With more and more own label apparel retailers eyeing growth in Asia and Latin America to make up for shortfalls in their domestic markets, Mike Flanagan asks whether a business formula that's running out of steam at home will now work abroad. Especially if it's fuelled by designers who have little connection to those foreign customers.

The apparel industry has been struck almost simultaneously by helter-skelter chaos in raw material prices and several years of slow or negative growth in its key Western markets. So it's not surprising many of its players are thinking again about some of the sector's long-standing assumptions.

Sometimes, of course, those assumptions are long-standing because they're right.

Many of you have probably heard as much as you ever want to about the collapse of Chinese competitiveness. Yet in August 2011, Chinese exporters saw their share of US apparel imports within a few microns of the highpoint they reached back in the heady days of 2009.

In the eight months to August, profits at China's largest textile businesses were up 36% on 2010. Yet at the same time, India's government is discussing a budget of around US$1bn to help textile businesses manage loans they can't afford to repay because of their recent losses.

For garment and textile producers, the issue of the day isn't falling Chinese price competitiveness. It's the fall in Western demand and the tiny size of the apparel markets in high-growth developing countries that are seen as an alternative to Europe and North America.

And for Western buyers, it's the unrealistic belief that countries like Cambodia or Indonesia have been exempt from inflating wages and raw material prices that have pushed Chinese prices up.

But, as I say, many of you have read little else for the past year or two. And it's distracted attention from one long-standing assumption that seems to be getting challenged with surprisingly little public discussion.

Since the 1960s, most of the market has been so dominated by own-brand multinational chains that most of us forget there used to be a time when manufacturers' brands ruled the roost.

From utterly different origins, Gap, Zara, H&M and Uniqlo - and the hundreds of chains with broadly similar assortment strategies - have become what most people think of as the apparel market.

So much so that even those manufacturers' brands (above all Nike, Adidas and the brands in the VF stable) that have survived the mauling of the past 40 years, now put rapid expansion of their own stores, selling only their brands, high up their strategic priorities.

For decades, those single-brand chains, together with C&A and all the others, dominated the markets in their own countries almost everywhere (except Italy) and have led Western apparel retail expansion across borders. Their success has led to some strange bedfellows - most famously Wal-Mart's attempt to move into fashion apparel through private brands like George and Metro 7.

Near-identical strategies
But in autumn 2011, even this world-conquering formula began showing signs of age. As well as some admirable, but debatable, optimism as the formula's leading practitioners announced near-identical solutions to a problem they may not have fully appreciated.

Gap Inc - which many still think of as the industry's biggest, though it's now been overtaken by Inditex and H&M - has, in effect, said its only future is to concede that the Gap brand has peaked in the US.

By 2013, it plans to reduce its Gap-branded stores in the US from 1056 in 2007 to 700. It plans different fascias for the US, increasing its dependence on outlet stores and Athleta and Piperlime. But the real focus of its strategy is the world outside North America, where it intends getting 30% of its sales by 2013.

Even though its international division saw falls in its like-for-sales in the first half of 2011, and Gap seems to seriously believe that beefing up the strength of its New York design centre will help it double sales in China. But more of that in a second.

At pretty much the same time, Esprit (from a much smaller base) made a surprisingly similar announcement. It wants to sell all its North American stores, speed up the closure of unprofitable outlets in its core German market, and invest heavily in new stores throughout Asia and other developing markets.

Already Hong Kong based, it doesn't believe garment success in China can be driven by a design studio thousands of miles away physically (and infinitely more distant culturally), so it's planning a design centre in mainland China to get its assortment right.

Both Gap and Esprit concede, however, that their enthusiasm for expansion into new markets is partly driven by problems in the countries where they currently do most of their business.

Fast Retailing doesn't. Its overseas expansion, it claims, is all about becoming the world's biggest garment retailer by 2020. This plan consists of:

  • Stepping up expansion in the countries Gap and Esprit have either failed in (Germany, which Gap pulled out of in 2004) or are pulling back from;
  • Using essentially the formula that's shown like-for-like sales decline in Japan almost every month for the past year;
  • Opening fewer new stores a year than Inditex is opening at present - hardly the most obvious strategy for overtaking it by 2020;
  • Moving that formula into the usual roster of developing markets and developing a new sourcing strategy;
  • But setting up a Shanghai management hub to ensure Uniqlo in China responds to Chinese tastes.

Fast-growing markets
It's no big surprise (and probably of little significance) that some of the major own label retailers want to move into those Asian and Latin American markets that are showing faster growth than their Europe/America/Japanese heartland.

But events at Walmart imply there may be something else to it as well.

Walmart, the world's biggest apparel seller - and likely to remain so for the foreseeable future in my view - has been seeing its US apparel sales slide for a few years. It's light on detail about the health of its apparel sales elsewhere too, which usually isn't a good sign.

Its plan to deal with this involves more emphasis on basic clothing, and moving its NewYork fashion design centre back to Bentonville, Arkansas. The evidence so far - even before the move back south - seems positive: comparable sales in September, after months of declines, were up 6% in underwear, 8% in socks and 5% in jeans.

Walmart commentators attribute the design centre move to a possibly greater ease in Arkansas of designing clothes most Americans feel comfortable with. They say it should also help address Walmart's struggles with the fit between fashion apparel and its image.

I believe both these views are oversimplified, possibly downright wrong and miss what may be a crucially important industry development. Let's look at what I believe lies behind all this:

  • Walmart wouldn't be Walmart if it hadn't decided New York isn't the cheapest place to design basic underwear.
  • Bentonville, Arkansas is cheaper. But the back office in a Guangdong factory is cheaper still. Anyone looking at the capabilities of bigger factories - in China of course, but in countries like Sri Lanka and Thailand as well - can't avoid noticing how technically skilled their designers can be, how quickly they can work with pattern cutters and sampling departments to adjust garments, and how keen their owners are to take over much of their Western clients' design role. However skilled they are, they can't rival designers in New York or London in really appreciating what young people are wearing. But they're probably better and faster, as well as cheaper, at adapting a standard skirt for a different fabric pattern or a slightly different length.
  • Walmart tried to improve its fashionability because its current customers were perfectly happy to spend hundreds of dollars on complicated electrical technology there, or eat the food Walmart sells. It wasn't Walmart's image that inhibited those customers from buying the company's clothes; those clothes simply weren't (or didn't look) right for Walmart customers.
  • Whether located in New York or Arkansas, Walmart's designers and merchandisers simply failed to design, sell to management and ensure suitable instore presentation of more fashionable clothes to customers.

And that, in my mind, is the core of Walmart's - and own label's - problem. Conventional own labels in apparel retail involve one design supremo overseeing a garment range that can run into tens of thousands of SKUs.

Design overview
It's a formidable job, requiring formidable skills. And with shorter product life cycles, the number of SKUs going through the system is increasing even before the retailer starts developing special ranges for India or China.

It's arguable that there's a point beyond which even the ablest can't go any further - and that Gap reached that point years ago. It's a phenomenon historian Paul Kennedy calls "imperial overstretch".

Walmart, in my view, wasn't incapable of designing more fashionable clothes: what it was unable to do was manage the extraordinary complexity of designing and merchandising through thousands of outlets a range of clothes that appealed to a group as diverse as Walmart's food and hard goods customers.

It's a problem that will hit all apparel own labels as they grow. Allied to the clear advantage of using producer-country designers for many retailers' own label programmes, I believe it's clear that the role of own labels in apparel will change.

What's also clear, in my view, is the huge question mark over whether strategies based on a business formula that's running out of steam at home will work abroad. Especially if it's fuelled by designers whose only connection with those foreign customers is an annual familiarisation visit, or occasional presentations from local managers.