Outlook 2014: Apparel industry challenges
By Leonie Barrie | 16 January 2014
Among the biggest challenges facing the apparel industry in 2014, responsible sourcing and the need for greater visibility across the supply chain were singled out. Another issue is increased volatility in apparel retail, along with the rise of omnichannel and its impact on sourcing and logistics.
Tom Nelson, managing director/VP global product procurement, VF Corporation:
I would not necessarily say this is a specific 2014 issue, but as we transition over the next three to five years the apparel industry will need to focus on 'maturing'. Several areas need to be addressed to help create a solid and sustainable production base that will support our future needs.
- The first area revolves around 'responsible sourcing,' and includes a variety of different themes inclusive of sustainability, compliance, chemical safety and product safety. In the past our industry has been very reactive in these areas, and efforts have accelerated to move to a more proactive model in several of these areas - including the Sustainable Apparel Coalition's Higg index and the Bangladesh initiatives led by the ILO, Accord and Alliance.
However, we are only touching the tip of the iceberg. We must continue to work with our factories to change their perspective from a 'catch me if you can' to a more positive approach to running their businesses.
Our industry also needs to face the realities of how it operates and find solutions that tackle the cause of some of our problems. One example of this would be hours of work and overtime. Our customers' expectations drive production needs to some times of the year more than others.
We need to work more closely together with the factories, brands, NGOs, governments and workers to develop systems that allow for appropriate overtime to produce the products we need, but also NOT in a manner that abuses the workers. We all have weeks when we work a lot more hours and a lot harder than others. I think we all know most of the issues, but are not working close enough together to find workable solutions to the problems.
- The second issue is to look realistically at how to improve our overall systems and processes. It has been easier in the past to just pick up and move products from one factory to another, or one country to another, to accomplish a specific goal. Those days are a thing of the past. A higher level focus and a lot more time will be required to look at our supply chains from end to end. We will need to spend more time reviewing things like waste, inefficiencies, partnerships, relationships and trust.
Roger Lee, CEO at TAL Apparel Limited:
2015/2016 - not 2014 - will be the years consumers will catch on to "sustainable" sourcing and manufacturing. So in 2014 the apparel industry needs to be focused on preparing to be more transparent on what goes into making its products and the carbon and water footprint it leaves behind.
With the recent introduction of the Higg Index 2.0 and the tragedies in Bangladesh, consumers are becoming more aware of what goes into making apparel products. Brands that do not embrace transparency today will find themselves playing a catch-up game in 1-2 years.
Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA) and lecturer at the Wharton School at the University of Pennsylvania:
This Christmas season's general consumption shifts seem to indicate a change to more sustainable, modest, conservative spending habits in Western markets, and the growing affluence of the Chinese market. The industry has to figure out how to respond to and manage these significant shifts.
There will be demand for even greater supply chain visibility, especially for tier 2 and 3 component suppliers. There will also be a stronger emphasis on quality, and more intelligence and agility in the supply chain.
Market turbulence will continue to challenge the industry to more value added activities like creative design, brand management, and product innovation on the 'art' side, and product performance, technical solutions, and quick adaptations on the 'science' side.
Rick Horwitch, vice president of strategy & solutions business development at Bureau Veritas, Consumer Products Services; and president/chairman of the Americas Apparel Producers' Network (AAPN):
I would put the challenges, and opportunities, into two macro buckets:
- Adjusting to the 'new normal' - speed, efficiency and cost management. Retailers and brands seem to have adjusted to the 'new normal,' which was created out of necessity of the economic conditions of 2008 (and subsequent years). Rising labour, material, energy and input costs; an increasingly activist regulatory environment; and rapidly changing consumer buying patterns.
'Quick response' or 'fast fashion' is no longer a catch phrase, it's a business reality. Speed is king. In addition, retailers have learned to manage with smaller inventories and to quickly react to consumer needs. At the same time retail prices haven't risen to match the rise in the cost of inputs. As a result, margin pressure is greater then ever.
The problem is there are no more low cost countries (with capability and capacity) to tap into. Thus, the focus is now on cost management through efficiency gains. From BV's perspective, we have seen several customers (retailers and brands) achieve great results in speed, cost and improved total quality (and customer experience) through proactive efficiency activities.
- Transparency, traceability and accountability. Increased NGO, governmental and consumer pressures are demanding this of retailers and brands. Social media can make or break a brand - quickly. The Zero Discharge of Hazardous Chemicals (ZDHC) initiative requires brands and retailers to take responsibility for the environmental actions of their supply chain. Federal and State governments are legislating that companies be accountable for their entire supply chain - not just tier 1 suppliers.
The Alliance and Accord (around Bangladesh safety issues) are forcing companies to go beyond traditional social compliance audits and understand new variables related to suppliers. Every supplier in a company's supply chain has its own supply chain. Understanding this matrix and knowing who is doing what, where and how is a significant challenge.
At the same time, this also represents an opportunity. Through greater transparency, traceability and accountability retailers and brands can also achieve improved speed, cost and total quality (and a greater customer experience).
Mike Flanagan, CEO of apparel industry consultancy Clothesource:
- Dealing with the underlying commercial problems in apparel retail:
- In the West: over-footage, while the internet is moving towards a fifth of apparel sales in many developed countries;
- In developing countries: real evidence apparel retailing just isn't making the money its managers expected.
- Understanding that many retailers and brands are attempting three equally challenging changes in their business models at the same time:
- The switch to online;
- Huge changes in the geography of their sourcing, often their logistics and admin backup, and their consumer market;
- The growing temptation for brands, and some manufacturers, to want to control their own retail - and increasing pressure on buyers to re-involve themselves in the detail of manufacturing;
- Managing the growing pressure on brands and retailers for better factory working conditions, together with the complex set of political tensions in the developing countries that account for most garments on sale in the West.
Josh Green, CEO at trade intelligence platform Panjiva:
- The internet: The internet continues to upend the apparel industry. Brick and mortar companies are still struggling to figure out how to harness the power of the internet - and struggling to figure out how big of a threat pure-play internet companies are. Meanwhile, the proliferation of internet-only companies continues, increasing the competitive pressure on everyone (including the older internet-only companies!). All of this will end up resulting in a much stronger industry overall - but in the meantime there will be a lot of hand-wringing and heartache.
- The economic recovery: It feels like the economic recovery is gaining steam, and overall this is a good thing. However, it's been a long time since companies have operated in this type of environment, and many companies will struggle to adjust. How aggressively should you invest in growth? How do you cope with rising manufacturing costs as aggregate demand increases? These are tough questions (but, yes, better questions than those that are asked in a downturn).
- The geographic shift of demand - The centre of gravity of the apparel universe is continuing to shift, globally, to the East and to the South. Spending power in developed economies is holding more or less constant, while spending power in emerging markets is growing significantly. Companies need to either turn their back on areas where they know they can't compete, or they need to re-orient their organisations to understand, market, and serve customers in new geographies.
Paul Forman, CEO, Coats Plc:
- Time is the vital basis of competitive success on every single level of the apparel industry and will continue to be for many years to come, not just 2014. The increase in fashion cycles from the traditional two to many more spread throughout the year, means speed of product design and development is key and every single part of the end-to-end supply chain plays a vital part.
- Labour and energy cost inflation is a structural challenge for all companies operating in Asia, Central Europe and Latin America in particular. Consistent improvement in cost efficiency in a world of inexorably escalating costs is hugely challenging, but those that can master it will be the ultimate winners.
- Maintaining corporate brand reputation and demonstrating to consumers that products have been manufactured and sourced responsibly and ethically is a continuing challenge. The Rana Plaza factory collapse in Bangladesh is still front of mind for many people, and the resource and investment needed to swing the barometer of trust back to positive cannot be underestimated.
- There are also ongoing challenges around the need for better supply integration and how to achieve global flexibility in supply to maximise advantages and benefits offered by different regions.
Dr Achim Berg, a partner at McKinsey & Company and co-leader of McKinsey's Apparel, Fashion & Luxury Group:
- Sourcing costs continue to rise as the era of purchasing-price deflation has come to an end. While large companies face labour costs as the top driver, smaller mid-market companies are experiencing a shift in purchasing power - and luxury companies need to invest in securing their raw materials base.
- The increased volatility we are observing in apparel retail on a global level is putting greater pressure on the apparel industry to become more flexible. It is also forcing industry players to deepen their customer understanding, make the supply chain more flexible, and enhance their skills in managing this complexity.
- Compliance will continue to become even more important. Apparel companies are working on a more integrated CSR approach across their value chain and, at the same time, are starting to more extensively align standards on an industry-wide level.
Alek Adamski, head of the UK supply chain practice at Kurt Salmon:
As ever, the sourcing mix, balancing stock volumes and style are challenges that don't change. But recent tough times have made the cleverer companies leaner, and they have applied science to help plan current and future range depths. Those who understand their cost to serve have the best chance of winning post the survival phase that many have had to embrace these past few years.
Kurt Cavano, chief strategy officer at GT Nexus:
It's all about speed...Whether it's finding a way to shorten lead times to compete with the fast fashion behemoths Zara and H&M, competing with Amazon's same day delivery, or keeping up with the army of young web-only brands that are growing like weeds. Consumers are obsessed with newness delivered now. Changing a brand that is not built for speed and making it quick requires major surgery; surgery that's not for the faint of heart. But those brands that don't focus on how they can get faster in every way will be left behind.
Tom Travis, managing partner of international trade law firm Sandler, Travis & Rosenberg:
There's a trend towards brands and retailers taking back their global licenses so they can better manage their businesses, including managing the sourcing of their products. This trend has accelerated over the last several years as companies take on the challenges of expanding global markets. The sourcing platform has become increasingly multidimensional, as opposed to encompassing just the EU or the United States. Companies are looking at a realignment of the supply chain to reflect this trend, with increasing consequences on manufacturing, logistics and trade compliance.
That paradigm shift to a global reality has been quick, because that's where the money is...and the supply chain has to follow suit. In meeting this challenge, each company and each supply chain has different individual strategies and tactics, but the impact of each is global. This is fascinating to me because it forces a quantum shift in how companies, their suppliers and transportation providers operate if they are to succeed in this expanded marketplace.
An obvious additional element in making this shift is transparency. Transparency - knowing exactly who is making what at which stage of production - is one of the great exports of the western world, and must be a constant objective for successful global companies. Without transparency, you put your brand at risk from any association with substandard labor, social or environmental conditions.
Julie Hughes, president of the United States Fashion Industry Association (USFIA):
I see two major challenges in the year ahead.
- The first challenge is how to keep the customer excited to buy new apparel. Initial indicators for holiday sales show that consumer electronics are up, but purchases of apparel are down. That suggests that for a lot of customers, they see the newness and excitement in tech toys. Let's fact it, it is hard for a sweater to compete with a tablet. But...the message seems clear that apparel retailers need to focus on creating excitement for the customer.
- The second major challenge is how to expand ethical sourcing throughout the supply chain. Clearly 2013 was the year that saw a new emphasis on ethical sourcing. Apparel companies now are actively engaged in Bangladesh to improve building safety. Whether they join the Accord or the Alliance, apparel brands and retailers have accepted new obligations to maintain high-level standards with all suppliers. While 2013 was the response to a clear crisis, I think that the year 2014 will be even tougher. Companies need to move beyond the crisis in Bangladesh and re-assess just what standards they will require from all suppliers. And not just direct suppliers, but upstream suppliers as well. How to craft standards that meet all the demands of ethical sourcing will be difficult. Expanding those standards across the industry so that companies align with the same standards will be even more difficult.
Mike Todaro, managing director of the Americas Apparel Producers' Network (AAPN):
Goliath had better pay attention to the small, nimble, plugged-in David's of the world. Goliath had amazing (market) strengths but was beaten by a smaller more agile competitor. The same may happen to US brands and retailers.
All companies compete as supply chains. Brands need to see the entire supply chain; that is their golden ticket to margins. At AAPN, we're developing a ROSI (Return on Sustainability Investment) because happy people mean more flexibility and faster speeds. This is true up and down the chain.
In fact, we have identified five areas where everyone needs to hear stories and learn about best practices in:
- Social responsibility/sustainability/environment/risk management;
- Engaged consumer/need for speed/supply chain adapted to online business/retail trends;
- Cost vs value/cost benefit/true costs/ inventory vs out-the-door/financing system (this is for a C-suite audience);
- Marketing/integrated thru the supply chain/risk:reward of showing the flag of the Americas/mechanisms to share needs and opportunities;
- Innovations/new products/new processes/new business models.
Magdalena Kondej, head of apparel research at Euromonitor:
From a consumer/retail perspective, the biggest challenges are also the biggest opportunities. An omni-channel focus - using technology to find new ways of engaging with consumers across all channels - will be key to shaking off discounting and boosting profits. Those unable to successfully navigate the world of e-commerce, m-commerce and social media will be the biggest losers in 2014.
Post-recession consumption patterns have changed dramatically and it is no longer realistic to expect the return of pre-recession shopping behaviour as consumers are now much more demanding. The balance of power is shifting towards the consumer, and adapting to this new environment is a huge challenge for apparel players.
Many brands are also struggling to synchronise image with pricing policy. Lack of clarity in this area can lead to a loss in market share and shoppers migrating to other brands that offer better value for money. Discounting cannot be considered a long-term solution, and adjusting pricing and branding strategies will be key to achieving sustainable growth.
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