The November Summary
Here’s what we think are the key emerging issues in sourcing at the beginning of November.
- Political stability and our ability to predict it. In their different ways, Bangladesh, Pakistan, Honduras and Haiti look great deal less conducive to efficient sourcing today than they did six months ago. On the other hand, China is a great deal more politically stable than many feared in late 2008.
- The recession’s nowhere near over. Retail clothing sales in some rich Western countries have stopped collapsing compared to last year, because this time last year sales were so awful. But they’re still down on 2007 and unemployment’s rising almost everywhere. This time in 2008, there was a real risk of a catastrophic chain-reaction of bankrupt businesses creating mass unemployment which in turn bankrupted more businesses. That’s not happened. But that doesn’t mean there’s any evidence sales are going to pick up any time soon
For everyone’s silver lining, there’s someone else’s gigantic great cloud.
Those Western retailers who’ve survived the last year’s carnage are mostly in surprisingly good shape. That’s chiefly because they’ve cut their costs in all sorts of ways. But especially the cost of buying clothes. Continued downward price pressure is still causing havoc among many emerging-market garment factories. In most cases, bigger garment makers have picked up business from unsuccessful smaller competitors. But in countries like Bangladesh and Cambodia, the collapse of many factories is producing serious social problems.
In the meantime, though, growing public confidence from bigger garment makers probably doesn’t mean their local peers are doing well. Currently, the big boys are succeeding by hoovering up the problems of their smaller competitors
How long can retailers carry on destocking? Throughout 2009, at least till August, Western countries kept on importing fewer garments than in 2008. Most of the time, the fall in imports has been faster than the fall in retail sales: stores are running on lower inventories.
This obviously can’t go on for ever. Sooner or later retailers who de-stock find their stock’s unbalanced and they’re losing sales: customers can’t find their size, the blouse colour that matches the dress isn’t available or the shop’s missing the chance to sell a suit customer a second pair of trousers. If a chain is seriously worried about imminent bankruptcy, it just lives with this: but as it becomes more confident about the future, a sensible store starts to find other ways of improving its housekeeping.
When they do this, they’re not signalling they think sales are going to get better. There just comes a point when they realise sales will get worse if they keep cutting inventory. Our bet is that we’re probably getting close to that point. But we might easily be wrong.
The protectionist problem China’s share of US clothing imports is currently at an all-time record level. It’s taking a lot of that share from Central America and Mexico – which means it’s selling fabric US textile makers thought they’d be selling to Central American garment makers. EU textile mills are suffering in a similar way – as are many garment makers in East and Central Europe.
There’s little doubt many Western textile businesses want greater barriers against China. Their options are limited, and their governments aren’t falling over themselves to alienate the world’s biggest country. But calls for “something” to be done will grow, and it’s unpredictable which – if any -particular “something” will in fact be done. Europe’s debate over anti-Chinese shoe duties – where most member nations want the duties abolished, but the nations who want them kept feel a lot more strongly – will give some pointers to how this whole argument will work itself out.