Uncertainty is perhaps the biggest challenge facing the apparel industry in 2013. The economic situation in Europe and the US, a combination of rising production costs and flat prices, the pressure to improve working conditions, a lack of new production centres and low volume growth in fashion all add up to a worrying year.

Roger Lee, chief executive, TAL Group, a leading garment manufacturer that produces 55m pieces of apparel a year and makes one out of every six dress shirts sold in the US:
1: Cost. In most manufacturing countries, costs (minimum wage, inflation, utility costs, currency exchange) continue to rise faster than efficiency gains. Our costs have risen considerably over the years and right now there is more garment manufacturing supply than demand, which increases competition.

Some customers have continued to chase lower cost manufacturing countries. But they will soon hit a wall because the number of "new" countries you can move to and still have stable delivery is now very limited, and paying your workers properly and having a facility that is truly safe to work in actually costs money.  

For the first time in over 10 years, we are raising prices to our customers across the board. The increase is minimal but it shows that even a large and well-established manufacturer, no matter how hard we work to improve efficiency, still cannot offset the uncontrollable costs that we face in every country. How will our customers react? We do not know. We may lose some customers but we aim to retain a majority of them. Significantly, this minimal increase is a message that something is giving. Costs are increasing, but consumers are not paying more. As a manufacturer we've tried our best to contain our costs over many years, but for the first time we are passing some of the cost increases onto our customers (the brands). Time will tell if they pass this onto consumers.

2. Doing the right thing. The Bangladesh fires are a wake-up call to the industry that working with manufacturers to improve working conditions, while at the same time squeezing margins out of them, does not mix. It costs money to set up good and safe working conditions for our workers. For example, I have just approved a US$1.5m upgrade to the dormitories at one facility (and we have 10 facilities across our group) in China. How many extra shirts do I need to sell to recuperate this cost? The answer is multiple millions of shirts!

Providing good food, internet cafes, building sufficient fire escapes, recycling water to reduce water discharge, providing an air-conditioned workplace, paying workers without fail for the actual number of hours worked...all this costs money. On the other hand, it is not acceptable to allow the industry to continue to operate at the expense of workers. We've been trying to 'do the right thing' for a long time, and while we manage it 98% of the time, occasionally individual managers make the wrong decision but with the best intentions, which can lead to failure in some compliance areas.

Andrew Lo, CEO of Crystal Group, one of Asia's largest apparel manufacturers, producing more than 230m garments a year for customers including Victoria's Secret, Levi's, A&F, H&M, M&S, Uniqlo, JC Penney and Gap:
1: We are still facing a weak and uncertain economy, although 2013 overall should be better than 2012. Even so, nobody would claim the economy is very healthy.

2: While not a new challenge, this year we will continue to see big wage pressure in supply countries. Countries where we operate, or which are competitive in apparel supply - like China, Vietnam, Indonesia, Bangladesh, Burma and Cambodia - will all have double-digit labour cost inflation. This puts extra pressure on manufacturers because apparel is not increasing in price in the countries that we sell to. We have been facing flat manufacturing prices in the last 10 years, but most manufacturers have been able to survive or flourish by improving factory efficiency. It's just that now we need to be so much better in order to just stay even.

3: We are also looking at how best to capitalise on trade preferences like duty-free arrangements, which are important in our cost equation. The European Union (EU) is making changes to its Generalized System of Preferences (GSP) system for developing countries, from the beginning of 2014. So we're looking at which countries have, or will have, duty-free in the future, and how to increase capacities in those countries. There might also be concessions on processes in those duty-free countries, and we have to build the supply chain to be able to capitalise on these. Let's say for the US, they might need yarn-forward, so we need spinning, fabric mills, basically everything in the supply chain in order to qualify for duty-free. Things like this we need to watch and plan for.

Tom Nelson, managing director, VP global product procurement, VF Asia - part of the $9bn VF Corporation whose apparel and footwear brands Wrangler, Lee, The North Face and Timberland:
From a supply chain perspective... 
1: Managing a more inflationary environment. There are not a lot of lower price countries to move to. To manage inflationary trends, the entire supply chain will need to work much closer, end to end, to eliminate waste and improve overall efficiencies. The opportunity to pick up and quickly move to another country or vendor for a lot lower price is a thing of the past.

2: Changing our mentality from "short term gratification" to a longer-term thinking and planning. Over the past decades we looked at the short term approach: where can we move today to get the product and/or price we want? As we move into the future we will need to be much more strategic in choosing processes, equipment and relationships. Creating efficient supply chains takes a lot more work than moving from one vendor to another for price, or a specific product.

3: Shortage of detailed skill sets. Our industry needs more hard skill knowledge. We need people that know the processes and equipment at ground zero. To create the supply chains of the future will require people that can go to a factory and sit down with the management teams and operators at the machine and "show" them how to do it right. All too often we as brands/retailers just throw out expectations without fully understanding what is possible or not, the baseball bat approach.

Ashad Sattar, managing director at Sri Lanka clothing manufacturer Timex:
1: The first challenge is economic conditions in Europe and the US for 2013. 
2: Due to the above conditions, buying will be very late and lead-times will be shorter. Manufacturers and retailers will have to work very closely to achieve shorter lead times.
3: Cost will be an issue for smaller units, due to minimums in fabrics and garment production costs will be higher. It will be challenging to see how manufacturers and retailers can pass this on to the customer in tough economic conditions.

Ranjan Mahtani, CEO of Epic Group, which operates manufacturing facilities in Bangladesh and Vietnam and supplies 36m garments a year for customers such as Wal-Mart, JC Penney, Kohl's, Gap, Abercrombie & Fitch, Marks & Spencer and H&M:
1: Spiralling costs in Asia.
2: Skilled manpower shortage.
3: Lack of new production countries/centres.

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
1: The spectacular uncertainty about sourcing.

2: The imminent pricking of the emerging markets bubble. There is no significant market for most major retailers in the stable ones (99% of the Saudi Arabia market is still not a lot). A few franchises in Slovakia or Guatemala are better than nothing - but they make no serious contribution if a retailer is losing share in its core market. And I can't find a single example of a major Western apparel retailer or brand actually making money in a BRIC.

3: The real possibility sales in Western markets won't grow. Increasing GDP just isn't translating into people working.

Jan Hilger, High End Fashion Consulting, and member of the board of DTB Dialog:
The three main challenges from my perspective will be:
1: The premium and luxury apparel industry will face growing bottlenecks in high quality supply in Europe as capacities become rare or over-aged. Most young people entering the job market are not attracted by apparel jobs and seek their professional future in other industries or services.

2: For the lower end of apparel sourcing, cost will be a tough challenge to tackle as Chinese wages remain on the rise and low-cost alternatives in the region remain unstable or underdeveloped from CSR or infrastructure perspectives.

3: CSR demands and transparency requirements will grow after recent incidents in Pakistan and Bangladesh; alternatives will have to undergo intensive assessments before they are ready to have orders placed.

Dan Dunham, global sourcing manager at Cabela's, the US-based specialty retailer of hunting, fishing, camping and related outdoor merchandise:
1: Labour cost increases.
2: Material and trim cost increases.
3: Lead time and capacity issues.

Josh Green, founder and CEO of Panjiva, a New York based firm that provides information for retailers and importers seeking new sources of production:
In the midst of a tough macro environment, apparel companies will face a series of key choices in the year(s) ahead. Some companies will react like deer in headlights - and refuse to make choices. The strongest companies will have the courage to choose the path that's right for them - and will thrive.

Choice #1: Invest or Harvest. Most companies prize growth above all. The problem is that the macroeconomic conditions will make it tough for most companies to grow. In the years ahead, companies with something truly special to bring to market can succeed by investing in growth, as always. But many companies would do well to focus on profitability, rather than growth, in a tough macro environment. Unfortunately, lots of companies will invest in growth, because it's what they are used to doing, despite the fact that they don't have anything particularly special to bring to the market. These companies will suffer.

Choice #2: Offline or Online. With the exception of online start-ups, most companies in the apparel industry face an uncomfortable reality. Their knowledge, their skills, their relationships - all are oriented toward working through brick-and-mortar distribution channels. But all the growth is happening online. Companies will have to choose between doubling down on offline, taking a leap of faith online, or finding that elusive balance between the two.

Choice #3: Global or Local. In the sourcing world, we've been talking for years about the need for a truly global sourcing strategy, one that takes advantage of a world of opportunities, wherever they are. Meanwhile, there's also lots of talk about local sourcing strategies - designed to minimise lead times and chase full price revenue. Which is right for your company? The answer will depend on your overall corporate strategy, and of course the answer may be a combination of the two. Clearly, though, getting to the right answer is crucial for any company that's in the business of delivering product to customers.

Jonny Mitchell, managing director of the legwear division at Courtaulds Brands Ltd, owner of the Pretty Polly and Aristoc hosiery brands and a major supplier to UK retailers including M&S:
The three biggest challenges facing this year are: consumer confidence, the health of the economy, and margin pressure. All three are inter-linked in many ways, but as retailers endeavour to maintain their profitability and give customers the best value in tough economic times, then margins will continue to be squeezed as raw material and operational costs are all increasing.

Rick Horwitch, vice president, strategy & solutions business development, at testing, inspection and certification provider Bureau Veritas, Consumer Products Services:
1: Adjusting to the 'New Normal.' Over the last 2-3 years, retailers and brands have adjusted, or re-calibrated, their buying patterns to address one major issue: providing the consumer with what she/he wants when she/he wants it. This has resulted in significantly reduced on-hand (and 'backroom') inventories, a greater velocity of orders (more orders with smaller quantities), and shorter lead times. I have talked to dozens of sourcing executive (retailers, brands and manufacturers) and all have said this is the new status quo, or as I like to call it, the 'new normal.' The challenge is that everyone within the supply chain MUST re-calibrate their business, too, to service the new buying patterns effectively. This has put greater strain on every component of the supply chain, but at the same time, provided new opportunities. The other great challenge brought about by the New Normal is cost/value management. Don't get this confused with "cheap prices" (although I'm sure many view it this way). As we all know, over the past several years input costs have risen significantly (materials, labour, energy, etc). At the same time retail prices have remained relatively flat. However, retail margins need to be maintained. The challenge is "how" - without affecting quality, design and availability?

2: Increased regulatory activism (states, federal, international and NGOs). It is no longer acceptable to design a great product, get it made, shipped, hope for a great sell-through and re-order. All companies (retailers, brands and manufacturers) need to also be lawyers, chemists and commodity traders. Keeping up with rapidly changing global trade regulations, product safety regulations, labelling and other laws, environmental concerns and social media campaigns that could go viral and impact brand equity, are major challenges.

3: Do you really know your supply chain? Over the last couple of years, and especially in 2012, I heard this question asked repeatedly. As pressures increase for speed and cost, retailers and brands may be forced to make expedient decisions versus value-based decisions. This could lead to product being sourced in less then savoury places, or more common, being sub-contracted without the buyer's knowledge. Whether you buy full package or CMT, whether you are a vertical manufacturer or sourcing agent, everyone has multiple suppliers, and those suppliers have suppliers. Do you know who and where they are? Starting in 2013 there will be new federal (CPSC) regulations requiring all companies to know their supply chains and what goes into their products. There is also significant activity on the NGO front, especially related to environmental and social/healthy/safety issues pushing for the same level of knowledge and transparency.

Kurt Cavano, founder, chairman & chief strategy officer at TradeCard Inc, the supply chain collaboration and global trade platform:
Economic uncertainty is the biggest challenge facing brands, retailers and consumers. We're coming off of a disappointing holiday season. Early expectations were for 3-4% growth in consumer spending in the US this holiday season versus last year. The actual numbers came in just slightly above last year - around a 0.7% increase. This was a major disappointment, but also a clear signal of the state of today's consumers. Concerns about the state of the global economy are weighing on consumer spending. Worries over the US fiscal cliff and now the debt ceiling have forced consumers to re-think their spending and lean more towards saving. If the US does fall into recession - and some say we already have - then the economy will continue to be the top challenge throughout 2013. Sadly most of the economic uncertainty is self-inflicted.

Mike Todaro, managing director of the American Apparel Producers' Network (AAPN):
1: The big challenge of any organisation that meets is to hope you keep meeting, that your content resonates, that your meaning matters. As the industry consolidates and as trade shows lose their audience, we are running out of places to meet - and by meet I mean without vendors, without powerpoints, without sales pitches, and without a profit motive of the host of the event. So our challenge as a non-profit, as a supply chain network, is to matter and to meet.

2: The second big challenge is to quit looking at the retailer as 'the retailer', and the brand as 'the brand'. It is not that simple. The majority of our recent spurt in membership have been brands and retailers and fairly consistently the contact executive was new, either to the position or in one case the industry. It matters little how tightly wound together in trust and performance your extended supply chain is if you have to fairly regularly start from scratch with your major customer, when, because of consolidation, there are fewer and fewer of them and they are bigger. There have been disasters in the industry when new executives have cut ties with entire regions, cut off award winning factories, ruined stellar careers only to see, months later, their replacement come in and try to repair the damage.

3: The third challenge? Who knows. The economy? Fires in Bangladesh? Stockholders versus stakeholders? Student anarchists attacking the activewear brands? The increasingly obvious inability to control operations when the factory is not close and you don't know how one runs anyway?

John Miln, CEO of industry body the UK Fashion and Textile Association (UKFT):
There are many challenges - but I see the three biggest as:
1: State of the economy. In order for business to survive and flourish in extremely difficult times the bedrock of growth and sustainability is a stable environment in which companies can work. The Government has to help and support this effort by providing meaningful and material legislation in employment, fiscal measures and export facilities. A stable economy needs low inflation, but external pressures in commodity prices mean this is difficult. Included in this has to be stability in exchange rates - much of which can be secured by UK economic growth - but which can be buffeted by external factors - but it has to remain at a level where UK companies can both export and source effectively. The other key factor is banks' ability to lend and, importantly, a firm's ability to borrow effectively: this still remains a major factor in company success as is credit management together with export credit guarantees.

2: We need to have a consistent approach to Europe. It still remains the UK's biggest trading partner and remains the centre for much of the legislation that affects our businesses (and our lives). Despite the Union, there remain inconsistencies in the ways that individual states support their business sectors - in apparel and textiles the UK is often at a distinct disadvantage to its fellow European countries by way of such support. There does exist considerable funding opportunities for UK business by way of European grants and support - getting at these in an efficient and measurable way is important.

3: Consumer sentiment. All apparel and textile suppliers are at the mercy of the retailer and thus the consumer that shops with them. But the consumer is today, and will continue for some time, to be challenged by decision making concerning their disposable income. With fuel pricing unpredictable, food pricing increasing way beyond the rate of inflation, housing and general living costs similarly rising and salary increases generally running well below inflation rates, it is clear that the decision taken by consumers on disposable income will affect our industry.

Neil Saunders, managing director at UK-based retail analyst Conlumino:
From my perspective the three major issues are:
1: 2013 is likely to see the continuation of the trend of low volume growth in fashion; this is partly driven by elevated prices and partly by lower confidence and the squeeze on disposable incomes. In essence, this type of environment is punishing for retailers as it means there is more of a zero-sum game playing out in the sector: one player's gain is another player's loss. With so much capacity in the market it is inevitable that some players will lose out. The challenge is to be compelling enough not to be a loser; that requires real focus on developing customer centric propositions.

2: Multichannel is a big challenge for retail as a whole and the fashion sector is no exception. The main issue here remains one of creating a 'single view' across a much more fragmented set of channels. Things like customer intelligence, stock systems, fulfilment and customer service need to be brought together which, for most players, is a significant challenge.

3: The rise of multichannel throws up a further challenge for the sector: rightsizing store portfolios. The fact is that there is too much physical capacity in the sector and the economics of so many physical stores do not stack up. Indeed, in order to maintain profitability, we forecast that over the next four years around 3,904 fashion shops will close with a loss of 6.6m sq ft of selling space. This does not mean the end of the store - on the contrary, stores will remain a vital part of the channel mix - but it does mean thinking about the configuration of chains, both in absolute numbers and in terms of how formats are segmented across different locations.

Magdalena Kondej, head of apparel research at Euromonitor International:
Pressure to break the cycle of discounting and increase margins will continue. A number of retailers (Fat Face, Jaeger, New Look) have been successful in cutting back on over-frequent discounts and trading at full price regardless of the competition. It is about strong branding and enough courage to ride against the tide. Consumer attitudes and perceptions of value will need to be shifted too, people have been trained to expect discounts and this is going to be hard to break.

On the bright side, "fast fashion fatigue" means more and more consumers are now paying increased attention to quality and longevity. This could spell worrying news for some lower-priced brands, but the premium segment is likely to get a push as evidenced by recent company activity: H&M's imminent launch of "& Other stories", Fast Retailing's acquisition of J Brand, and Gap's attempt to venture into luxury retail with the acquisition of Intermix.

Helen Mountney, managing partner at consumer goods consultancy Kurt Salmon UK and Ireland:
As consumers, rather than retailers or brands, remain in the driving seat, a pre-requisite for 2013 will be for fashion businesses to have an integrated channel strategy that allows their customers to have a seamless shopping experience across channels and a superior fulfilment service. To achieve this, they will need to be more consumer centric, gaining greater insight into shoppers' preferences - both in how they buy - in store, online, mobile - and what they want to buy and at what price.

The onus will be on delivering even greater product with greater value - while keeping an eye on day-to-day costs. To achieve this "speed" and "agility" become the watch words of the year. For the most part, fashion retailers have been looking at their store operating costs in more detail over the past few years and addressing the most obvious areas, but there is probably more work that can be done. While their online offer has been a traditionally unprofitable channel, this needs to be made profitable or there is the risk that overall margin will be eroded as more sales go through via the internet.

In a flat economy, more companies look to increase sales outside of their traditional markets and move into new regions, either with bricks and mortar stores or online. However, the challenges of working in different cultures must not be under-estimated.

As such, developing the teams and the processes to manage an omni-channel global business, where quick decision-making will be an imperative, will need to be a priority for apparel businesses if they want to improve sales and profits in 2013.

Gilbert Harrison, chairman of investment banking group Financo:
I think it's going to get better, depending on what happens with the financial crisis, because all of our clients continue to question what is going to go on with the government.

Click on the following links to read other articles in this management briefing:
Outlook 2013: Apparel industry opportunities
Outlook 2013: Lessons that should have been learnt
Outlook 2013: Other issues to watch