Demand for apparel and footwear is expected to grow as the world slowly recovers from the COVID-19 pandemic. However, supply chain disruptions and worker shortages may lead to price increases on a wide range of products. Will consumers accept these higher prices?
Disruptions in the Global Supply Chain
As the U.S. economy opens back up, it’s not all good news, largely because turning the world’s economic engines back on is not as easy as flicking a switch. Increased demand and supply shortages are leading to delays and higher costs for businesses all along the supply chain.
In response to a surge in demand, freight costs have skyrocketed as much as 50% over the past year. With increased reliance on “just in time” manufacturing, many businesses have slashed inventories and are forced to wait for shipments of raw materials and finished goods.
Potential Worker Shortage
Businesses in the fashion industry, including manufacturers and retailers, are also struggling to find qualified workers. Overseas, many factories are still facing COVID-19 outbreaks, with vaccinations slow to roll out outside of the United States. Some manufacturing facilities are also finding that workers who left when factories were forced to shut down are leery of returning or have found better jobs elsewhere.
In the U.S., the transportation and logistics industries face labor shortages due to increased demand, with businesses struggling to find enough workers to deliver their goods. Employment in the retail industry is also down: 400,000 lower than February 2020, according to the April jobs report.
The labor shortage in the United States is likely due to a number of factors, including the federal government’s expanded unemployment insurance benefits, lingering concerns about contracting COVID-19, and the need for some workers to care for children with schools and daycares still operating at reduced capacity. In the wake of COVID-19, many workers also want to be paid more because their jobs are inherently more stressful and dangerous.
There is currently no consensus regarding whether the labor shortages represent a slight blip in response to the pandemic or an overall tightening in the labor market. Typically, tight labor markets are linked to wage growth at the bottom end of the income distribution as businesses compete for workers. However, economists and White House officials have yet to observe an increase, suggesting that a shortage is not a significant issue at this point. At a recent press conference, Federal Reserve Chairman Jerome Powell dismissed claims of significant labor market shortages, saying, “We don’t see wages moving up yet. And presumably we would see that in a really tight labor market.”
Risk of Inflation
Businesses in the fashion industry are also keeping a close eye on inflation. The Labor Department’s Consumer Price Index increased 4.2% over the 12 months from April 2020 to April 2021. The increase is the largest increase over a 12-month period since a 4.9% rise for the year ending September 2008.
While prices have risen significantly in certain industries, it is unclear if the trend will become widespread. White House officials have cautioned that any signs of inflation are unlikely to last, but can be attributed to the rapid economic recovery from the pandemic.
“To the extent that supply chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own,” said Federal Reserve Governor Lael Brainard. “Remaining patient through the transitory surge associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals.” However, other economic experts, including former Treasury Secretary Larry Summers, have argued that the latest stimulus package could overheat the economy and lead to inflation.
Finding Success in the New Normal
Businesses in the fashion industry can take steps to position themselves for success in the “new normal.” To decrease the risks of being impacted by logistical logjams, businesses should reevaluate their business plans to address potential manufacturing and shipping delays and work to diversify suppliers as much as possible.
Employers who face shortages of suitable, interested workers can attract workers by increasing wages and benefits. While higher wages will lead to increased operational costs, it may be possible to recoup these costs via higher prices.
As the COVID-19 pandemic recedes in the U.S., many consumers will have pent-up demand for clothing, shoes and accessories. They may also still have extra money to spend thanks to several rounds of stimulus payments. The wild card will be how willing consumers will be to pay higher prices for fashion if they are also facing rising costs for food, fuel, home improvement supplies and other necessities.
Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades’ worth of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters.
Howard D. Bader