Foreign exchange rates and labour costs are seen having the most impact on sourcing costs in 2017

Foreign exchange rates and labour costs are seen having the most impact on sourcing costs in 2017

More pessimistic expectations for consumer confidence in all key markets in the year ahead set the scene for just-style's State of Sourcing 2017 survey. The impact of the Brexit vote and the US presidential election on trade agreements are among upcoming concerns, while respondents are bracing for another year of exchange rate volatility and rising raw material and labour costs. 

What is your outlook for consumer confidence in your key markets in 2017?

The overall outlook for 2017 comes amid more pessimistic expectations for consumer confidence in all key markets in the year ahead – with the exception of Asia where big improvements are seen.

The biggest fears are directed at the UK, where 52% expect confidence to worsen over the next 12 months, a massive rise from just under 10% who took this view last year. And whereas 30% thought things would get better during 2016, the figure has declined markedly to just 9% this time around. There's no doubt uncertainties surrounding the Brexit vote to leave the European Union and continuing uncertainty about the state of the economy top their concerns.

The picture is also less rosy for both Europe and the US than it was a year ago. The fear factors don't just include Brexit and president-elect Trump; also likely to be causing consternation are the fallout from the Italian constitutional referendum, and next year's elections in the Netherlands, France and Germany.

In Europe the results have flipped over the course of 12 months, with 36% now seeing consumer confidence worsening and 23% eyeing an improvement. That said, 61% see no change year-on-year.

In the US, 35% think things will be worse in 2017, against just 11% who held this view a year ago. But perhaps surprisingly, the number seeing an improvement has held relatively steady at 46%, dipping just slightly from 49% last year.

In North America, 25% see consumer confidence worsening, while 33% believe it will get better; in South America the figures are 30% and 12 % respectively; and in the Middle East a majority of 66% believe the status quo will be preserved.

But it's a very different story in Asia, where 48% are forecasting an upturn in consumer sentiment during 2017, rising from 38% last time. In the meantime, the proportion of those expecting consumer confidence to worsen this year has fallen from 22% to just 6%.

What are your biggest concerns following the Brexit vote?

The expected drop in consumer confidence in both the UK and US tallies with the UK's Brexit vote in June and the election of Donald Trump as the next president of the United States. Both have the potential to throw long-established trading arrangements into turmoil – a concern picked up in our survey.

Biggest worries following the Brexit vote are its impact on trade agreements, currency fluctuations, and the potential for falling consumer confidence and recession in the UK and EU. Also in the mix, but trailing behind, is unease over increased tariffs and regulatory uncertainty.

Talk of a 'hard Brexit,' uncertainties over its timelines, and the terms under which the UK will eventually trade with both the EU and the rest of the world mean that in the not too distant future apparel firms will be sourcing products without knowing the rules under which they will be imported into the UK. More immediately, the decline in the value of the sterling is set to push up the price of a wide range of imported goods – including clothing – next year.

What are your biggest concerns following the US presidential election?

A slightly different picture emerges on the other side of the Atlantic, where trade agreements are cited as by far the biggest concern for 41% of respondents following the US presidential election. Increased tariffs and regulatory uncertainty are cited by 29%. Specific fears are the fate of the Trans-Pacific Partnership (TPP) free trade deal, protectionism, and the impact this trade uncertainty will have on planning.

And their concerns are well-founded, given that president-elect Trump has already pledged to pull out of the proposed TPP free trade deal with 11 countries including Vietnam. Other threats made on the campaign trail include tearing up NAFTA (the North American Free Trade Agreement with Canada and Mexico) and imposing a 45% tariff on US textile and apparel imports from China.

What are your biggest sourcing concerns as you head into 2017?

Zooming out to take a look at the global sourcing stage, exchange rate volatility, rising raw material and labour costs are the top challenges for those surveyed as they head into 2017, each mentioned by 55.6%. While these three also topped the list last time, exchange rate volatility and rising wages have slipped slightly from 60.1% and 67.0% respectively last year, while a greater weighting has been given to raw material cost increases and/or volatility in the coming year, which is up from 43.5% a year ago.

A first glance at the comparison with last year suggests little change across many of the issues although, not surprisingly, changes in trade agreements (48.1%, up from 35% last time) and political risk (43.6%, up from 30%) have assumed more prominence this year.

Also worth noting is that demand for increased speed to market was identified by a strong 49.6% of those surveyed as another on-going pressure.

The number of possible responses to this question illustrates the complex mix of factors that influence apparel sourcing – everything from energy price volatility to the availability of production facilities and sustainability.

What is your expectation for overall sourcing costs in 2017?

Having established that sourcing costs remain pressing in the year ahead, it is interesting to see the sentiment here is far gloomier than it was a year earlier. A whopping 68.8% of those surveyed expect overall sourcing costs to rise in 2017, independent of sourcing country.

Within this, 16.8% are anticipating a significant rise of more than 5%, while 52% see costs rising by between 1% and 5%. A further 24% predict little change.

Last year 9.7% said they thought costs would go up by more than 5% in 2016, 44.8% saw an increase of 1% to 5%, and 31.7% thought they would stay the same. An optimistic 11% thought they would fall by 1-5%, compared with just 6.4% who see this happening in 2017.

How is your sourcing budget likely to change in 2017?

Respondents appear to be planning for these higher costs with a rise in their sourcing budgets in 2017. Almost half expect their budget to go up, with 14.5% seeing an increase of more than 5%, and 33.9% anticipating a rise of between 1% and 5%. A further 29% see their budgets staying the same in the year ahead.

Answering the same question last year, 9.6% of those surveyed thought costs would go up by more than 5% in 2016, 34.3% saw an increase of 1% to 5%, and 37.7% thought they would stay the same.

Worryingly, given the expected rise in costs, 12.1% expect their budgets to drop in 2017.

What do you see as having the main impact on sourcing costs in 2017?

The biggest impacts on sourcing costs have scarcely changed from last year, and mirror responses to the question on overall sourcing concerns – with foreign exchange rates and labour costs at the top of the list, according to 27.0% and 26.2% respectively. The cost of raw materials comes in at third place as a driver of costs for 13.5% of those surveyed, rising from 8.8% last year. Together, these three are seen as having the main impact on sourcing costs in 2017 according to 66.7% or respondents.

Also of note – and again chiming with responses to earlier questions – is the increased impact that duties and preferences, and safety and compliance initiatives will have on sourcing cost next year, each getting 8.7% of the vote.

What strategies are you focusing on to reduce costs?

Faced with an expected rise in sourcing costs in 2017, and a shortfall for many respondents in their sourcing budgets, it may not be surprising that renegotiating with current suppliers has risen as a cost-cutting tactic, edging up to 38.9% from 36% year-on-year.

But process and productivity improvement (61.1%) and closer collaboration with key suppliers (56.3%) remain the top measures to try to mitigate any increases, and are unchanged from responses given a year ago. Looking for – and improving – sourcing efficiencies were also among separate answers given.

Surprisingly, given that the cost of raw materials has been cited as a key driver of costs, raw materials management has slipped as a potential strategy mentioned by 30.2% (down from 39.5%); as has identifying new, lower-cost vendors (down to 27.0% from 34%), and exploring new sourcing hubs (down to 27.8% from 37.4%). Plans to streamline internal sourcing organisations also appear to be on the wane (down to 26.2% from 36%).

For more analysis of the results of just-style's State of Sourcing 2017 survey, click on the following links:

State of Sourcing 2017 – just-style survey results

State of Sourcing 2017 survey – Supply chain shifts