The South African apparel industry is starting to emerge from the economic slowdown - and there have been distinct winners and losers. According to the latest research from Euromonitor International, the sector is expected to grow at almost 3% year-on-year between 2010-2015, as firms focus on higher quality to overcome rising input costs.

Some brand owners and retailers have stated that 2009 and 2010 were two of the worst years in the past two decades. The economic slowdown caused some brand owners to see their sales drop by 25% in value. Retailers and distributors also reported declines in both value and volume terms.

Foot traffic in stores did not change, but what people actually bought did. In many cases, consumers also traded down to cheaper brands or private label products.

2011, however, is already deemed by most to be showing an improvement, with many industry sources believing the worst to be over. Those retailers offering credit to consumers are recovering from the downturn the quickest, while growth is starting to slow for value chains or discounters as consumers have already started to trade up.

The biggest winners over the period were those retailers whose sales do not depend on offering consumers credit, or those whose customer base comprises middle to upper- income earners.

Mr Price Group fared very well during the economic recession for a variety of reasons. First of all, it is mainly a cash business, offering credit to consumers but making the most of cash sales. Secondly, consumers traded down to Mr Price and other discount/economy retailers, such as those owned by Pepkor.

Truworths and Woolworths also fared well as their target audience comprises higher-income earners. This group of consumers has managed to get out of debt more quickly than lower-income earners and has started spending again.

Strong rand eases pricing pressures
The end of 2010 saw the price of cotton skyrocket and Chinese labourers demand higher wages, thereby increasing the cost of garments across the board. This took the South African industry by surprise and sent many distributors and brand owners into a tailspin as they rapidly started searching for better prices.

The impact of this price increase is set to be felt in the autumn/winter 2011 ranges.

Most retailers are likely to accept they will need to pass this on to consumers to the tune of between 8-10%, while others will tackle the situation item by item and category by category, and see where they might be able to absorb some of the inflation.

South Africans are price-sensitive and, because of a lack of media coverage of the situation in the Far East, consumers are generally not aware of the problem and as such, price increases will not be well received.

Some retailers, however, are positive about the situation, stating that the increased cotton prices and wage effects have been offset by the strength of the rand. Some also believe the higher cotton price is a short-term glitch, and that supply will not be an issue going forward as cotton growing countries have planted more than usual to safeguard against a repeat episode.

Some have said that the world is indeed facing the end of the era of cheap clothing. This might mean that brand owners will start producing more locally in order to avoid possible problems in the future, and in some instances South African produced products are becoming more price competitive as a result of the increases in Asia.

Another result is that many retailers and brand owners have stepped up their sourcing activities.

Positive growth forecast
The general expectation is that the South African apparel industry is slowly emerging from its downward trajectory and will achieve strong growth by 2015.

This is very much being driven by low interest rates - the lowest they have been in the past 30 years - allowing consumers to get out of debt more quickly and start spending again. That said, there have been predictions about a rate hike by November 2011 as the government is expecting the economy to recover by then, which could potentially slow down the recovery.

There is also a growing black middle-class which is creating increased demand, and this is also forecast to improve sales as the economy recovers.

Growth is likely to continue from 2011 onwards as long as prices do not increase significantly. But the expected rise in prices as a result of higher cotton costs and Chinese wage hikes may dampen the recovery or at least the growth that the industry needs.

Local production may become more competitive by 2015 as the industry implements various changes and benefits from government support, meaning that local manufacturing could experience some growth and job retention.

But the most likely scenario is that retailers and brand owners alike will broaden their sourcing activities to find cheaper prices elsewhere in an effort to continue to offer consumers the prices they have come to expect.

Stronger sales growth will mean that retailers can start offering consumers better quality and focus on areas such as organic fibres and dyes and more luxurious finishes and fabrics, since consumers will be in a position to pay more for higher quality products.

This, however, does not bode well for the domestic industry which cannot produce highly technical textiles or garments. These products will need to be sourced from countries with a competitive advantage in that area.

This could have a significant impact on sportswear, a category in which technical garments comprise the bulk of what is purchased and produced, as well as international brands.

This growth and demand for better quality and specifications will benefit consumers and the industry at large as higher quality products will be produced and purchased. It will also benefit retailers as they can offer their customers high quality products at competitive prices.

Brand owners will then need to be careful to market their products in such a way that will make consumers aware of the added value or quality. In many cases, consumers are ignorant of the science behind a good quality garment.

It will be the task of brand owners and retailers to educate consumers to be more demanding and exacting in their choice of apparel, knowing what to look for in a good quality piece. This will help them to justify their premium prices and maintain growth momentum going forward.

By Magdalena Kondej, head of global apparel research, Euromonitor International.