2016 is shaping up to be another interesting year for the apparel industry

2016 is shaping up to be another interesting year for the apparel industry

Suppressed consumer spending on clothing, shoppers seeking on-demand customised products, pressure on pricing, and production cost inflation all add up to an uncertain year ahead for the apparel industry and its supply chain, according to first feedback from a panel of executives consulted by just-style.  

Colin Browne, VP and managing director of Asia Product Supply at VF Corp:
2016 is shaping up to be another interesting year. The strengthening of the US dollar and the volatility in commodities costs will keep us on our toes. The shape of retail is also changing, with online shopping dictating that we rethink routes and speed to market. This is all happening at a time when product is shifting to new source countries in order to take advantage of the plethora of forthcoming trade deals such as AGOA (the African Growth and Opportunity Act) and ultimately TPP (the Trans-Pacific Partnership). These moves and shifts will define the shape of our industry for the next five years and beyond. Also, we can expect to see the continued focus on ensuring the safety of garment factory workers throughout developing countries around the world.

All of the above is happening at a time when we are seeing an increased level of geo political risk, which will make our roles ever more challenging. It's going to be an "interesting" year.

Mr KL Lee, vice chairman of Esquel Group:
The economic outlook for 2016 will be mixed across key markets. One can expect a volatile currency market as the Federal Reserve ends quantitative easing and begins to tighten the monetary policy, albeit it mildly and gradually. Added to that is the evolving consumer buying behaviour more steering towards the e-commerce platform. Brands/retailers and manufacturers across the world must respond to that – and the ones that can figure out the "winning formula" will stand to succeed.

Marc Compagnon, president of LF Sourcing and executive director of Li & Fung Limited:
From an industry perspective, all you hear about is disruption, disruption, disruption. But disruption doesn't mean the system is broken. It also provides a tremendous opportunity.

Today's consumer has access to real price transparency and the value equation has changed as a result. The initial mark-up (IMU) has become a game where the 'initial' doesn't mean anything. Everybody's selling at 50% off and now the consumer expects to buy at a discount. As a business, you have to figure out how to survive with that type of markdown.

A lot of experts talk about omnichannel or O2O (online to offline), but what it boils down to is product. You need to be selling product the consumer wants. What that product is and the timeliness of it are the components of what makes or breaks companies. So in our world you have to figure out how to create supply chains to satisfy market needs.

And these market needs are always changing – whether millennials, baby boomers or the active grey nomads – what does this mean for product differentiation and distribution channels?

Finally, people tend to overlook the fact world trade continues to grow at 2-3% a year. So even if the current environment isn't easy, there is light at the end of the tunnel.

Rick Horwitch, VP Strategy & Solutions Business Development, Bureau Veritas Consumer Products Services:
Putting aside that 2016 is an election year in the US (which is probably the biggest challenge the industry faces), I would put the challenges, and opportunities, into two macro buckets:

Demand and supply
Last year I wrote about Speed being the key challenge/opportunity. I have seen nothing over the past year to change my mind. In fact, I see this accelerating. Speed will remain the biggest challenge, and opportunity, the industry will face. The traditional approach to business has been based on a Supply and Demand model. The problem is we now live in a Demand and Supply world. The customer wants the product to her/his personal specifications and they want it delivered NOW. On-demand, customised, products are no longer offered only by niche companies. This means long-standing business models, and processes, need to change, in a collaborative manner.

Moving to a Demand and Supply model requires a commitment, from the top down, to innovate and change. The problem is change is neither easy, nor inexpensive. However, we have seen numerous companies who have embraced and promoted change and are realising tremendous results in improved speed to market, revenue and margin growth, and increased customer loyalty and retention.

Smart products
I strongly recommend you attend the CES (Consumer Electronics Show) in Las Vegas or Shanghai. This is no longer about TVs, cameras and audio/video equipment. In 2015 over one-third of the total show space was dedicated to smart products (up from around 5% in 2014) and will grow even larger in 2016. Products range from automobiles, to robotics (sewing machines), to 3D printers ("making" everything from toys to clothing to prosthetics), to wearable devices of all shapes, forms and materials. If you want to see what the world of consumer products really looks like, this is a must-attend show.

The opportunities will be around the integration of technologies into fibres, yarns and materials, to develop very cool and transformative products. The challenges will be:

  • Sourcing and production – can the products be made?
  • Quality – do the products work?
  • Are there regulatory and biometric security concerns?

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:
The big challenges this year continue to be around environmental sustainability, social compliance, materials and labour costs in the supply chain, and the complexities of omnichannel and turbulent global markets.

Consumers and concern groups have clearly made known their demand that goods come from responsible, transparent, and green suppliers. However the issues are complicated, and the bar is rapidly rising.

Last mile solutions, supply chain speed, demand forecasting will continue as areas of great interest to many companies.

The opportunities are generally in the areas of new smart apparel-based systems, sustainable business models, and smart manufacturing.

Smart apparel systems are wearable solutions and integrated functional clothing that not only keeps us warm, dry, and comfortable, but also protects us, monitors our health, keeps us connected, and actively adapts to our changing environments.

Just as 10 years ago all we required from our watches was to tell time, and our phones to make calls, so in the years ahead we will expect our apparel and footwear to provide multiple wearable solutions to our everyday lives.

The apparel business will become smarter, higher tech, and integrate the best from other industries. Apparel will be both a design and a technology based knowledge business.

Rick Helfenbein, president of TellaS Ltd, Luen Thai (USA), and chairman of the American Apparel & Footwear Association (AAFA):
The Lewis Turning Point is a time of inflection, where surplus labour dries up, and real wages start to kick in for developing countries. Such is the status of the terrain where responsible brands continue to source their product. Rising wages and costs (in general) from countries that supply apparel and footwear products continue their upward spiral.

The American consumer is now seven years post the economic crisis, and has slowed down on soft spending like apparel/footwear, but continues to pursue a buying spree on high ticket items like automobiles. That same consumer remains interested in purchasing wearable product when it is on sale, and needs to be lured into the store. So, what we see now is that the big chill of 2008 has morphed into the big squeeze of 2015, and it will remain in full throttle for the foreseeable future. This type of environment leaves sourcing experts with the mission to strategise solely on the optimisation of their individual supply chains.

Robert Antoshak, managing director, Olah Inc:
Changing demographics, economic inequality, and weaker demand in the developed world are some of the major challenges facing the apparel industry in 2016. In many parts of the world, the median age of consumers is rising. Older consumers typically purchase less clothing year-in and year-out than younger consumers, particularly in the developed world. In addition, economic inequality plays a central role in overall demand for clothing and this affects purchasing decisions for all consumers.

Since the global recession of 2008, economic inequality has grown more pronounced with consumers at the top of the economic pyramid continuing to purchase clothes at healthy rates, while consumers at the bottom of the chain struggle. On balance, this dichotomy has resulted in lacklustre overall sales. Moreover, overall population growth will play an increasingly important role in determining overall retail apparel sales.

Growing populations typically translate into higher apparel sales, but in the developed world such growth has become problematic. As population growth slows in the United States, Europe, and Japan, then apparel sales will likely decline or at least be stagnant. For the developed world, though, the story is quite different. With so much of the world's population housed in China and India, the importance of greater population growth takes on new significance as both countries continue to add to their respective populations. 

Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey's Apparel, Fashion & Luxury Group:
The apparel market's volatility, driven by macroeconomic developments as well as consumer and channel trends, will remain the biggest challenge for apparel players in 2016. A significant number of players continue to suffer excess stocks, declining sales densities in brick-and-mortar retail, and exchange rate effects, to name just a few elements. The competitive situation has increased, demanding that apparel players step up their game in terms of speed and consumer experience, while battling increasing margin pressure.

Stephen Taylor, senior manager, Kurt Salmon:
2016 is unlikely to be a bumper year for most apparel retailers. Consumer spending on apparel will remain suppressed, with continued macro-economic uncertainty and potential interest rate rises on the horizon, among other factors. However the shift of consumer apparel spend online will accelerate in 2016 with significant impact on the role of the retail store. Brands that have established omnichannel capabilities and begun to transform their stores to showcase the brand and product are set to benefit. Brands that have been slow to invest, and those that remain reliant on traditional wholesale routes to market, are most likely to suffer.

Establishing and maintaining sustainable and ethical sources of supply will be a key priority. Millennial shoppers and external stakeholders are increasingly questioning the origins of a product and its manufacturing processes. This impacts all brands, not just the discount and mass-market players. For some apparel brands this means in 2016 they will need to build their internal sourcing capabilities and get much closer to their upstream supply chain operations.

Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
A huge opportunity for the industry is to continue on the path of 'improving production, not moving production'. In 2016 it can show to itself and to the world outside of the industry that investments in factories and in the supply chain can create durable improvements in sustainability, productivity and labour conditions and save money all at once.

Exciting innovation in functionality of fabrics and garments has the potential to improve the image of apparel. Smart wearables and fabrics that are both more comfortable and more eco-friendly can create a new sense of value with consumers. Innovation can act as an antidote to continuous sales periods and sweatshop images.

The biggest challenge for the industry is to translate all of the technological and organisation potential for improvement into reality, into the supply chain. Implementation is happening in big tier-1 factories or factory groups. For the second layer of manufacturers, investments in improvements, such as productivity and/or sustainability, are more difficult to make as they face more financial, time and knowledge constraints.

Paul Forman, group chief executive, Coats Plc:
Speed and productivity will be the key aspects.

The biggest challenge is the combination of increasing pressure on pricing and production cost inflation and how to best to manage its impact on bottom lines. Our industry is all about speed so improving supply chain efficiency can help mitigate that impact, but increases in labour and material costs along with downward pressure on industry retail prices are constant challenges.

No short or long term crystal ball gazing is complete without considering China. It seems unlikely it will continue to grow as rapidly or maintain its insatiable consumer demand appetite to the levels it has previously, particularly with the ongoing capital flight. However it is still the world's second largest economy and therefore represents a huge opportunity for our industry; although those that aren't there already have generally missed the boat.

After seven years of negotiation the recent agreement of the Trans-Pacific Partnership made 2015 a landmark year. Although it still faces a further lengthy process of ratification by the individual countries, we should start to see further momentum building in countries like Vietnam, which is set to benefit from a significant boost in free trade and competitive liberalisation as a result.

Julia Hughes, president, United States Fashion Industry Association (USFIA):
Let's start with the opportunities. Obviously, new trade agreements present some of the biggest opportunities for our industry. If you look at the data, fashion brands and retailers typically are not big users of free trade agreements, in the United States or elsewhere. According to recent US Customs & Border Protection data, only 19% of US imports of textiles and apparel were duty-free because they qualified for a Free Trade Agreement or a unilateral trade preference programme. And despite the fact that our industry is charged some of the highest duties in the US Tariff Schedule, brands and retailers report very low utilisation rates of the majority of US trade agreements – with most being used by 30% or fewer by the leading brands and retailers who participated in USFIA's 2015 Fashion Industry Benchmarking Study.

However, we're hopeful that new agreements with countries where the industry is already sourcing, like the Trans-Pacific Partnership (TPP) and the EU-Vietnam Free Trade Agreement, will encourage companies to take a fresh look at the benefits of free trade. While the TPP still has a restrictive yarn-forward rule of origin, which really doesn't represent the realities of global value chains, there are some significant sourcing opportunities in the agreement for those products that will be duty-free on day one and also have access to non-TPP inputs thanks to the TPP Short Supply List. For example, both dresses and skirts will be duty-free as soon as TPP goes into effect. And there are quite a few fabrics that are included on the Short Supply List that are used to make dresses and skirts.

The key to success will be if companies are able to spend the time and resources learning how to take advantage of the TPP opportunities.

Now, the challenges. Last year, we discussed trade protectionism – and this remains a challenge, especially if we consider the out-of-touch rules of origin and market access schedule in the TPP. And ethical sourcing also continues to be at the forefront, as companies are committed to ensuring their supply chains are not only compliant, but also ethical. This is increasingly challenging at a time when costs of raw materials, labour, shipping, and logistics continue to rise.

Related, supply chain and cargo security is another concern. Between labour strife and natural disasters threatening to shut down operations, to the risk of terrorism (and the necessary response to it) impacting shipping and logistics, companies must be vigilant. Today, supply chains must be compliant, and ethical, and secure – oh yes, and companies must continue to make the right product at the right price for their consumers!

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
The industry remains dominated by six key issues:

Selective devaluation. In Europe especially, apparel cost prices are rising, while retail prices are falling. In the US, retail prices are falling – but so are apparel prices from manufacturers.

Domestic overcapacity, made worse by falling retail prices. Closures of once-profitable retail store locations are likely throughout the developed world over the next five years. In terms of numbers of garments, the Western apparel market is still growing – but historical over-expansion is a brake on profit.

Internet unprofitability. We can't unmake the internet, but a 2015 PwC survey showed that 84% of retailers worldwide are losing money on internet fulfilment – and two-thirds were finding those fulfilment costs still growing.

International sales operations. Inditex, H&M – and possibly Primark, though it's too soon to say – aside, it's almost impossible to find an apparel business delivering on its overseas expansion. Uniqlo's poor US performance (and clear abandonment of its "200 US stores by 2020" boast) came just days after the announced closure of Mango's 450 concessions in JC Penney.

A huge part of the problem is the lack of interest shown by shoppers in looking like the rest of the world. Clothing, for most people, is a form of self-expression: not a uniform pledging allegiance to a global cult. A less publicised part of the problem is that developing-world customers, especially in China, are turning against multinational products and services.

The issue is particularly acute for American retailers and brands, with dollar appreciation devaluing whatever returns overseas operations might make.

Domestic living wage pressure. This is not the best time for inflation-busting pay rises in British and American operations – but it's the time local political pressure has chosen. This is a particular problem, since the delusion of easier pickings in overseas retail operations has been thoroughly exposed, so the domestic market is where most retailers (it's a bit different for real brands like Nike) will increasingly depend on for profits. Unless they keep on throwing money away on modish vanity projects.

Consumer unpredictability and data obscurity. Hard data about business performance is tough to read in an environment where many brands and retailers are seeing the value of sales fall, their volume rising slightly (because of retail price collapses), but the cost of apparel purchases also falling (because garment manufacturers are getting less per garment, in dollars, yuan or taka, than a year ago). Hysteria about apparently falling topline sales doesn't always translate into falling profits – but often does.

Meanwhile, many consumers are expecting prices to keep on falling – and to find special deals. Other consumers, at the same time, are bemoaning declines in fabric quality, fit and detail.

  • Many consumers have now been educated to expect constantly falling prices;
  • Most consumers believe they can expect things suppliers may see as mutually incompatible: lower prices, faster delivery, higher quality – all guilt-free. Consumers are not being hypocritical when some complain about low worker wages while others want prices to fall. Wanting it all is a common human tendency: businesses and activists should recognise this, and not dismiss it.
  • In all the fuss about globalisation, many commentators and traders have forgotten that we have a global market of 7.3bn different people – with 7.3bn different combinations of priorities, not just uniform members of an army like "millennials" or "the retired".

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