You're flipping through the TV channels the Friday after Thanksgiving and spot a news clip of shoppers waiting in a long line to buy the new X-Bot electronic game from Wal-Mart or some other “Big Box” store.
You reflect for a moment on the mental state of folks who would do such things and change the channel, probably never thinking about the impact this craze for the latest video game or other electronic gizmo has on the demand for cotton textile and apparel products.
Although those topics are seemingly unrelated, this latest venue of competition for the consumer dollar is one of the more troubling factors in the current market projections for cotton, according to J. Berrye Worsham, president and CEO of Cotton Incorporated.
“I pulled together some numbers for 17 or 18 major apparel retailers and found that the average after-tax profit was about 3 cents on the dollar,” said Worsham, who spoke recently on “National and International Factors Influencing California Cotton Production” at the Central Coast Cotton Conference in Shell Beach, Calif.
“That's not a lot,” he noted, adding that retail margins for textile and apparel products have not been trending up in recent years although 2004 was a better year for most companies.
“The bottom line is that clothing, home furnishings and so on are competing for the consumer dollar with electronics and computers and video games,” he said. “We've had so much competition for that dollar that in 9 of the past 10 years, the price of clothing has fallen — by nearly 3 percent in some years.
Beat down suppliers
“The take away message is that the retailer cannot add to his price,” he said. “They're under pressure from shareholders to maintain profits. So they are relentless on the cost side. Companies like Wal-Mart especially are beating down its suppliers to make sure their prices are low. At the same time, they are telling the suppliers they want better quality.”
The result is that the same apparel product that your wife purchases at a Wal-Mart or a Dillard's today is probably cheaper than it was five years ago, but the quality is probably also better.
Growers sometimes complain that they're growing higher quality cotton, but not getting paid for it. “Unfortunately, the reality is that neither is the retailer,” Worsham said. “Consumers are receiving higher quality at a lower price.”
In the current market, quality is almost a given, said Worsham. “You just can't afford to have any kind of negative reputation on quality. The quality of U.S. cotton going forward is going to be a big deal in terms of staying in the game and being able to compete in the world market.”
The other unfortunate reality is that video game purchases aren't the only drag on clothing purchases in today's economy.
Worsham showed a slide comparing U.S. retail apparel sales growth and the five-year average for disposable income growth. The graph depicting the ratio between the two had a decided downward list.
“What we would like to see here is something that is relatively flat,” he said, pointing to the slide. “That means that for every 1 percent change in disposable income you would have a 1 percent change in apparel sales. If that were the case, that line would be perfectly straight.
“The reality is that for every 1 percent change in income, it's taking about a 0.8 percent change in apparel sales. So what we've seen over the past 15 or so years is a kind of a downward movement in this slope. That means we have to earn more and more income to get the same amount of growth in demand for apparel, and apparel is our biggest market for cotton.”
Part of the explanation for that is consumers, particularly younger consumers, today have other options. “They have all kinds of gadgets, such as cell phones that didn't even exist 15 years ago,” says Worsham. “They have computers and iPods and all this stuff, and that is, to some extent, cutting into demand for textile products.
On the other side of the spectrum, retail sales growth in the U.S. market is likely to be constrained by several factors, including demographics. The age of the U.S. population is rising, leading to increasing costs for health care and education and a possible overall slowing of growth in overall U.S. consumer spending.
“In the past 20 years or so, the United States has been the driver in the world cotton market in terms of consumer demand,” says Worsham. “I think that's going to slow, and I think we will need to look for opportunities to grow consumer demand outside the U.S. market because we're not going to be able to carry that ball.”
Thanks to Cotton Incorporated, cotton's market share has increased dramatically in the United States. (Worsham didn't say those first few words, but most of his audience would have agreed with the addition.) But outside the United States, that hasn't been happening.
For retailer brands to survive, he said, they will need more new products; they will need to do a better job of controlling costs; better communications with their customers; faster inventory turnover; enhanced product characteristics; and continued improvements in quality.
If you look at cotton use in all fiber products in the United States — apparel, home furnishings, floor coverings, automotive products — cotton's market share has held fairly steady around 41 percent since 1998. (“If you put just apparel and home furnishings this line would be steadier and straighter up,” Worsham said. “But to do a worldwide comparison, I have to include all these other categories.”)
Outside the United States, the opposite is true. Cotton's share of all fiber in world markets when you remove the United States has been declining — from about 51 percent to 39 percent — over the past 15 years.
“So worldwide, we have left a lot of demand for cotton on the table,” he said. “If we had just maintained our market share as recently as 1997 in the rest of the world, we could possibly be using another 10 million bales of cotton. You go back to our graph on supply and demand and just think how that would change the value of cotton.
“It would change some other things, as well. If the value of the cotton was higher, and we had another 10 million to 15 million bales of demand, I don't think we'd be hearing from the West Africans or the Brazilians. This is one of the biggest challenges we face — how to improve the demand for cotton outside the U.S. market.”
Cotton Council International, the export development arm of the National Cotton Council, and Cotton Incorporated have been working on joint projects to try to increase demand for cotton outside the United States.
“We're doing more now in China to investigate what options we have whether it's in public relations or advertising to try to stimulate demand for cotton compared to other fibers,” he said. “But we need to do more in that country and in other countries that have the potential to make much greater purchases of cotton-based textile and apparel products.”