Textile Shortages – Potential Implications For Hotels

 

By Brian Bensman

Some have referred to cotton as the new “white gold.” And with cotton prices nearly doubling over the past year—to their highest levels since cotton pricing began being tracked as a commodity—it’s no surprise. Several factors have influenced this price surge, including severe weather patterns, oil prices, trade restrictions, stockpiling, a global recession and emerging markets.

With little change expected in the foreseeable future, experts predict that the rise in costs will have a direct impact on consumers. Additionally, the increase in cotton prices has begun impacting pricing for other common raw materials such as polyester.

Rising cotton prices can impact several areas of procurement within a hotel operation, including employee apparel, bed linens, towels and items used to clean the facility such as cloths and mops.

By being mindful of this situation, hoteliers can prepare and limit its impact by offsetting costs in other areas of the operation.

Less Supply

Much of the current cotton situation can be reduced to the simple economics of supply and demand. China, India, Pakistan and the U.S. remain the four largest producers of the world’s cotton supply. In an industry that many economists claimed to have “bottomed out” in recent years, the global demand for cotton has increased while the supply has steadily decreased. In fact, reports indicate that in 2009, worldwide cotton production was the smallest since 2003. Unforeseen variables such as severe weather have contributed to this shortage.

Last year, China, the world’s largest cotton producer, experienced heavy rains in much of its cotton-producing regions, preventing machinery from harvesting the crop. In addition, some of its provinces including Gansu, Shandong, Hebei and Henan were hit with heavy snowfall and frost, further reducing expected yields. According to the Wall Street Journal, Some cotton producers in the country are also withholding supply, waiting for higher pricing to compensate for higher labor and fertilizer costs, up 20 percent in the past year (Jan. 29, 2011). The total amount being withheld could account for as much as nine percent of the world’s cotton supply.

Heavy flooding was also the culprit in Pakistan, ruining 25 to 40 percent of the normal yield. These countries have also signed agreements, enabling China to source much of their supply from Pakistan, promoting further price increases.

While the U.S. is also typically a large cotton producer, supply has been affected by higher government subsidies to produce other consumable goods such as corn and soybeans. While the U.S. exports more than 80 percent of its cotton, experts project that in 2011 many U.S. farmers will resume cotton production, according to a January 2011 report in The Modesto Bee. This will be particularly beneficial in areas such as California where planting had fallen to a new low of 200,000 acres two years ago from 1.6 million acres in 1979. It is anticipated that farmers will grow at least 400,000 acres in the upcoming year. This yield increase is only a drop in the bucket for what will be needed to keep up with current market demands.

More Demand…

Within the past few years, China has experienced unprecedented economic growth which has resulted in lower unemployment. Due to the high demand for qualified labor, cotton factories and mills are forced to pay premium wages for a traditionally low paying workforce—a cost which is passed along to customers. Menswear Magazine reports that wage levels in the critical Pearl River Delta area increased by an average of 17 percent in the first six months of 2010. This influx of workers has also placed a greater demand on the cotton supply due to the increase in uniforms and other recreational apparel such as t-shirts and jeans.

Cotton Incorporated’s “Supply Chain Insights” newsletter also attributes an earlier-than-expected resurgence from the recession in the U.S. as another contributor to increased demand in its June 2010 special edition.

“…Recovery from the recession has largely been stronger and sooner than expected, causing retailers to compete for the manufacturing capacity to replenish their inventories in the face of growing consumer demand.”

The growing gap between supply and demand has resulted in cotton prices reaching their all time high. Some reports show that cotton prices went from 84 cents a pound in July 2010 to a high $1.50/lb. in November. At the beginning of February, the price was around $1.61/lb.

The Oil Impact

Textiles are just one area that will feel an impact from the rising costs of oil. With crude oil barrel costs at a high during the start of 2011, experts have forecasted prices will continue to escalate due to increased demand from developing nations, according to the Washington Times. Because the U.S. imports many of its textiles, the price of oil will further impact product costs due to higher transportation expenses. In addition, because oil is used in many facets of the production process, higher oil costs will also impact direct costs associated with producing goods. Ultimately, this translates into higher costs for the buyers.

The Truth about Polyester

To avoid price increases, some organizations are considering switching to polyester-based products. While this may seem like an easy solution, it is one that will unfortunately have similar cost implications. The rise in cotton prices has created an increase in demand for polyester. Capitalizing on the opportunity, polyester manufacturers have escalated prices by as much as 20 to 25 percent, according to an October 2011 Wall Street Journal report. This increase has also been driven by the rise in oil prices.

“It’s a chain reaction,” said Alper Ensari, an account executive for a major polyester fiber manufacturer.

What It All Means

While experts have conflicting opinions on how much the rise in costs will impact customers, they all agree that it will inevitably result in price increases for end users. Hoteliers can expect to see price increases for many items requiring textiles such as employee apparel programs and guest linens. Due to the uncertainty of market conditions and continued expectation for increased demand throughout emerging markets such as China and India, it’s projected that some of these price increases are here to stay. Increases will also impact the prices for consumer clothing such as jeans, t-shirts, socks and other apparel.

Tips for Offsetting Increases

There are several considerations hoteliers should take into account which could help offset textile related price increases throughout their property. For example, for employees whose apparel program consists of suiting consider using suits that can be laundered at home. This will help avoid dry cleaning expenses. Another option for staff members who work in high soil environments is to utilize a uniform rental program rather than purchasing their apparel. A rental program allows costs to be spread out on a weekly basis rather than incurring substantial up-front costs.

Postponing expenses in other areas of the operation is another way hoteliers can help limit the impact of increases in textile costs. For example it may be necessary to delay a planned capital investment for a particular guest amenity. Simply being knowledgeable of the current global textile environment will help hoteliers plan accordingly and make wise business decisions

Survival of the Fittest

Unfortunately, many smaller suppliers haven’t been able to withstand the fluctuating market prices and have subsequently been forced out of business. This is a trend that is expected to continue as the market faces further uncertainty. By using large financially stable vendors with more purchasing power, hoteliers can ensure the consistency of their product while securing the best pricing available.

The hospitality industry has faced greater adversity over recent years. Having survived much larger threats recently, the hospitality industry will no doubt weather the storm of the current textile environment. However, it is extremely important to prepare the business and evaluate supply chain resources so the overall quality of the guest experience is not affected.

About Brian Bensman
Brian Bensman is a Senior Director of Global Production and Purchasing for Cintas Corporation. He has responsibility for all points of Cintas supplier spend for both direct spend (products brought into Cintas Distribution Network) and in-direct spend (managed through buying agreements for Cintas’ 400 locations nationally). Brian has been with Cintas for 10 years and has a total of 15 years as a Supply Chain professional.