Costing... Why this tsunami of cost increases? 2011 AAPN Annual Meeting Miami, Florida May 2, 2011 Mary T. ORourke O'Rourke Group Partners LLC.

Costing . . .Why this tsunami of cost increases?

2011 AAPN Annual MeetingMiami, FloridaMay 2, 2011

Mary T. O’Rourke

O'Rourke Group Partners LLC

Recent Price Increases . . .

Unprecedented Limited relief in sight

Global scale Regional implications

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Key Drivers . . .

Increase in global fiber demand Recession interrupted / masked the trend

For example, China: Per capita fiber consumption rises from

15 to 33 pounds over the last decade Less arable land available for cotton

More needed to feed developing populations Food equals 40 – 60% of household

income Widespread weather issues

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Fabric Prices . . .

Significant rise in raw material price inputs Cotton fiber nearly triples over six months Polyester staple fiber up 40%

Price per yard gap East/West narrows

Fabric cost component of garment increases Disproportionately to other component costs

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Other Factors . . .

Fabric availability tighter, increasing lead times Asian labor cost increases in key countries Less available labor in China (for apparel) Fuel increases drive up transport costs Increasing energy demand and costs in Asia New financing terms

Deposits and/or fabric pre-paid More Letters of Credit

East/West garment price LDP narrowed and/or eliminated in various apparel categories

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Average Apparel Manufacturing Hourly Labor Costs – US $

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Fully loaded, including social charges – Q4 2010/Q1 2011

Labor Productivity Matters . . .

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Some at 60-65%

35-45% more typical but

targeting 50% + with USAID program.

40-45% not uncommon;

improvements are slow.

Inland factories at 55% -65%;

Improvement emphasis.

Some as high as 75%

Comparative Lead Time – DaysOrder to US Distribution Center

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Some reporting 42 – 50 days.

Basic Denim Pricing DifferentialsAsia v. Regional (February 2011)

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10% Denim gap to Asia15 – 20% Basic Cotton Twills18 - 20% Cotton Knit Jersey

23 – 25% Woven Textured Poly

Men’s Basic 100% Cotton Denim Jean CostJune 2010 v. February 2011

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Garment: China NICARAGUA China NICARAGUA Fabric: China Mexico China Mexico

8.96

7.07

8.40

7.31

13.75 oz. OE/OE, medium

Product Sourcing ImplicationsPoly/Cotton Twill Pant / $

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Fabric Source China China China China Mexico U.S.Fabric $/Linear Yard 2.90 2.90 2.96 2.96 3.65 3.85

Fabric Yield/Yards Req'd 1.5 1.55 1.6 1.6 1.5 1.5

Labor Productivity 0.75 0.60 0.50 0.65 0.65 0.65

10.40 10.57 10.47 10.37 9.57 9.91

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Selected Uniform MarketsEstimated % Regional Sourcing

CBI/CAFTA

MEXICO

USA

45%50%

60%

65%70%

85%

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Regional opportunities abound. . Everyone is re-evaluating costs and suppliers. All cotton-dominant categories Highest fabric yield-required categories

Jeans Trousers

Greatest quality and highest in-stock program requirements Uniforms

Regional Competitiveness in Apparel Manufacturing Degree of regional cost competitiveness takes

many by surprise. Synthetics getting another look regionally Increased demand for speed to market.

Leaner inventories required at retail. More replenishment program shifts. More frequent, faster fashion deliveries. Cycle compression in pre-production facilitating

and providing more cost reduction. Must improve sampling turnaround for basic

fashion items.

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Other Important Trends Big box retailers and major brand owners

involved in fabric cost negotiation. Asian garment shifts to West but trim and

findings often remain Asian-sourced. Buyers want to delay associated “new

source” product testing and approval process.

Regional capacity limitations emerge. Who will lead expansion?

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For further information:

O’Rourke Group Partners, LLCMary T. O’Rourke

Managing [email protected]

(917) 567-3540

www.ORourkeGroupPartners.com