huge margin buffer when China holds firm on price. That buffer is officially gone.

India's wholesale price index jumped from 8% to 11% over the past 9 weeks - its steepest increase in years. Since the 'buy Ch-India' trade started its implosion in October, wholesale prices went from 3% to 11% -- and GDP is now rolling the other way. So it was in a mode for 3 full years where nominal GDP outpaced inflation by a solid 3 points. That's changing.

While this is flat-out bad for India, I'm still of the view that the impact on the apparel industry of the culmination of events in China, Thailand, Indonesia and India will fly under Wall Street's radar. That is -- until CEOs admit that industry margins are 2-3 points too high. Certain models are prepared for this -- like Ralph Lauren and Liz Claiborne. Others, like Guess? Warnaco and a host of others, are not.
  • The first Exhibit shows that over the past 7 years, China's share of US apparel imports went from 8% to 30%. That was a seismic event for the industry. The share gain was very steady, with one major exception - the first 3 quarters of 2006. During that time period, China began to hold firm on price, subsequently lost share, and it went right into India's pocket.
  • Now, China is holding firm on price again, simply because it can. But with rampant inflation in India and Singh fighting to tame social unrest to secure re-election, I'm not so sure if India will be there to bail out US apparel importers by hacking prices and eating the margin pinch like it did in 2006.
  • Yet more proof that the US apparel industry needs to pick one of three options; a) either succumb to the prospect of sustained higher prices out of Asia, b) find some ingenious way to grow margins in a slow growth, high-cost environment (i.e. M&A), or c) attempt to pass through higher prices to consumers, and likely take it on the chin with unit demand.

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