For the final part of our Outlook 2018 report we asked industry executives what keeps them awake at night – and other issues the apparel sector should be keeping a close eye on in the year ahead. Not surprisingly, US trade policy and free trade agreements remain top of the agenda for many – along with health and safety, ethics and compliance, automation and efficiencies, and the continuing impact of omnichannel retail.
Marc Compagnon, group president, Li & Fung:
As with the previous year, the key thing keeping us awake at night as a company is the pace of change in the industry. To us, speed is the new currency at retail and we are determined to build the supply chain of the future. We are therefore focused on being more agile and producing results more quickly by simplifying processes, using technology and embracing new ways of working with our customers and other industry partners.
Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey’s Apparel, Fashion & Luxury Group:
After a tough but improving 2017, a continued recovery is on the horizon for 2018. The McKinsey Global Fashion Index projects global fashion industry sales to grow by 3.5% to 4.5% in 2018. But this growth is not spread evenly across all regions or segments.
And while “uncertain” and “challenging” remain the most common words that executives in the BoF-McKinsey Global Fashion Survey have used to describe the state of the industry this year, right behind them in third place is “optimism.” This is also enforced by the fact that a clear majority of companies will focus on growth management and improving sales growth in 2018, versus only a small portion who will focus on cost improvements.
The top 3 priorities to enable sales growth in 2018 will be:
- Increasing omnichannel integration;
- Investing in e-commerce;
- Improving digital marketing capabilities.
The top 3 priorities on the cost side will be:
- Reviewing organisational structures and improving employee efficiency;
- Reducing product assortment complexity;
- Pursuing end-to-end efficiency opportunities.
All in all, 2018 will be another challenging year for fashion players – but, for those willing to help design the new features of the modern fashion system and lead the way through it, 2018 will also offer plenty of excitement.
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:
Remember all those 2020 commitments everyone made to detox, to clean up, to stop doing? 2020 is coming! How much real progress have we made so far? Are we ready to execute? The big winners will be those companies that can execute by 2020. These 2020 standards will become the new baseline for a new and cleaner apparel business. I don’t think everyone is there yet.
Unless we have some unexpected market shaking global event, 2018 should be a good year.
Julia K Hughes, president, United States Fashion Industry Association (USFIA):
Last year I said that I was lying awake at night thinking about the elections and the impact on trade policy. So I may joke that it has turned into a recurring nightmare! Seriously, I remain concerned about the impact of uncertainty on the fashion industry and on the economy.
However I think that 2018 will be a better year because we will see more action on trade. And when the President has to make decisions on trade cases and strategies, we have the opportunity to make the case that American jobs and the global economy rely on trade. We have the opportunity to turn around the debate from negative sound-bites and we will be working hard to achieve that goal.
We also have the opportunity to enhance the sustainability of the fashion industry and spread that message to consumers. USFIA will be building on the work of our Social Compliance and Sustainability Committee to help member companies amplify the good work that they are already doing.
And our focus for 2018 is to continue to bring USFIA members the latest information and resources for how to build strategies to support their business by working closely with government officials, for example US Customs and their Trusted Trader Programs, and also work closely with industry leaders to offer cost-effective and efficient operations, while supporting the fashion industry’s commitment to ethical sourcing.
Rick Helfenbein, president & CEO, American Apparel & Footwear Association (AAFA):
America’s retail in 2018 will likely be better than in 2017, simply because the US economy is rocking. Consumer confidence is up, GDP is up, unemployment is down, and the price of gasoline is down. Simply put, no one is running around naked and people do want to shop for clothes. The big issue will be how we connect with the consumer, and most retailers are gaining a better understanding of exactly how that works.
The bigger concern for the industry is how the Trump administration is looking at trade. We’re all trying to understand if they are trying to fulfil campaign promises, or are they really convinced that bilateral trade deals are better than multilateral. They have staked their entire reputation on the fact that trade deficits are inherently bad. Really? Who says?
America trades a total of $4.9 trillion dollars. We import $2.7 trillion and we export $2.2 trillion. That puts our deficit at $505 billion and perhaps, just perhaps, that’s a sign of prosperity not disparity.
It will be great if we can get our exports up, but not at the expense of trashing existing trade agreements like NAFTA and KORUS.
That’s what keeps me up at night. I worry our Don Quixote has targeted the wrong windmill.
Robert P Antoshak, managing director, Olah Inc:
The global economy appears to be doing better. The economic malaise from the Great Recession seems to have abated. As such, retail sales have picked up in the US and Europe – encouraging signs after so many years of struggling to attract consumers.
The industry continues to evolve. Portions of the textile industry are consolidating (for instance, the recent rash of denim closures in the US), and broader trends suggest that China’s industry will continue to migrate to lower cost countries such as Vietnam, Cambodia and elsewhere. Africa is now suddenly on everyone’s radar as the next hot sourcing destination.
But the elephant in the room is Trump’s trade policy. It’s hard to be sure what his trade policy will ultimately mean, who it will affect, how international trade could alter and if the global trading system and be irrevocably changed. Pulling out of TPP was simple; the US still had to ratify it with Congress. Politically, it was easy to just walk away. The same goes with the Paris Climate Accord; Congress hadn’t approved the accord yet. Remember, these were relatively easy deals from which to walk away.
As of writing, we know the Trump administration is taking a hard line on trade, with free trade agreements in particular under review. But it’s difficult to understand where Trump is headed regarding trade policy. It’s not as simple as just saying he’s anti-trade. There’s more to it. We still don’t know enough – other than rhetoric from the White House and activity on updating NAFTA.
Even so, there are two worst case scenarios that can’t be ignored. First scenario: Trump pulls the US out of the WTO. It could happen, although the implications would be complicated with lots of countries and companies affected. For the US to turn its back on the WTO would be tantamount to turning its back on the post-World War II that the US helped to build. Moreover, under this scenario, it’s possible the WTO could collapse, although it is more likely that it would continue, supported by pro-trade countries around the world.
Next, what about NAFTA? Personally, I think he will back out the US out of NAFTA (I hope I’m wrong). I believe he will dump NAFTA because he’d like to force a trade crack-up over a trade agreement that an average American will understand, and that his political base will believe courageous and strong. Junk the WTO? For the average American, the WTO is nebulous, some quasi-European organisation run by quasi-European bureaucrats. So, it’s hard for the average American to get worked up over the WTO. His base may approve of withdrawing from the WTO, but NAFTA is something more easily relatable to Trump’s supporters, closer to home, more tangible.
So then the question is: what will the future hold for the apparel industry? Not knowing Trump’s trade policy other than some relatively easy actions that he has already made is worrisome. Trump’s trade policy isn’t particularly nuanced, nor is it enlightened, but it is hard to pin down at this point. We still have more to see, and his approach to trade will have implications for our industry for years to come.
Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware:
I think the apparel industry should keep a close eye on the following issues in 2018:
#1: The destiny of the North American Free Trade Agreement (NAFTA). The potential policy change to NAFTA means so much to the US textile and apparel industry as well as suppliers in other parts of the world. Notably, through a regional textile and apparel supply chain facilitated by the agreement over the past 23 years, the NAFTA region has grown into the single largest export market for US textile and apparel products as well as a major apparel sourcing base for US fashion brands and retailers. In 2016, as much as half of US textile and apparel exports went to the NAFTA region, totalling US$11bn, and US apparel imports from Mexico and Canada exceeded US$3.9bn. If NAFTA no longer existed, sweeping changes in trade rules, such as import duties, could significantly affect the sourcing and manufacturing behaviours of US textile and apparel companies and consequently alter current textile and apparel trade patterns in the NAFTA region. For example, Mexico’s focus on basic apparel items suggests US importers could quickly source from elsewhere if duty savings under NAFTA are eliminated.
#2: The possible Regional Comprehensive Economic Partnership (RCEP). Even though RCEP is less well-known than the Trans-Pacific Partnership (TPP), we should not ignore the potential impact of the agreement on the future textile and apparel supply chain landscape in the Asia-Pacific region. One recent study of mine shows the RCEP would lead to a more integrated textile and apparel supply chain among its members but make it even harder for non-RCEP members to get involved. This conclusion is backed by the latest data from the World Trade Organization (WTO): In 2016, around 91% of Asian countries’ textile imports came from other Asian countries, up from 86% in 2006. A more efficient regional supply chain as a result of RCEP would further improve the price competitiveness of apparel made by “factory Asia” in the world marketplace. Already in the past few years textile and apparel exports from Asia have posted substantial pressures on textile and apparel regional supply chains in the Western Hemisphere.
#3: Automation of apparel manufacturing and its impact on the job market. At the MAGIC trade show last August, several vendors showcased technologies that have the potential to automate the cut and sew process entirely or substantially reduce the labour inputs in garment making. The impact of automation on the future of jobs is not a new topic, but the apparel industry presents a unique situation. Globally, over 120m people remain directly employed in the textile and apparel industries, a good proportion of whom are females living in poor rural areas. According to the World Trade Organization (WTO), for quite a few low-income and lower-middle income countries such as Bangladesh, Gambia, Pakistan, Madagascar, Sri Lanka and Cambodia, at least 70% of their total merchandise exports were textile and apparel products in 2016. Should these labour-intensive garment sewing jobs in developing countries were replaced by machines, the social and economic impacts would be consequential. I think it is time to start thinking about the possible scenarios and the appropriate policy responses.
Rajiv Sharma, group chief executive, Coats:
Health and safety is a key area that everyone in the apparel industry should be working to address. Until, as an industry, we reach zero accidents there will always be more that can be done.
Ethics and compliance can make or break a company, sometimes overnight. There are limits to constant cost pressures in the industry, as this will lead to players cutting corners or not doing the right thing to improve profits. This leads to longer term reputational and financial issues. Going after the lowest cost product or service is no longer the default response for leading brands and retailers as they look to optimise risk, benefits and reputation.
In terms of looking ahead at 2018, it appears to be broadly more of the same as 2017 – with one notable exception: Raw material prices are going up and the inflationary pressure on all other elements of the supply chain will continue. As the shift from high street and malls to online continues, so do the store closures and companies entering administration. It is difficult even for seasoned industry analysts to predict exactly where that it is heading.
Suffice to say that, as ever, the apparel industry players that are able to initiate an adept and responsive strategic approach to the ever-increasing demands of consumers and markets will be better positioned for success.
Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
A real threat, occurring even in growing economies, is online retail dragging the industry into a low price spiral with renewed vigour. The price instrument seems to have been given a new and unfortunate prominent position as demonstrated for instance by the rise of ‘Black Friday’ sales in Europe.
On the one hand the industry is doing its best to give new value to fashion using new functionalities, new business models and also allowing the consumer to co-design the product. In some parts of the world where fashion has gone out of fashion, a bigger appreciation of craftsmanship and heritage is partly replacing it as a value driver.
But on the other hand, globalisation of online platforms, a growing competition among these platforms and still very high costs associated with returns could fuel retail price wars that will again erode consumers’ value perception of clothing. Safeguarding the value of clothing was important in 2017 and will be just as important in 2018. Translating value generated earlier in the supply chain to resonate with consumers is one of the industry’s big challenges for 2018.
Mike Flanagan, CEO of apparel industry consultancy Clothesource:
What keeps me awake at night? That neither retailers nor suppliers will do anything I suggested in Question 3.
Is there anything else the apparel industry should be keeping a close eye on in the year ahead? Really for the UK, although I see no evidence the problem is any different elsewhere: Staff. The quality of staff dealing with customers in all service industries is improving…except clothing.
There are fewer and fewer native 18-40 year-olds, and recruitment is a real problem in many parts of the country. Start putting just one-tenth of the effort into your prime customer interface (your staff) that you put into that website you’re wasting thousands or millions on. With inflation starting to take off again, and Euro-immigration slowing, finding workers isn’t going to get easier.
Rick Horwitch, vice president and global retail lead for supply chain strategy at Bureau Veritas Consumer Products Services:
A main concern related to the next generation of industry leaders is increasingly poor communication and analytical skills and process knowledge.
- Clear and effective communications skills are of utmost importance. In a world that is wired and “connected” 24/7, the lack of interpersonal communications is often the root cause of most problems. While social media tools are important, verbal communication is invaluable. My concern is that current, and future, generations of business leaders are not learning the importance, and value, of verbal communication and personal connection.
- Technical training in areas like manufacturing, sourcing, product engineering and quality management has become a lost art. As products, value chains and consumer demands become more complex, the need for a high level of technical understanding becomes increasingly important.
- Investment in Information/Data Management systems, and people, needs to be elevated to the same level (or higher) as merchandising, design and sales functions. Companies need data, and the related insights, to unlock the opportunities.
The real winners will be those industry leaders (and companies) who are willing to evolve and adapt to rapidly changing consumer needs, and emerging opportunities, in 2018 and beyond.
Click on the following links to read more comments about what to expect in the year ahead: