Clothing Quota Ban May Mean Price Reductions

According to Merrill Lynch, the quota restrictions on clothing and retail goods that are to be lifted for World Trade Organisation member nations such as China, India and Bangladish, will result in price reductions on certain products sourced from Asia. Certain American-based retail corporations are eagerly anticipating price reductions ranging from 8 to 30 per cent.

Merrill Lynch said, "We see the elimination of apparel quota, and the deflation likely to result, as a longer term negative for our branded apparel stocks." "Lower sourcing costs will eventually be passed onto consumers, we think, depressing organic growth and sector multiples." However, the research house said that for a few seasons next year, it expects the gross margin boost from lower cost sourcing will outpace retail deflation.

In Merrill Lynch's view, exactly how much of the sourcing savings is passed through to retailers and consumers will be largely a function of competitive dynamics and channel inventories.