Outlook 2014: Three key shifts in the global garment industry
By David Birnbaum | 13 January 2014
Transnational factory groups are transforming the global garment industry
From the rise of the billion dollar transnational factory giants to the bursting of the Bangladesh bubble and the decline of the retail store, David Birnbaum offers his take on the key apparel industry issues to watch in 2014.
"Garment industry experts confidently predict that the 500bn ton meteorite that slammed into downtown Chicago yesterday morning will have a negative impact on 2014 holiday sales."
Those of us who predict the Chicago calamity will get it right; those who fail to see the future will get it wrong.
The above notwithstanding, predicting the unpredictable is for most of us a waste of time. The best we can do is see current trends and extrapolate them to the near-term future.
And herein lies another problem:
- We can see the past;
- We seem all too willing to speculate about the future;
- It is the present that confounds us.
Because we do not understand just what is going on around us, our ideas of the future are distorted by our failure to consider what we do not see.
Here are three invisible issues that will continue to dog us in 2014.
I: The rise of the billion dollar transnational factory giants
The greatest sourcing challenge today is not the race to the bottom, or the decline of China or falling FOB prices. The great challenge is that the global garment exporting industry has split into two competing groups, each with its own strategy. On the one side we have the transnational factory groups, while on the other side we have everybody-else.
We all know the everybody-else mob's strategy:
- Keep FOB price down;
- Get out of high-labour-rate China;
- Move to Bangladesh and/or the next low labour rate country;
- Pay lip-service to social responsibilities;
- Treat the workers as disposable tools, easily replaceable.
The transnational factory group strategy is different.
Several weeks ago I was present at an interview with John Cheh, CEO of Esquel. Esquel is a cotton shirt maker. Esquel is also the billion-dollar-plus transnational factory group personified. To put this in context, if Esquel were a country it would rank 22nd on the list of top garment exporting nations.
Esquel is mostly China based, but has substantial operations in Mauritius, Malaysia and Vietnam.
The Esquel strategy is different.
- Their number one asset is their ability to guarantee their customer peace of mind;
- They are more than product makers; they are service providers;
- They are not moving to the latest cheap labour country because they do not see labour rate as an important cost factor;
- Their strategy is to reduce overhead by increasing worker productivity; Worker training; Capital investment in cutting edge machinery;
- They have a total commitment to social responsibility. Zero tolerance to lapses;
- They successfully reduce worker attrition to a minimum through: Greater attention to workers' problems and needs; Better pay and benefits; Worker empowerment;
- From basic sewer to senior manager, if you work for Esquel, you do not have a job, you have a career.
Customer trends towards the Esquels of the industry and away from the everybody-else mob became clear in the recent recession and will doubtless become even more pronounced in 2014. This is not a prediction, just the recognition of past and current trends.
Here are two predictions based on this trend:
- Garment exports from China will remain little changed. The everybody-else mob may move out, but the transnationals will stay.
- As the importance of cheap labour declines, the garment export industry as the first step of development will become a more difficult strategy.
II: The global effects of the end of the short-lived Bangladesh era
A man jumps off the top of the Empire State Building. As he passes the 83rd floor someone sticks his head out the window and yells: "How is it going?" To which the man replies "So far so good."
Professionals on all sides are slowly moving the conclusion that putting all your eggs in the Bangladesh basket is not a good idea.
The Bangladesh problem has no solution because neither the factories nor the customers are willing to effect a solution. I can understand the Bangladesh side - living in hell does not give rise to a culture that includes providing benefits to others.
It is the customer side that confounds me because the customers are not only the good-guys, but more importantly any customer can solve its Bangladesh problem easily, quickly and cost-free.
Here is a simple foolproof strategy: notify your local buying office that anyone placing an order with a sub-standard factory will be fired.
Granted the problem will not disappear overnight. However, the first time you fire someone on a Friday, you can expect the problem to disappear by the following Tuesday (assuming Monday is a holiday).
The difficulty is that the customers want to continue working in Bangladesh; they just do not want to pay the price. Therefore, recognising that working in Bangladesh is virtually the same as living in hell, they have opted for the time-honored solution - indulgences - paying cash after the event to avoid damnation.
However, there is a difference between recognising that a catastrophe is inevitable, and predicting when and how it will occur. Finding the single event that might just burst the Bangladesh balloon is about the same as a pathologist opening up the cadaver of a 110-year-old man, trying to determine which of the many fatal illnesses was the first to succeed.
The above notwithstanding, l offer the following scenario.
The Bangladesh customer base is moving dangerously up-market.
Traditionally, the Bangladesh customer was exclusively the mass-market retailer such as Wal-Mart.
To the mass-market consumer, low price is everything. As a result he or she views the horrendous events in 2012-2013 with some degree of ambivalence: On the one hand the mass-market customer is appalled that human beings literally died to make the T-shirt or jeans he or she just bought from Wal-Mart; but on the other hand, that same customer feels reassured that by sourcing in Bangladesh, Wal-Mart is doing everything possible to ensure that their Wal-Mart customer is buying at the lowest price and let's face it, to the Wal-Mart customer, low price is everything.
However, as Bangladesh factories move up-market to designer labels and premium brands, they are dealing not just with a different customer, but with a different consumer.
What is true of the Wal-Mart customer is not true of the 'Francoise Schmidlap - designer-to-the-stars' - customer. To the 'Francoise Schmidlap - designer to the stars' - customer, image is the dominant factor, and image includes far more than just up-to-date design and higher standard of make. To that customer, image is something cultural, sociological, almost mystical. The 'Francoise Schmidlap - designer-to-the-stars' - customer is imbued with the touching belief that while the low class hoi polloi will buy clothing produced by children slaving away in Dhaka sweatshops they, the elite patrician class, can afford to buy garments made by smiling ladies working in pristine conditions in Paris, London and Milan. This image translates directly into the cash value of the company.
However, the moment a 'Francoise Schmidlap - designer to the stars' - garment is found in the smoldering ruins of the next Bangladesh factory disaster, 'Francoise Schmidlap - designer to the stars' - will lose forever that ethereal image and will immediately be transmogrified into just one more scum-of-the-earth exploiter.
At this point, with perhaps 20-30 designer labels and premium brands sourcing in Bangladesh, the industry has reached the tipping point.
Whatever the actual scenario, without real meaningful change, the Bangladesh garment export industry cannot survive. That is not a prediction, just the recognition of reality.
Here is the terrible prediction:
The end of the Bangladesh garment export industry, while undoubtedly important to Bangladesh, its government, and its people, will not seriously affect the global industry. Only the Bangladesh factory owners and the Bangladesh Garment Manufacturers Export Association (BGMEA) believe they are indispensible.
More important than the continued existence of the Bangladesh garment export industry will be the three salutary lessons it provided by its end:
- The minute the Bangladesh garment export industry implodes, the current very very slow trend towards greater social responsibility will move up from priority 0 to urgent and become a dominant force in customer global sourcing decisions and supplier strategies.
Customers will be searching assiduously for suppliers able to guarantee peace of mind and will turn to those who have proven 100% reliable in the past.
- The transnational factory groups, who are already moving towards 0-tolerance in areas of social responsibility will be the great beneficiaries.
- Countries wishing to develop successful garment exporting industries would do well to avoid the Bangladesh cheap-labour-at-all-cost strategy.
III: The decline of the retail store
For those of us living in caves in the High Pamir Mountains who have not yet heard the news, I have to tell you, 2013 holiday sales were somewhere below not-wonderful.
At the same time, due to the crush of unforeseen e-business, the major logistic operations, such as FedEx and UPS, were unable to deliver goods on time.
To put it another way, once again in-store holiday sales took a beating, while e-business increased substantially.
Almost all traditional store retailers have become omnichannel: store + Internet. They have shown substantial increases in e-sales, albeit from a small base. Nevertheless the omnichannel retailers find it difficult to compete with the single channel e-retailers such as Amazon, E-Bay etc, in part because they lack the technology. However, there are more important fundamental reasons.
- Demographics: I would not buy clothing online, but then again I am 73 years old. (Although I am reliably informed that my 92-year-old mother-in-law shops almost exclusively online.) My children no longer see the need to go to stores to buy clothes.
- Shopping used to a social event. My children believe shopping to be a drag.
- They say they find more choice and lower prices on-line.
- Higher costs: The store has substantial costs that internet retailers avoid:
- High initial capital outlay
- High rentals
- Labour intensive
- High cost of decoration and maintenance
- Large inventory
- The store offers limited products: The store is circumscribed geographically. Its customers are limited to those willing to travel to the store. The more special the product, the more limited the customer base, the less likely that special product can be sold in a store.
- The internet retailer offers lower price: The virtual store with its lower costs and lower risks can provide the same quality clothing at 50% store retail.
- The internet retailer better meets the niche customers' needs; and as the niche customer becomes the mainstream customer, the store becomes increasingly less able to meet customers' needs.
To a great degree, the competition between the traditional store retailer and the single channel e-retailer mirrors the competition between the traditional television network and the cable network. The former relies on the ability to meet the needs of the average everybody, while the latter relies on the ability to meet the needs of the specific somebody. It would seem that both in television and clothing, the niche customer is the better customer.
It does not take a genius to conclude that 2014 will bring continued increases to single channel e-retailers at the expense of the store or the omnichannel (store + Internet) retailers.
Three distant predictions:
- In the long run, the clothing retailer with 5000 stores, like the dinosaur will become extinct.
- In the long run, the world's largest clothing retailers will be Amazon, E-Bay, etc.
- In the long run, when the major e-retailers form strategic relationships with transnational factory groups, the global industry will be changed forever, offering more original, higher quality, at substantially lower prices but much higher profit.
IV: Some last thoughts
The global garment industry, as it exists today, while showing some improvement remains dysfunctional.
On the customer side:
- Importers buy for $1, sell for $10 and go broke.
- Lead time is still measured in months rather than days.
- Markdown remains the single largest cost factor.
On the supplier side:
- Factories still believe that forcing their sewers to work 16-hour days increases productivity, without considering the possibility that moving to two 8-hour shifts will increase production, reduce overhead and result in higher profit.
- The garment that requires 20 minutes to produce requires 20 days to ship.
- Management believes that compliance, sustainability, and pollution control are advertising gimmicks, with little place in the real world.
But as they say in Kentucky, times are a-changing. Time is taking its toll. The old school gamentos are dying off and their protégés are going broke, leaving the industry increasingly in the hands of educated professionals.
I hope that when we look back, we will all agree that most important trend in 2014 was the continuation of the trend towards a more rational industry.
But then again, I have always been an unrepentant optimist.
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