Shortage of Leather Threatens to Hit Americans in the Wallet

By ABIGAIL GOLDMAN

May 11, 2001 12 AM PT

TIMES STAFF WRITER

The price of U.S. cowhide is soaring and the cost of finished leather will soon follow, the first major repercussions here from Europe’s twin plagues of foot-and-mouth and “mad-cow” disease.

American shoppers could end up paying as much as $1.5 billion more for leather goods over the next year, a Commerce Department economist said. The increases should be small on things such as purses and wallets, but products requiring more material, such as leather furniture and car seats, could rise by hundreds of dollars.

“Businesspeople are taking this very seriously,” said Jack Morgan, a spokesman for the American Apparel and Footwear Assn. “If the prices go up, there’s a good likelihood the consumer will look for something else, either artificial or textile. Consumers have come to expect deals and specials and extremely competitive prices.”

American hides are being bid up by desperate European manufacturers, which have run short on their own leather supply as millions of animals there are killed and burned.

The detection of foot-and-mouth disease in Argentina, another major exporter of hides, has further squeezed the market.

And if the shortage of healthy animals continues, price hikes are likely on a number of other non-leather items, because animal byproducts are used in the manufacture of such things as lipstick, shampoo, cheese, candy and vitamins.

For many U.S. retailers, the high prices on hides are the exact opposite of the big problem last winter: a leather glut. Leather was cheap enough for mass merchants to get in on the trend, bringing lower-cost leather clothing and car interiors to traditionally price-conscious shoppers.

So far, the situation in Europe and elsewhere has not affected U.S. meat prices. Few countries import American beef because of the use of growth hormones. Small price hikes on red meat, producers say, have come from this year’s heavy rains across the country and are expected to subside in time for summer barbecues.

But that’s little consolation to makers of leather goods. U.S. tanners already are paying as much as 25% more for hides. Shoemakers have warned Wall Street about price hikes or a potential hit to corporate profits. And retailers are bemoaning yet another blow to already weak consumer spending.

“I’ve been in the business for 42 years, and I’ve never seen a supply shortage or anything even close to this,” said Ken Purdy, president of Prime Tanning Co. of New Hampshire, one of the nation’s largest leather suppliers. “Somebody in the next six months’ time has to absorb these price increases. When most manufacturers go in to price their new lines, any cost increase will be in there, you can bet on that.”

In Britain alone, more than 2 million animals have been destroyed in efforts to stem transmission of foot-and-mouth disease. But that’s only part of the reason for the shortage of animal hides.

Mad cow, or bovine spongiform encephalopathy, bears the brunt of the blame. Although the disease has not led to massive controlled kills, it has spawned a public relations nightmare for the European beef industry.

Unlike foot-and-mouth, which people do not easily contract, mad cow can be fatal in its human form, a variant of Creutzfeldt-Jakob disease. Fear of the rare disease has for a decade whittled away at the demand for red meat in Europe, cutting beef consumption by half in that time.

And because the only economical way to harvest hides is by using special machines at the slaughterhouse, the reduction in beef consumption has served to reduce leather supplies.

The lack of demand also has sent European beef prices tumbling. In reaction, several European countries have ordered controlled cattle kills to try to boost prices. That has led to the destruction of hundreds of thousands of healthy animals already this year. Because those animals are not sent to the slaughterhouses, their hides are also unavailable.

The result, tanners say, is about 200,000 fewer hides available each week.

“It is a world market,” said Todd Slater, a retail analyst for Lazard Freres & Co. in New York. “So a crack in the supply in any one geographical area can be felt” everywhere.

U.S. tanners shipped 23% more rawhides overseas in January and February than in the same period last year, the government reported.

Germany, for example, increased its purchases of raw U.S. hides from less than $200,000 worth in the first two months of last year to $1.2 million worth in the first two months of 2001.

U.S. exports of partially processed hides have risen even more, with a 75% gain, government figures show.

Even Italy, known for its flawless home-grown skins, has boosted its imports of raw American hides by nearly 7.5%.

So far, American consumers have been mostly shielded from the price increases because retailers usually have fairly long contracts and are still paying pre-shortage prices. Bigger tanneries, meanwhile, are hoping to get by on older inventory until prices begin to recede.

Hides in storage, however, last only so long, Prime Tanning’s Purdy said. By this fall, even the largest tanneries are likely to need more hides, he said, and few believe that the European crisis will have changed much by then.

Many companies are already feeling the pinch:

* Shoemakers Nike Inc. and Timberland Co. warned Wall Street in their Securities and Exchange Commission filings that the European epidemics could threaten their earnings for the new fiscal year.

* Sporting goods makers say apparel, baseball mitts, basketballs, footballs--which are calf leather rather than pigskin--and many other pieces of equipment could likewise go up in price.

In its April quarterly report, Rawlings Sporting Goods Co. warned of the potential for problems throughout the industry:

“The price of leather, which is a component of baseball-related products, has increased recently due to supply shortages caused by the hoof-and-mouth disease among cattle,” the company said. “If this problem continues, the company and others in the industry will be forced to increase prices or recognize lower margins.”

* Irving Tanning Co. at the end of March cited skyrocketing domestic cowhide prices as the reason for seeking bankruptcy protection and initiating layoffs at its Hartland, Maine, operations.

* Executives at Wilsons Leather Experts Inc. said they have enough hides to last through fall but could be forced to increase prices after that if prices continue to rise. Chief Executive Joel Waller told financial analysts that a 10%-to-15% rise in the cost of raw materials could mean a 10% retail price hike.

Luxury brands such as Coach Inc. and other top-tier leather product sellers are less affected, at least for now. Their larger margins mean more room to absorb some of the costs, Coach said, and less of a backlash if they are forced to raise prices.

“A woman buying a $200 handbag is not likely to mind paying $218,” said Lew Frankfort, Coach’s chairman and chief executive.

Among the hardest hit will be car and furniture makers, which use huge amounts of leather.

“If we bring it down to shoes and wallets, it might be ho-hummer,” said Charlie Myers, president of the Leather Industries of America trade group. “But bring it up to leather sofas and leather trim in cars, then you’re talking real bucks.”

Although it takes about 3 square feet of leather to make a pair of men’s shoes, outfitting a car’s interior can require more than 230 square feet, tanners say.

Demand for leather seats in compact cars--not even an option in some of those models a few years ago--has leaped 110% in the last two years, said Carolyn Picard, a supplier services senior manager at J.D. Power & Associates’ Troy, Mich., office.

Demand for leather seats in hot-selling light trucks has skyrocketed as well, Picard said.

Furniture makers have watched higher-margin leather goods drive their growth in recent years, even for more moderately priced pieces. They are trying to hold off on stiff price increases for fear that it would crimp sales, said Brit Beemer, who studies trends for the furniture industry.

“It certainly could hurt the industry,” Beemer said. “Nobody wants to kill the goose that laid the golden egg, and leather is that goose.”

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Move ‘Em Out

U.S. exports of raw cowhides grew by 23.4% in the first two months of this year. Prices have also risen sharply.

Exports of U.S. leather are generally soaring ...

Exports of raw hides in January and February compared with the same period a year ago:

Germany: +533.3%

Hong Kong: +421.2

China: +168.8

Thailand: +121.4

France: +63.7

Italy: +7.4