Tuesday, August 9, 2016

SOURCING: CHASING CHEAP IS GETTING EXPENSIVE

Unsustainable Sourcing: Why Chasing Cheap is About to Get Costly


SummerSale
The apparel industry is acting irresponsibly.
What’s more, the powers that be are creating an unsustainable sourcing environment, which, in my opinion, is ripe to implode.
We have two fundamental issues. The first is that the price of apparel keeps going down. The post-recession culture of discounting has gotten more aggressive and has spoiled customers to the point of commoditizing clothing and its worth. While Millennials may preach on the pluses of sustainability and corporate social responsibility, the numbers don’t lie—the vast majority of consumers still shop based on price.
The second issue is that brands and retailers will not be able to continue sourcing at cheaper, or even the same, FOBs much longer, making it nearly impossible to satisfy these deflationary prices.
And this epidemic of discounting doesn’t discriminate. Whether it’s Barneys or Bergdorf, Macy’s or the off-price channels, prices keep going down. While Ross and TJX won’t promote discounts, those who do business with them know that year over year retail ticket prices have fallen.
Aggressive promotions or straight up lower prices are putting a strain on those supplying the merchandise. Wholesaler margins continue to erode to unsustainable levels and factories faced with increasing costs are unclear how to manage increasing requirements with price reduction demands.
I spent two weeks in May traveling throughout Asia meeting with factories, agents, trading companies and brands (all who asked not to be mentioned in this article), but names aside, there were some common themes filling the discussions we had:
  1. Business is worse today than it was in 2007-2008.
  2. Orders are down year over year, and number of skus and pieces per sku are also down.
  3. There’s plenty of open capacity at the factory level since order volume is down considerably this year.
  4. Customers are demanding price reductions. One factory recounted a story of being invited to a vendor conference in Hong Kong where the brand (a large, multinational publicly-traded company) told all vendors in the opening remarks that this wasn’t a vendor conference but a cost cutting conference, and that moving forward, all prices needed to be cut 15 percent or the vendor would face losing their business. Factories hardly work on much margin to begin with, so owners are constantly inquiring as to what they should do.
  5. In each meeting, there was mention of factory consolidation and factory closings over the next year and beyond, as the costs of doing business combined with the loss of sales has made it difficult for many factories to remain successful.
While factories are desperate to keep their machines running, brands are out demanding lower prices than the year before. And since business is depressed globally, factories are agreeing.
But this won’t last forever, or for much longer according to the factories I speak with. More factories are closing each day than those that are opening.
So, are retailers booking more margin with lower FOBs, or just satisfying lower retail tickets?
What’s happening with these cheaper goods is what’s causing me concern.
Companies aren’t improving their margins or profitability. They are simply fulfilling their buyers’ requests for a cheaper product at the retail level, and the only one benefiting is the spoiled consumer.
What happens when factories start to close? What happens as wages, compliance, energy and all other related costs continue to increase, forcing either price hikes or bankruptcy at the factory level? How will the retail community continue to purchase clothing at the same depressed prices?
Now we have another issue on our hands, one we haven’t thought about much in the past two years.
Cotton prices have gone up nearly 17 percent in the past month and if certain conditions continue (like lower crops in the largest cotton producing countries leading to short supply), I would not count out cotton hovering around the current 80 cents a pound, or even ticking up from there.
For the past year or so, raw material prices were not part of the cost conversation as they remained somewhat stable and manageable. Orders taken at break-even or slight losses are now in jeopardy.
The questions now are: Will the factory fulfill these orders? Will brands have their orders bumped for better paying clients? How does this affect holiday and spring deliveries? Who is absorbing—or even prepared to absorb—any increase?
Think about this, we have established retail prices and FOBs that would be unmanageable moving into next year if cotton increases and wages increase. Which they likely will.
In June, Cambodia agreed to increase monthly wages from $128 to $140. Vietnam said last week that it may increase its minimum wage 7.3% in 2017. South African cotton workers have seen an 8.25% increase in their wages, and there are talks that the ASEAN region is trying to introduce a regional minimum wage.
All of this is good news for living wages and growth in the respective countries, but not for securing orders at the same prices as last year.
In this race to the bottom, there will be more casualties along the way. If retailers and brands don’t find a unique product offering or a way to differentiate beyond just low cost, their increasing costs and decreasing sales could very likely lead to extinction.
Opening off-price stores and outlets may result in short-term sales, but could, in time, cannibalize the core brand. And if the off-price market continues to lower prices, who will be able to successfully manufacture for them?
The challenge then becomes accommodating such a price reduction in an ethical and profitable way, which some have been unable to do. So, the question becomes: Are we encouraging deceptive practices?
Retailers have also created a system which rewards wholesalers who cheat.
This is a don’t ask, don’t tell problem of the industry. As long as stadiums were packed, no one cared if home runs were helped by baseball players who took steroids. It’s not so different in our industry.
As long as prices are low and shoppers come in and buy, certain buyers don’t care how you get those prices. You have buyers who are given marching orders to just get the best price and fashion at any cost. They have no education in sourcing, production or cost of goods.
While there is plenty of inventory to choose from, no one ever wonders how some of these upfront or private label orders are achieved. I do not intend to be a whistleblower or stir up problems, but the amount of mis-declaration, fudging fabric content, under-invoicing and hiding profits and money overseas is what enables so much low-cost product to flood the market.
When does this get questioned or scrutinized? As costs increase and buyers refuse to raise prices, how many more questionable business practices will be engaged in?
It’s as if we need an Apparel Congress or UN of sorts. Like in the Godfather when all the families sit down together, and even though they compete they have some level of understanding and principles.
All brands and retailers need to agree to stop discounting and out-promoting each other.
While this may seem like a fantastical idea, the end result if we don’t will just be lower revenue, continued losses and more store closures and bankruptcies.
We must stop lowering prices. Customers are spending their money in other channels because we have helped train them to do so. And unless we agree to stop the madness, we are just bringing each other down—way down.
Go ahead and ask your factory partners for lower prices. Just don’t expect them, or those stores you are selling to, to be around for too many more seasons.

By Edward Hertzman
New York native Edward Hertzman earned a degree in economics from NYU and then spent more than a decade working as a top executive and decision maker for major global sourcing companies, including Synergies Worldwide and Pearl Global. In addition to being founder and publisher of Sourcing Journal, he continues to consult widely on sourcing and supply chain matters.