California Apparel News

Healthcare and shopping. One doesn’t seem to go with the other. But with the mandatory health-insurance program, known as Obamacare, going into effect next year, many consumers will be on the hook to pay more out of their pocketbook to get health insurance,

For example, a 25-year-old Los Angeles consumer who makes $25,000 a year but does not have employer-provided healthcare will have to pay $93 to $232 per month, depending on the health plan, to get coverage. This is after a $61-per- month government subsidy.

That means that a young shopper in that much-desired shopping demographic has $1,116 to $2,784 less every year to spend on clothes, accessories, shoes and other items.

California Apparel News Senior Editor Deborah Belgum quizzed several financial experts about how this will affect apparel and textile manufacturers and what they can do to deal with it.

Sydnee Breuer, Senior Vice President, Business Development, Rosenthal & Rosenthal

The Jan. 1 implementation of Obamacare may have a negative effect on consumer spending, which would likely reduce consumers’ disposable income and, therefore, reduce apparel sales. There is much hype surrounding the implementation, and, quite frankly, I am not sure whether the actual impact will be positive or negative, but I don’t think anybody else knows either.

Consumers could be paralyzed—at least initially and not know what to do—and therefore not want to spend money.

Manufacturers also need to be sure they are in compliance with Obamacare for their own businesses and their employees. If they are not sure whether they are or are not, they should analyze whether the penalty is financially better than the cost of a group plan.

They should also seek advice from their business professionals (attorney, CPA, consultant, etc.).

Mitch Cohen, Western Regional Manager, CIT Trade Finance

I think it’s too early to say exactly how Obamacare will affect consumer spending. In order for manufacturers to stay flexible through decreased spending periods, they need to create operational efficiencies, manage cash flow and secure tight controls on inventory. That could mean an upfront investment in new technology.

Rob Greenspan, Owner, Greenspan Consult

With the implementation of Obamacare this year as well as next year for those companies that now have a deferral, the effects are anybody’s guess.

First, for those people who now might have to buy healthcare coverage, no matter the price, I believe anytime people are forced to spend their money their first reaction is to tighten up.

People tend to be very cautious about the unknown, and this is another case of an unknown to many.

Second, if people now have to pay a tax for not having coverage, the result is most likely the same. They will be more conservative in their spending until they are comfortable knowing what is going to happen next and they can be prepared for it.

Third, if their insurance coverage from their employer changes—either in terms of benefits, costs, or higher deductibles—this will also most likely cause a reaction to hold back spending.

For manufacturers, this issue can create numerous problems. Assuming there is less disposable income, it generally impacts discretionary spending. This generally causes slowdowns at retail. And we all know the pitfalls of any retail slowdowns.

Additionally, if manufacturers are faced with increasing insurance costs, the manufacturer will look for ways to pass these costs along to the employees or to the ultimate consumer of their products.

However, the markets are such that trying to raise prices will most likely be unsuccessful. So the only option the manufacturer has is to try to lower other costs, such as lowering other insurance benefits, charge employees more where they can for other benefits, consider terminating people or reduce others to less than full-time employment. All of these types of actions, when taking in the economy as a whole, would have a negative effect on consumer spending.

Sunnie Kim, President and Chief Executive Officer, Hana Financial

Depending on whom you choose to believe, Obamacare (the Affordable Care Act) will cost an average of $200 to $500 per month, based upon an individual’s demographics, geographical location, and any subsidies that the individual may be eligible to receive.

Given that this is a mandatory requirement that imposes a fine if not followed, we can assume that most individuals will participate. That being the case, the disposable income of many Americans will be negatively impacted, which will have a deleterious effect upon consumer spending in the near term.

Therefore, manufacturers need to prepare for lesser volume and keener competition by lowering expenses and maintaining a handle on their inventory levels.

Nick Hart, Managing Director, Bibby Financial Services

No one can argue with the intention of the president to bring affordable healthcare to as much of the population as possible. However, the devil will be in the details, and the law of unintended consequences will be profound.

The effects on consumers will depend on how they are personally impacted. Households need to balance budgets. So if money needs to be spent on insurance, unless they have spare cash, something needs to be cut. Not easy, as the government has found out, as it has closed for business. Unlike the government, low- income families cannot overspend. Middle-income families cannot recklessly spend as the credit markets do not tolerate poor credit.

A possibly bigger impact than an individual’s cost will be how employers react to the new regulation. Any rise in costs will ultimately be passed on to the consumer or margins will be squeezed. However, employers will react in the only way a business can, which will be to review the cost and determine how the rules and regulations work.

If they can pass the cost on, they will. If not, they will try to mitigate it. This may result in a move to part-time rather than full-time workers, employment of financially better-off candidates or a lack of growth in order to stay below the 50-employee threshold.

All of the above will hit low-income households and may result in a drop in household income. This will lead to a drop in consumer spending. The question is by how much.

Manufacturers should concentrate on the immediate impact and obligations of their business first. Work out what the cost to them is and what they need to do about it. It may be business as usual. If they are a cut-and-sew operation on thin margins with high numbers of employees, it may have a significant impact requiring structural change.

Secondly, businesses should read and watch the news to get a clearer view of consumer-spending habits. A recovering economy may well mask a reduction in consumer spending because of this legislation. So manage what you can and be vigilant about the future.

Dave Reza, Senior Vice President, Milberg Factors

Based on what I have read, “experts” on both sides of the political spectrum have differing opinions about the potential impact on consumer behavior as a result of the implementation of the ACA.

Supporters generally say that the cost of the premiums will represent an insignificant percentage of consumer spending.

Critics of the legislation are saying that the real costs will be felt at tax time, when some of the more stealthy components hit the consumers.

Once the dust has settled, manufacturers and importers should respond to both order activity and feedback from their customers, vendors and professionals to guide themselves.

Paul Schuldiner, Managing Director of Business Development, King Trade Capital

With many corporations continuing to provide employee health coverage and self-employed individuals paying roughly the same amount, if a little more, the impact of the Affordable Healthcare Act on consumers and apparel manufacturers will more likely be felt on those operating in the moderate price points.

Luxury brands will be somewhat insulated and should not be overly affected. Manufacturers with a focus on fitness apparel may even see a rise in sales with the expected accompanying emphasis on, and incentives for, wellness programs.

However, apparel manufacturers need to be fully aware of the impact of the costs of compliance with the Affordable Care Act and what the additional costs (likely for many businesses) will do to their operating margins.

If a business has not met with their outside CPA to review this area, they will likely be in for quite a surprise and will not be able to adapt (i.e. increase gross margins) to offset or mitigate the additional costs. All business owners should engage their professionals familiar with the healthcare act as soon as possible.

Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance

We really haven’t yet taken an official position on what the impact will be, given all of the variables involved.

With the current deadlock in Congress, for instance, it’s difficult to say what the Affordable Care Act will ultimately look like when it’s eventually implemented.

Certainly, if companies within the manufacturing sector opt to shift to more of a temporary workforce instead of full-time employees, that could have a negative impact on consumer spending.

As it relates to the apparel industry, though, we don’t see our clients making that sort of shift. Most contend that they are already operating very efficiently and that existing positions would not easily translate into temporary positions instead of full time.

Ken Wengrod, President, FTC Commercial Corp.

In my opinion, the Affordable Care Act, or Obamacare, will initially create confusion and fear among low-skilled labor consumers as well as business executives for different reasons.

The low-skilled-labor consumers, who represent one segment of the market, are worried about maintaining a full-time job (vs. part-time) and potentially having to pay higher costs for medical insurance and therefore are not spending on nonessentials.

Another segment represents the general population, who are already cutting back on their apparel purchases. They find no reason these days to replace their wardrobe and instead are maximizing their existing pieces. Both segments are negatively impacting retail apparel sales. Even British designer Vivienne Westwood claimed in a recent issue of Telegraph Online, during London Fashion Week, “Buy less. Choose well. Quality, not quantity. Everybody’s buying far too many clothes.”

Many apparel executives share the same concern. Will the ACA increase their taxes, hidden taxes, penalties and fees, which in turn could reduce overall investment in the economy and place restrictions on employment, reducing jobs? Businesses with more than 50 people employing less-skilled workers will probably respond by shifting their employees onto the federally subsidized healthcare exchanges and replacing full-time positions with part-time jobs.

Certainly, this atmosphere of uncertainty is not conducive for expansion of the typical impulse buyer. Apparel manufacturers who produce merchandise for the chains and big-box stores need to be cautious about their projections for sales and maintain lower inventories while keeping their overhead costs down to a minimum until the tweaks of ACA are flushed out and they have a better understanding of what new realities are versus initial perceptions.

I believe, given my many years in the industry, there will always be consumers who have a need to buy. This means now is an excellent time for consumers to discover merchandise that’s seasonally fresh and holds value and will enhance their wardrobe rather than the need to upgrade to the new smart phone.

Paul Zaffaroni, Director of Investment Banking, Roth Capital Partners

It’s unclear how the Affordable Care Act, known as Obamacare, will impact consumer spending in 2014, but few think it will have a near-term positive impact.

Many small-business owners we represent are concerned about the increased healthcare and compliance costs and how this could impact future profitability.

Some companies have responded by hiring more part-time employees instead of full-time employees while others are cutting back on hiring altogether.

Part of the challenge is the definition of “small company” under the Affordable Care Act, which is defined as fewer than 50 full-time employees. If you have more than 50 employees, you either offer health coverage or pay a fine.

The best way for companies to prepare is to clearly understand your responsibilities and budget accordingly. Many law firms have a benefits group or partner that can provide this advice along with the information that can be found on government websites.