The Impact of Substantial Labor Cost Increases on Apparel Retail Prices
“This document provides background information concerning the likely impact of substantial labor cost increases, such as those that would result from the implementation of USAS’s proposed Designated Supplier Program, on the retail price of university logo apparel. The evidence available indicates that such substantial increases in labor costs would result in relatively small increases in retail prices.
The key data point in assessing the likely impact on prices is the percentage of the retail price of a garment that is accounted for by labor costs. While estimates vary by product and location of production, it is clear from information supplied by apparel industry sources, and from published academic research, that labor costs represent a very small portion of retail price: typically 1-3% for a garment sewn in the developing world. Thus large increases in labor costs do not require correspondingly large increases in retail price. For example, for a typical sportswear garment, doubling labor costs (by doubling wages) would result in retail price increases of roughly 1-3%; tripling wages would result in price increases of 2-6%. In most cases, the resulting price increases would be toward the lower bound of these ranges. These estimates assume that all of the increased cost is passed along to the consumer; if some of the costs are absorbed by licensees, retail price increases would, of course, be commensurately smaller. Before reviewing empirical data on production costs, it may be helpful to briefly review the production process and key terms used in pricing discussions in the apparel industry. Apparel brands (known in the industry as “manufacturers” or “importers” and in the university context as “licensees”) typically contract out the production of apparel goods to independently owned supplier facilities, in some cases through intermediary organizations known as “agents”. The price paid by a brand to a supplier facility at the factory door – before shipping and import fees– is known as the “Freight-on-Board” (FOB) price; itt includes all labor and non-labor production costs of the factory, including factory overhead, cloth and other materials, labor, and profit. The final price paid by a brand or licensee for finished goods, including shipping, duty, delivery, insurance, and customs clearance costs, is called the “Landed-Duty-Paid” (LDP) price. The price paid by the retailer to the brand or licensee for finished goods is the wholesale price.”