New EU tariff hike gives US premium jeans the blues

OPINION_ As of 1 May 2013, the EU introduced an additional 26 percent import duty on girl’s and women’s jeans made in the US, taking the total tariff from 12 percent to 38 percent. The brunt of this increase will be felt by US denim brands operating

in the super premium jeans segment, for whom “Made in the US” is the essence of their cachet, pressing them to recalibrate their production and pricing strategies for one of their most potent international markets – Western Europe.

Contrasting

performance either side of the Atlantic
Jeans, the most ubiquitous and democratic of garments, have long transcended their humble origins to become a viable luxury product. However, there has been a stark contrast in recent market movements at the super-premium end on both sides of the Atlantic.
In North America, arguably the most rarefied market for jeans, the super premium segment was hit hard over 2008/2009, with the financial crisis curbing consumer appetite for pricey apparel. While the rebound was strong, as brands invested heavily in design and quality to defend their elevated price tags, price fatigue once again kicked in in 2012, making full recovery tentative.
On the other hand, in Western Europe the category has shown strong recession-resilience and witnessed consistently positive year-on-year growth. Although polarisation has also supported the economy end of the market, it has been the uppermost echelons which have seen the greatest gains in this region. In 2012, value sales of super-premium jeans grew by 3.6 percent in Western Europe compared to a meagre 0.2 percent for economy jeans.

American origins attract European denim fans
This growth has been due to the proliferation of US-based brands that have been expanding in the Western European market. According to the US Department of Commerce, the US shipped women’s and girls’ jeans worth 30.3 million US dollars to the EU in 2012, compared to 44 million dollars in 2011. The popularity of these brands has been visible – in 2012, five of the top 10 super-premium jeans brands in Western Europe were US-based.
Like any other designer apparel product, branding plays an integral role in attracting consumers. However, denim has an idiosyncratic necessity for good fit. Given the complexity of crafting a well-fitting pair of jeans, paired with their long-lasting nature, consumers have been willing to pay a premium for denim expertise.
And what place says denim expertise better than sun-soaked California, the original birthplace of blue jeans? Virtually all super premium brands, including best-sellers J Brand and True Religion, are produced in California. In fact, it is the “Made in the US” tag which generates the greatest cachet.

Tariff hike stalls retail expansion
This why it will be these super-r premium brands who will be hit hardest by the tariff hike, which was introduced in retaliation for the Byrd Amendment (a law which allowed the US to impose additional duties on undervalued imports), despite the World Trade Organization ruling against it in 2002.
The tariff is likely to throw a spanner in the works for US brands targeting Western Europe for international expansion. While there are certainly other markets, like Latin America and Asia Pacific, where the super premium segment is growing rapidly, the sophistication of Europe’s market, as well as cultural similarities and an affinity for US-made products, made it a logical target.
Apart from the brands themselves, many of which operate their own retail network in Europe, the rise in duties may also hit luxury retailers and boutiques which promote these brands to their style-conscious clientele. For example, British department store Selfridges launched its ‘Destination Denim’ department in 2012, with a series of workshops hosted by brands including Hudson, J Brand and Citizens of Humanity – all LA exports.

Caught between the devil and the deep blue sea
Faced with the rise in duties, denim brands may choose to reconsider their sourcing options. For example, relocating manufacturing to nearby Mexico would enable them to dodge the tariff, which only applies to US-made products.
This will have a knock-on effect on the recent renaissance of on-shoring in the US, which has been pioneered by the denim category. The inevitable loss in jobs in LA will affect not only the production factories but will also have a spillover effect on wash houses, trimmings and associated textile producers. While the tax will only be applied to women’s jeans, the production of men’s products is likely to also be shifted abroad.
However, such a large-scale shift seems unlikely given the importance of the “Made in LA” tag to brand identity. According to Peter Kim, the CEO of Hudson, the brand will remain committed to its “Made in LA” positioning and not increase prices, taking a short-term hit on its margins instead.
The other alternative is to continue operations and raise retail prices in Europe. If brand equity is strong enough, there will be loyalists who will bear the additional cost, especially those who consider a high-quality pair of jeans as an investment piece.
However, for many there will inevitably be a tipping point after which consumers will seek other alternatives, of which there is no shortage. These include a host of European brands such as G-Star Raw and Nudie Jeans, which offer parallel expertise and now also a price advantage.

Price-sensitivity drives short-term shifts
It is uncertain whether this tariff will have long-lasting effects on the competitive landscape, but given that price-sensitivity remains the hallmark of the Western European market, more competitively-priced brands will benefit in the short term.
These include not just super premium European denim brands but also a host of mass-market competitors which are also developing their denim expertise and mimicking high-end details, fits and washes – including Fast Retailing, which may ironically benefit in more ways than one from its recent acquisition of J Brand.

Ashma Kunde, Apparel Analyst at Euromonitor International

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