THE FLANARANT: A new retail model to cut clothing costs
By Mike Flanagan | 16 May 2011
Most people agree the garment industry has reached the end of the road as far as continuously falling clothing production prices are concerned. But could the internet offer apparel retailers the next big opportunity to take costs out of the supply chain? asks Mike Flanagan.
Garment production prices haven't stopped falling just because wages and raw material prices are going up. It's also because we've virtually exhausted all the cost saving benefits of moving production offshore for the past 20 years.
Until 1 January 2009, when quotas were finally lifted on US garment imports from China, and the EU stopped requiring export licences for garments from China, there had been limits on garment imports for as long as anyone can remember.
Those restrictions took decades to eliminate, but by the end of 2010 Western buyers had come close to getting as much mileage as possible from Asia's low manufacturing wages. Not completely though.
Asian businesses keep investing in new infrastructure, and importing nations keep on changing their import rules, so the best places for good value in 2009 won't necessarily be the best places in 2011.
Our new 'Clothesource guide to apparel trade regulations 2012,' available from just-style, for example, helps buyers track the impact on garment buying of:
- The new system of free trade areas between Japan, Southeast Asia, Australia and New Zealand;
- Japan's new laws on duty-free access for knitted garments from the world's poorest countries; and The EU's new rules on imports from very poor countries and from countries along the southern and Eastern shores of the Mediterranean.
Meanwhile the 'Clothesource World Apparel Sourcing Monitor 2012' also available from just-style, looks at emerging product category strengths and price competitiveness from over a hundred different exporting countries.
But not even the most assiduous users of the information in these new guides will see the kind of savings that many buyers achieved by switching production between 1990 and 2010.
The end of the road
The fact is we've come to the end of a very long era. For most of the past 250 years, the garment and textile industry has seen a series of technical and legal innovations which had the effect of constantly bringing down garment production prices.
The Industrial Revolution started with the mechanisation of spinning and weaving: railways and steam ships were first developed to speed up the transport of cotton from the United States to the factories of Manchester.
The movement of garment production over the past 15 years to places up to 10,000 miles away from the final customer was just the last step in a process that started in the mid-18th century with the invention of mechanised spinning and weaving
Can it really be that with the final implementation of a quota-free regime in 2009 that the cycle of perpetual cost reduction has finally come to an end?
Well as far as the production of clothing is concerned, probably yes. But of course production and transport of the garment and its raw materials are only part of a garment's cost.
Gap, for example, adds an average of 70% to the cost of a garment landed in the US to pay for the garment's handling, storage and wastage, the salaries of the people involved in those processes - and the dividends it pays its shareholders. Many retailers add even more.
And for many retailers there's been little reduction over the past 20 years in the mark-up they need to provide their services. So is the cost of apparel retailing going to be the next area that new technology will revolutionise?
Of course in many industries, such a question isn't really worth asking. Amazon has devastated specialist book retailers, while supermarkets and the web have almost eliminated conventional music stores. Travel agents are almost a thing of the past.
But the web has so far had a rather different effect on selling clothes. Generally, its increased consumer choice, made clothes buying more convenient, and helped retailers reach shoppers who could not otherwise get to their stores. But it has hardly brought costs down at all.
For domestic sales, the cost of courier or postal delivery to a home is generally more expensive than maintaining a shop in a prime location. For most foreign sales, customers often find themselves faced with a bill for import duty, local sales tax and a courier's administration.
Retailers and service suppliers have been working hard to make clothes buying on the internet more seamless. But it's fair to say that there isn't a hint of an Amazon or Spotify on the horizon likely to suggest the imminent disappearance of Gap or Zara shops anytime this century.
Are we all this missing something screamingly obvious? Surely there must be some visionary Chinese businessman who right this minute is building a warehouse from where low-wage pickers will assemble web customers' orders, put them into robust shipping packs, then FedEx them so they'll arrive at a customer's mailbox in Ohio 24 hours later - all for just a fraction of the cost of running thousands of physical stores?
Is the garment industry's final frontier going to be the virtual elimination of retail costs?
Of course there's no reason retailing has to take place in the country where a garment is going to be worn. Indeed the garment trade is already seeing a couple of examples where technology has moved the point of sale.
In Australia for example, there is no import duty or sales tax on goods ordered over the Internet - and the Australian currency is currently riding high. So (especially with some high ticket items like ski boots), Australians can save a great deal by buying over the web from mainland Asia or from Europe. Indeed some specialist Australian retailers have started charging deposits to customers coming in for advice and sizing.
People will try ski boots on in an Australian sports shop, then go online to buy the shoes they've just tried on far more cheaply from a web retailer thousands of miles away.
In the London area, it is increasingly common for men to get measured for bespoke suits from visiting representatives of Chinese or Indian tailors. They select the fabric in London, the representative e-mails the details back home, and then a week or so later, FedEx delivers the suit at a price well below what any London tailor would charge.
Both with tailoring in London and ski boots in Australia, customers are prepared to live with a slightly messy arrangement for returning faulty or ill-fitting goods in return for the substantial savings remote shopping offers.
And no-one's yet shown that the environmental damage from FedExing is greater than the damage caused by huge networks of warehouses and retail shops.
But apart from these few exceptions, the web hasn't yet significantly driven down mainstream clothing prices. In practice:
- Couriering a garment around the world almost always costs considerably more than conventional retailer mark-ups. Even sending a garment around the world by surface mail adds a substantial delay between the customer ordering a product online and receiving it, and can still add a significant cost.
- But most of the time, ordering garments online from abroad is a customer-unfriendly affair. Most shoppers are happy with the speed of the arrival - but profoundly annoyed at the substantial tax bill that comes with it, and the inconvenience of paying the bill if the customer was out.
Garments generally carry one of the highest import tax levels of any kind of consumer goods. And the recent failure of the Doha Development Round of trade talks at the WTO means we're not likely to see them coming down worldwide for many years yet.
Although techno-fanatics have long argued that Western governments should stop charging import duty on web-ordered goods, they have zero chance of success: with governments' budgets under pressure, there is simply no political appetite anywhere for upsetting conventional retailers and seeing a fall in public income at the same time.
But there are signs things are beginning to get easier. One Distribution Centre (DC) in low cost Europe can now service almost any EU address overnight, with no import duty or local sales tax bills. One DC in the US can serve the US in the same way - though at present, bills are presented to some addressees in Canada for import duty and provincial GST for any garment manufactured outside NAFTA.
In Asia, an expanding network of Free Trade Areas puts us very close to being able to send most Asian garments duty-free to anywhere in Japan, China, Australia, New Zealand and the ASEAN group from a warehouse in any south-east Asian city (like Bangkok, Singapore or Kuala Lumpur).
And a number of postal administrations, like Britain's Royal Mail, now have some arrangements by which foreign vendors can prepay import duty on web ordered goods.
It's almost inconceivable that any US or European country will stop charging hefty import duty on Chinese clothes in the near future.
But it is already possible for garments to be packed in an Asian factory for shipping to consumers, surface freighted in bulk to three DCs in Europe, the US and Southeast Asia, where pre-packed garments are picked and air-freighted overnight to an end consumer without the need for messy paperwork.
80% of the world's garment market can be served with such a system - and for many garments, delivery to a customer would be quicker, easier, cheaper - and possibly greener - than through conventional retailing.
Most major retailers are quite aware of all this - but most see it as a way of providing a larger proportion of potential customers with a better buying experience. No-one, as far I'm aware, is yet planning to launch themselves on the world as a true online garment discounter.
But sooner or later, someone is going to marry all this together and launch Apparelzon: a real garment industry "category killer" capable of undercutting retailers able only to deal on 70% mark-ups.
When that happens, we'll see a greater revolution in clothing prices than at any time since the first spinning machine was invented in the 1750s. And in my view, the revolution will be led by those retailers who would risk being put out of business if they let someone else do it first.
Until then, commercial garment buyers are going to stay under pressure from their management to moderate inflationary pressures. And our new aids - the Clothesource guide to apparel trade regulations 2012, and the Clothesource World Apparel Sourcing Monitor 2012 will help buyers keep their bosses at bay.
The Clothesource World Apparel Sourcing Monitor brings together key facts about 100 supplier countries and 35 product categories, graphically displayed. It's the quick and easy way to familiarise yourself with the main facts about any country's apparel industry, or to search for a particular product.
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