Challenging times ahead on the apparel sourcing front
Companies seem to have revised their attitude to China
Is Bangladesh losing its lustre with garment buyers as ongoing factory safety issues and unrest take their toll? The results of a new survey suggest this could be the case - yet it still remains the country of choice in a sector where price continues to hold sway when it comes to sourcing decisions.
What a lot of difference two years makes to the apparel sourcing landscape.
Back in 2011 a survey by McKinsey & Company forecast Bangladesh ready-made garment exports would nearly triple within a decade, propelling the country to an annual growth rate of 7-9% and export value of around US$36-42bn by 2020.
But new research being released by the consultancy firm this week and shared with just-style seems to suggest - perhaps not surprisingly - that the country has lost some of its sheen.
The latest survey of chief purchasing officers (CPOs) in 29 European and US apparel companies with a combined sourcing value of US$39bn, warns of the challenge of shifting production to countries with lower labour costs.
And it highlights "recent tragic events" - such as the collapse of the Rana Plaza factory complex with the loss of more than 1,100 lives - as among top insecurities surrounding the country.
The executives say they are taking a more cautious view of Bangladesh as a sourcing destination, with nearly one-third of them no longer ranking the country as a top-three supplier. Back in 2011, 70% placed it as one of the most likely hotspots over the next five years; but this has now dropped to 47% thanks to "compliance issues and unrest."
In other changes in the standing of individual countries, Myanmar/Burma and India have risen up the ratings as places to watch.
The easing of trade restrictions with Myanmar/Burma means 47% of the sourcing professionals now put the country within the top three, while India's standing has risen with 40% of buyers as a beneficiary of the shift from other sourcing countries.
But capacity issues are seen as weighing on the potential of Vietnam and Indonesia, while capacity, along with compliance and unrest, have pushed Cambodia's standing as a top-three contender down from 46% of respondents in 2011 to just 13% in 2013.
And it also seems companies have revised their attitude to China as a sourcing destination. Although most companies, especially mid-market players, say they favour moving some of their sourcing away from China, this is now less than indicated back in 2011.
All that said though, Bangladesh still looks set to hold onto its crown as the country with the highest potential for future sourcing for the next years - a trend that is well-evidenced in data from the US, where the country's shipments rose 10.8% to 1.0bn square metre equivalents (SME) in the first seven months of this year, with value gains of 9.2% to $2.997bn over the same period.
Sourcing costs continue to rise
As well as changes in sourcing location, the latest McKinsey & Company survey also leads on the fact that buyers expect sourcing costs to continue to rise in the next 12 months - marking an end to decades of apparel cost deflation.
"We have now reached a tipping point and it will become even more difficult to keep consumer prices stable", says the study's author Achim Berg.
The value segment and large players are particularly affected, he notes, while the mid-market segment seems to have more margin room to manoeuvre.
Some 76% of those questioned for the report expect an average of 1.7% higher prices, regardless of where they are sourced. And 14% expect a strong to very strong cost increase of more than 4%.
The value segment and large players expect an average cost increase of 2% and 3.5%, respectively.
The main driver is increasing labour cost (especially in China), followed by rising prices for raw materials and fabric/yarns. In addition, mid-market players appear to be facing a "supplier's market", with a shift of the purchasing power to their disadvantage.
According to the survey results, 72% of buyers are planning to decrease the sourcing value share from China.
While the expected rise in sourcing price is seen as inevitable, some CPOs have taken steps to try to mitigate it - with many major players having already shifted larger parts of their sourcing from China to countries with lower labour costs.
The challenges of such a strategy are most acute for value players that started sourcing in these countries earlier on, and for large players that experience capacity problems when shifting bigger volumes.
Proximity sourcing is also becoming more important for 69% of respondents. This is especially true for mid-market players (81%) and those in Europe (71%).
And companies are becoming more proactive when it comes to corporate social responsibility initiatives - as well as preparing contingency plans to help them cope with the challenges they face in these countries.
"It is becoming increasingly important that buyers - and companies as a whole - take a more end-to-end approach to sourcing and improve their own operational execution as well as that of suppliers," says Berg.
"But one thing is for sure, we will definitely see more challenging times ahead."
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