Retail Store Supply Info

As the much needed holiday selling season quickly approaches the retail industry, many big-box retailers are tightening inventories, suspending expansion and keeping a close eye on expenses. The financial crisis has no doubt had a direct impact on the retail industry and, consequently, the retail fixturing industry. In this unstable economic climate, it’s important to have good communication between retailer and supplier and ensure that changes are adapted too quickly and efficiently while sticking with core competencies. Value engineering has been taken to the next level with retail fixture manufacturers being given the challenge of designing and innovating fixtures while continuing to finds way to reduce costs.

Making sure the distribution center is being used at its highest efficiency level, reducing freight costs, finding new low-cost materials are all great examples of contributions to a final product that affect both supplier and retailer. While it may be difficult to find the silver lining in such a troubled and bleak economic environment, it’s times like these that often yield important and well-thought decisions and innovations that otherwise might not have surfaced in calm waters.
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The National Retail Federation recently released their forecast of this year’s holiday selling season with retail sales growing a mere 2.2 percent, lower than the 4.4 percent average growth over the last ten years. Retailers big and small are preparing to weather the economic storm that is surrounding all of us this holiday season. NRF reports the current foreclosure crisis and poor economic climate will have many consumers watching their pocketbook much closer this year when holiday shopping.

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This two-part series discusses the current challenges being faced by importers of Chinese goods, particularly retail fixture providers, and the swiftly-changing landscape of Chinese exportation. Below is a follow-up to Part I – Governmental controlled market factors.

Part II: Market-Controlled Input Factors

As discussed in Part I, changes in the global marketplace and Chinese economy have dramatically affected the financial truths of exporting products from China. The Chinese RMB continues to appreciate against the dollar and government incentives favoring exporters are slowly being eliminated. In addition to these government-controlled aspects, global and Chinese markets control input factors that directly affect the costs of goods we import. Specifically, we have seen elevating prices in two major market-controlled arenas impacting the costs of Chinese exports: labor rates and raw material costs.

For the past three decades relatively inexpensive labor has been the foundation of the Chinese economy. However, in recent years labor rates have risen more swiftly as China continues to grow as an industrialized nation and global leader in exports. As a result, a growing worker shortage, mostly driven by rapid increases in economic demand, has forced Chinese factory owners to increase wages. China’s inexhaustible supply of skilled migrant workers has not kept pace with such demand. Research from the Chinese Academy Social Sciences shows China’s rural labor surplus at approximately 50 million, much lower than the previously estimated 150 to 200 million. In addition, competition for skilled or trained labor is fierce as output demands increase, further exaggerating the rate of escalation in wages.

Additional economic factors such as higher energy costs, rapid industrialization and a new labor law which took affect Jan. 1 have also contributed to higher wages, greatly increasing the prices of the end-product Chinese manufacturers produce. Exporters and procurers of retail fixtures and displays can expect higher prices to continue (labor costs are expected to raise 15 percent this year alone), but the increased rates will remain modest in comparison to stateside labor.

Just as China’s labor rates are increasing, so are the costs of raw materials. Chief manufacturing materials such steel, nickel, plastic and fright components like oil, paper and packaging have all been increasing as the global marketplace continues to shift. We have been fortunate in the past to have experienced a relative stable global economy and seen little changes in the costs of these materials until recently. Costs for these inputs have risen dramatically in the last few years. The chart below illustrates this point:

The price of oil greatly impacts the global economy and, directly or indirectly, affects all raw material movements. Just three years ago we thought we saw a substantial increase when prices went from approximately $37 to $50 a barrel. Now with prices at approximately $125 a barrel and recently seen as high as $145, this input alone is a reason for increased costs and higher end-prices, as you have undoubtedly been experiencing at the gas pump.

Just as your wallet has been feeling pressure from the pump, no other input is more affected by the price oil than freight. Freight comprises a big cost for Chinese exporters and this includes accompanying freight components paper and packaging. These costs have risen steeply in direct correlation with oil. Corrugated boxes alone are comprised of nearly 17 percent crude oil derivatives. Like many raw materials, freight costs and materials needed to ship goods will continue to be high so long as oil stays at unprecedented prices.

Like oil, steel is a great example of a “was stable, now sky-rocketing” raw material. The demand is high all around the world, and especially high in developing cities of China. Steel prices increased minimally from 2003-2006. It’s all been downhill, or should I say uphill, since then. This year alone steel prices have increased 50 percent and as prices continue to rise, global demand shows no signs of slowing down.

Nickel, a critical element to chrome plating, is another raw material the fixturing industry greatly depends on for a number of products. As illustrated in the above figure, we’ve seen an astounding 350 percent increase in costs, though recent months have shown a relatively small regress. Equally important to fixture manufacturers, petroleum-based plastics are the foremost material in mannequins, torso forms, shopping baskets and signs to name a few. Last year resin suppliers began their rounds of price increases (a direct correlation to oil prices) and, like many inputs discussed, are forecasted to rise before they stabilize.

So what does this mean?

The market-controlled input factors have clearly changed the price threshold for imported goods. Labor and raw material costs are rising, and are forecasted to continue to rise. Nonetheless, China’s relative competitiveness still makes importing retail fixtures and POP displays viable for the foreseeable future. As procurers of imported goods, it is important that we all stay educated on the underlying cost impacts to continue making the best purchasing decisions for our companies and to continue to experience the gains the Chinese market has to offer.

Andrew Sharon
President
The Nu-Era Group

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Going green has become a household phrase in the last couple years. Companies across the board are implementing green initiatives and spending a lot of money to tell the world about it. Global sustainability is a growing concern that must be faced by all of us, not just leveraged as a public relations tactic, but a focused issue that is confronted by us as human beings to better the environment we leave for the next generation.

Manufacturers and suppliers in the retail fixturing industry are no exception to the green movement. While a socially and sustainably responsible supplier of imported Chinese goods may sound oxymoronic, Nu-Era is taking steps to reduce the carbon footprint we leave behind. So, what does it mean to go green? While we can’t eliminate our impact on the earth, we can strive to reduce it.

The Nu-Era Group has made concentrated efforts to combat pollution and contribute to global sustainability. Reducing packaging waste and continually creating innovative ways to ship more efficiently and reduce emissions not only leads to less pollution, but allows for cost-savings. Recycling initiatives in all our facilities and the use of recycled, carbon-free paper has also become common practice.

Being socially responsible is important to us as well, from maintaining international safety standards to providing a safe and clean working environment with respectable pay to treating employees with dignity and respect. To be green isn’t just to be environmentally-conscious, it’s to be aware.

What green initiatives have you or your company implemented?
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This two-part series discusses the current challenges being faced by importers of Chinese goods (particularly retail fixture providers) and the swiftly-changing landscape of Chinese exportation. The first part, governmental controlled input factors, will be followed by Part II – Market-controlled input factors.

Part I – Governmental Controlled Input Factors

It continues to be The Nu-Era Group’s privilege to provide each of our clients with retail products procured around the world. As you know, we are experiencing unprecedented changes in the global marketplace and governmental policy shifts that have changed the financial truths of doing business in China. This is no doubt a direct result of the Chinese industrial revolution. According to BBC News, in 2004 half of the concrete used in the world was poured into China’s cities. The same source reported that in the next 25 years 345 million people will move from rural areas of China into industrialized cities. The landscape is indeed literally and figuratively changing.

China’s economic growth has it poised to become the world’s largest exporter in coming years, and the government maintains control of two major factors that directly impact the price of goods being exported: the RMB exchange rate, and the value added tax reimbursement rate. Recently, we have seen substantial changes in both.

A frequent conversation among peers at GlobalShop this spring was the decrease in the RMB exchange rate. This is a major costing factor for any organization conducting business in China. For many years the rate was pegged by the Chinese government at anywhere between 8.4 and 8.1 (i.e., 1 USD is equal to 8.4 RMB). This rate was highly predictable from year to year and helped establish Chinese exporting capabilities. However the last several years, particularly the last 18 months, have shown an unprecedented sharp decline.

To give you a better idea:

What we are seeing is a concentrated effort on the part of the Chinese government (at the request of the U.S. government) to “right price” goods from China. Below is a forecast according to a May 6, 2008 briefing of Economist.com.

It is important to keep in mind that China remains a competitive source for procurement. What we are seeing is a reduction in the price disparity between domestic- and foreign-produced goods. However, although the percentage variances presented above can be unsettling at first; everyone is experiencing the same pressures. For the near future, Chinese-manufactured products will continue to deliver lower costs than domestic goods despite the RMB’s appreciation, but we need to be aware of government-controlled aspects of costs to continue making educated purchasing decisions.

The latter of the two government-controlled areas of costing is the value added tax reimbursement. VAT rebates for exporters, coupled with a generous RMB exchange rate, made (and still make) for a favorable importing environment. In an effort to stem its ballooning trade surplus, the Chinese government significantly lowered VAT rebates for thousands of export categories last summer. Much like the RMB exchange rate, the Chinese VAT rebate was a figure that stayed approximately the same from year to year. Originally 15% in 1997, it plateaued around 13% from 1997-2007. Recently, the government made the decision to lower the reimbursement, and it was dropped to 5% in 2007. Many economists are forecasting that it will be eliminated before 2009.

So what does this mean?

If, in 2005, you bought a market basket of goods for $1,000, and we ignore all raw material movements (to be discussed in Part II), you could expect that same basket of goods to cost $1,342.86 in 2008 as a result of these two government-controlled levers.

The unusual aspect of all of this is the scale and the suddenness with which these two factors have changed. Our experience tells us that China has been and continues to be an intelligent source to procure retail displays, but the Chinese economy is radically changing, as is the paradigm in which we must operate to achieve the economic gains globalization has to offer.

Andrew Sharon
President
The Nu-Era Group
www.thenueragroup.com

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