THE FLANARANT: Local knowledge is key to retail success
With western retailers increasingly optimistic about business in emerging markets, does it also hold true that the industry will soon "be sourcing everywhere and selling everywhere"? Not according to Mike Flanagan, who believes most developing markets will stay small for a long time, and that locally-owned retailers will be the long-term beneficiaries.
"Never forecast. Especially about the future," is an insight about human frailty - apparently first articulated by Yogi Berra, a famous American baseball star. But it's one that Li & Fung, the world's largest apparel buyer, seems to have taken to heart.
It's almost always easier to observe that a given operator - Manchester United in football, let's say, Berra's New York Yankees in baseball, or China's factories in garment making - is currently the best than to forecast accurately who'll actually come out on top.
Yet many people still want forecasts. "Manchester United will hammer Arsenal in tomorrow's match" gets the headlines. Or "We're going to move production out of China this year" is what analysts like to hear.
So in spring 2010, Li & Fung got little more than nodding approval when it announced it would buy fewer clothes from China over the following year. And - analysts' memories being shorter than most goldfish - no tough questions when a year later its report for the first half of 2011 revealed the company had actually increased its orders from China.
A case of the left hand being unaware what the right hand's up to? Or just the observation that you can say almost anything to brokers as long as it's what they want to hear?
Whatever: one important lesson is to avoid too much precision in any future prediction. Sooner or later, L&F will buy less, or get a smaller share of its purchases, from China. The company just got its timing wrong this time. But often, timing's what really interests people.
L&F's latest prediction is that there's "a total shift in how the supply chain operates. You'll be sourcing everywhere and selling everywhere." Only this time there's no potentially embarrassing detail. And they're wrong anyway.
Sometime in the future, countries with big populations, but currently tiny economies - like Nigeria, Ethiopia or Bangladesh - will import the kind of volume of manufactured goods that Japan does today. No-one can possibly foresee, though, whether anyone reading this article will be alive to see it.
But I'll stick my neck out and make two predictions.
First, barring some spectacular and unpredictable event, it won't happen in any reader's 10-year business planning horizon. And never in the next two years which, for most people in the apparel industry, is the definition of really long-term planning.
Second, when today's large but poor countries do get rich, it won't be today's western retailers who'll profit from it. No-one's going to be "sourcing everywhere and selling everywhere."
Most developing markets will stay small for a long time
Overall, most professional forecasters are gloomy about growth prospects in the west for the next five years, and a lot happier about prospects outside Western Europe, North America and Japan. Forecasters most optimistic about the west predict annual growth of 1.5-2% (and many are a great deal gloomier than that). Most predict 8%-10% annual growth in many emerging markets.
Does that really mean we'll "be sourcing everywhere and selling everywhere"? In the next five years?
Not really. 80% of the world's clothes are bought by the 40% of the world's population living in Europe, North America, a handful of rich countries (like Australia and Japan) and Greater China.
However fast anywhere else is growing, there are really good reasons why those "other" places have extraordinarily undeveloped clothing markets.
The average French person, for example, spends over ten times as much on clothing as the average Indian. And in some markets, like hosiery, or swimwear, that difference gets as high as a hundred-fold. Brazilian women, overall, buy twice as many swimming costumes and bikinis as American women - but the cash value of the Brazilian swimwear market is less than half America's.
With a very tiny handful of exceptions (like C&A in Brazil) the only volume market in the emerging world for western brands and retailers is China.
Notwithstanding the breathless monthly announcements from major retailers of their expansion in new countries. For example, Inditex in September revealed openings in South Africa, Taiwan, Georgia, Azerbaijan and Peru - but it's still getting 71% of its sales from Europe. However fast it expands in Georgia and Azerbaijan, sales there are unlikely to overtake sales in France or Italy in anyone's lifetime - even if you double or even treble today's rate of growth in emerging markets.
In fact, virtually every western clothing retailer boasting of international expansion is either selling tiny volumes to a local elite or keeps the profitability hidden because they're actually losing money there right now.
The reason, of course, is that there's more to selling clothes than just putting a store somewhere people are getting richer. The further culturally a country is from the mainstream west, the more the four Cs kick in:
- Local culture: about making clothes, how to buy them and how much flesh it's appropriate to reveal, and
- prevailing customs - especially about traditional dress
- Competition differs widely around the world.
Indians spend so little on clothing because they're a lot poorer than the French. Even the richest don't need the seasonal wardrobes so necessary in France, and they often buy lengths of fabric for someone (themselves or a tailor) to turn into a sari or suit. The 'ready-made garment' sector accounts for well under half the clothes Indians wear.
However you play with the numbers, for at least the next decade or so, the world's apparel retail sales are going to be dominated by western Europe, North America, rich Asian countries like Japan and Australia, and Greater China.
Sooner or later, India, Brazil - and Nigeria - will develop markets to match. But in forecasting, as in telling jokes, timing is all. It's no use trotting out vague generalisations about the future: boom and bust are part of every economic cycle, and what matters is being more or less right about when they're going to take place.
But who'll benefit when they do?
The dirty secret about garment retailing is how very, very local the industry is. In virtually every significant apparel market, over 80% of clothes are bought from locally-owned retailers.
True, there are markets - above all the rich micro-states like Singapore or countries of the Persian Gulf - where the malls are full of foreign brand names. But even there the shops are physically owned by local franchisees.
And it's also true that while more and more apparel specialists boast of their international growth, in almost every case this contrasts with flat sales in their home market, which often accounts for 90% or more of their sales. Some - like Uniqlo - boast spectacular overseas growth to come, in spite of a less than stellar overseas record in the past decade.
However many branches of glitzy foreign retailers there might be on Fifth Avenue or Bond Street, the largest apparel retailer in the US remains Wal-Mart and in the UK M&S. Locally-owned retailers dominate almost everywhere else as well.
They do so because buyers at, say, JC Penney, concern themselves with designing or buying clothes that meet the wants and needs of their neighbours in North America, while their operations colleagues concern themselves with running and designing stores and processes that meet those same neighbours' needs.
Start trying to understand the widely different preferences elsewhere, and management risks losing the focus on the customers it needs to survive in its home market.
Look, for example, at what women wear on their legs in Japan or Shanghai and it's clear how spectacularly attitudes to clothes vary, even between seemingly similar countries, with similar climates.
And with growing calls for protectionism from foreign clothes and textile imports in many emerging markets, practically no foreign chain is going to get any significant success out of selling to markets like Egypt, Turkey, South Africa, Brazil, or Argentina until at least the end of this decade.
Will Li & Fung's forecast ever come true?
Oddly, it may well come true a lot earlier for Li & Fung than for most of its customers. By around 2030, someone's going to carve out a successful volume garment retail business in Nigeria or Bangladesh.
But that someone will almost certainly be Nigerian or Bangladeshi; it's very unlikely a foreigner will ever have the detailed insight into the nuances of how Nigerians or Bangladeshis, in the mass, shop for garments, even when those countries are rich enough to support a few branches of foreign chains like Zara.
But the disciplines of successful sourcing don't require deep consumer insight. Like accountancy or oil exploration, the principles translate easily around the world, and demand for successful practitioners is global.
In a couple of decades, the market leaders in the booming apparel retail markets of Nigeria or Bangladesh will be local. But to optimise their profits, they'll be using Li & Fung - or a competitor with similar scale, when one ever finally emerges - to scour the world on their behalf for the best sources.
People will be selling everywhere - but really understanding a market will differentiate the successful from the unsuccessful, and that means local knowledge will always win.
Sellers will be sourcing from everywhere, and that almost certainly means using intermediaries for at least part of every brand's and retailer's assortment.
But if Walmart or M&S ever get the apparel share in Bangladesh or Nigeria they've got today in their home markets, I'll eat my baseball cap.
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