WWD.com/business-news/financial/at-sourcing-conference-execs-talk-strategy-and-price-increases-3068951/
government-trade
government-trade

At Sourcing Conference, Execs Talk Strategy and Price Increases

Rick Darling and George Feldenkreis spoke at the AAFA's “Sourcing, Customs & Logistics Integration Conference.”

MIAMI — The East versus West debate for apparel sourcing comes down firmly on the side of Asia, but the Western Hemisphere has settled into its role as the go-to source for close-to-home replenishment.

Manufacturing executives said the recession of the last two years entrenched many sourcing decisions. China’s role as the flexible, dependable and fashion-focused workhorse of apparel production was codified and the Western Hemisphere solidified its reputation as a solid supplier of basics and commodity apparel products that must be replenished quickly.

Speakers at the American Apparel & Footwear Association’s “Sourcing, Customs & Logistics Integration Conference” here last week said many of their sourcing strategies will remain the same in seasons ahead, but there are some tweaks being driven by a host of global factors, including rising costs, transportation challenges and increased competition from consumer markets outside the U.S.

Apparel industry costs are increasing, said Rick Darling, president of Li & Fung USA, who sees an end to the deflation of apparel prices that resulted from the rise of China as a sourcing powerhouse.

“We’re paying almost the same amount for T-shirts today as we did in 1980,” he said. “Li & Fung is a low-cost company. We move from country to country to create deflation [of apparel prices]. We believe that is over.”

Many agreed, arguing the current increased costs and prices are inescapable.

“We colonized the world for apparel. It’s over, there’s nowhere else to go,” said George Feldenkreis, chairman and chief executive officer of Perry Ellis International. “You can’t outpace costs and that will lead to a tightening of the supply chain.”

Darling predicted apparel costs are likely to increase 3 to 5 percent annually over the next 10 years. Rising labor and raw material costs are unavoidable, he said, and the low freight rates seen in the last year and a half are unsustainable.

Executives acknowledged a bulk of their production resides in China and its neighbors, and that is unlikely to change drastically even with the rise of lower-cost alternatives like Bangladesh. But most said they also maintain sourcing in the Western Hemisphere.

Rising costs can provide a big advantage for the Western Hemisphere to leverage some of its trade benefits and other advantages to shore up apparel production, said Jesus Canahuati, general manager of Elcatex, a textile firm based in Honduras.

Ralph Iannazzone, senior vice president of supply chain management for Oxford Industries, said his company has moved its sourcing around the world gradually, driven largely by price considerations. The company has tried to “look for balance,” he said.

The advantage to manufacturing closer to the U.S. is the speed with which a company can meet its replenishment needs, said Tom Nelson, managing director for VF Asia. The advantage to sourcing in Asia is the region’s capability to produce a wide range of apparel, he said.

China, Vietnam, Indonesia and Bangladesh are the countries likely to dominate sourcing over the next five years, the executives said, but China is sure to retain its top spot. A lot of production in China will continue to shift away from traditional centers in the Pearl River Valley toward the interior of the country, Darling said, but the apparel industry has a distinct edge because most companies are used to sourcing in multiple locations.

“Apparel people today have a huge advantage because they’ve already spread sourcing,” Darling said.

In addition, emerging markets should put additional pressure on supply chains as they develop their own consumers and move away from purely export-driven manufacturing. Factories in China are becoming more vertical, selling their own brands to Chinese retailers, Darling said. That means U.S. apparel brands looking to move into that market aren’t just fighting for market share with their traditional competition, but with Chinese brands sold by Chinese retailers.

“The sleeping dragon awakens,” Darling said.

China isn’t yet in a position to surpass the U.S. as the world’s leading consumer market, he said, but the size of its consumer market will have an inevitable impact on trends.

With the emergence of one billion new consumers in the world outside the U.S., Europe and other Western countries, the competition for raw materials, shipping, factories and other resources will only get tighter.

“If you believe that factories are not going to be built at the same rate that they have been for the last 20 years and there’s another billion people in the world, it’s a very simple supply and demand thing — prices are going to go up,” Darling said.