No relief for retailers with higher Chinese labour costs to raise prices, inflation pressure

Retailers are prepping themselves for another six months of pain, with Myer chief executive Bernie Brookes and the head of the Australian Retailers’ Association warning rising labour costs in China will lead to higher prices back home towards the end of the year.

But the revelation is also a double-blow, as higher costs are more than likely to put upward pressure on interest rates – something the ARA has been railing against since the RBA started increasing the official cash rate to curb inflation.

“Obviously this is going to impact on costs, and definitely there are going to be increases later in the year,” ARA executive director Russell Zimmerman says.

“The other aspect of this is the Australian dollar. At some stage that is going to move and there will be an increase in costs because of it. That will translate to seeing more pressure on interest rates.”

Myer chief executive Bernie Brookes said in The Age this morning the company will increase its outsourcing in the Asia-Pacific region to focus on best-selling brands, but also warned higher labour costs will result in higher prices.

”The biggest change I see now is in labour laws, and you are now seeing people work 44 hours a week as the sort of mandatory hours, seeing people earn rates that have double and triple time when they work over the 44 hours and have Sunday shifts where they get double and triple time,” he said.

Brookes commented that labour laws of the western world “had caught up with China”, and also signalled rising cotton prices will mean apparel will cost more later this year than it did in 2010.

“There has definitely been a bit of noise about cotton prices, but we’re told that it probably won’t affect retailers until the summer,” Zimmerman says.

However, summer is when retailers will need those sales the most – after a shocking year for retail sales companies will be waiting for the Christmas season to help them survive. But higher prices for summer clothing and rising interest rates may quash that dream.

“We’re seeing costs rise across the board, and we’re going to see the effects of that later this year. When that happens exactly will depend on when retailers have pre-purchased and so on, but it will happen.”

Some retailers are desperately searching for alternatives – Zimmerman says many are expanding into using flax and even bamboo for various clothing products.

“Even synthetics are now moving up in price, and the reason they are moving up is because the cost of cotton is so high.”

This has been exacerbated by the rising labour costs.

“People are looking to better themselves, moving into new areas like tourism, and because of that there is a shortage of labour in manufacturing.”

While Brookes says the prospect of such changes is “exciting”, Zimmerman says the prospect of interest rate rises is inevitable – and more retailers will feel the pressure.

“We’re seeing people look at other countries in some instances, such as Vietnam, for their outsourcing. But despite that the rise in cotton prices and retail prices is going to follow, and there will be increases this year.”