When it comes to the global procurement of products, the world is getting much smaller.
That’s one of several conclusions made in a recent report by HSBC consumer brands and retail analysts Mark Husson, Nora Kahn and Matt Marsden. The report, titled “ImportAsian 2006,” said China “has halted its penetration of product sold at large U.S. retailers, following the country’s surge in imports in 2005.”
“Retailers are actively switching sourcing from country to country, suggesting that the global procurement arena is becoming more transparent, fluid and borderless,” the analysts said. “We see big gains for India and ‘other Asia.’ Retailers might also be trying to avoid too much risk by spreading supply around, in the event a pandemic like the avian flu were to strike.”
The report found that from a sourcing perspective, “experienced direct sourcers from Asia have [a] built-in, several-hundred-basis-point advantage over smaller, domestic retailers that rely on middlemen.” In the post-quota era, the analysts also found that the global sourcers in Asia have “fine-tuned” their production. As a result, the winning countries will be India and Cambodia, while the winning global sourcers include firms such as Li & Fung. Retailers best positioned to take advantage of these changes in global procurement include Wal-Mart Stores, Target and Marks & Spencer, the report said.
But what impact are rising distribution and fuel costs having on sourcing? The analysts said companies are able to offset higher selling and general and administrative costs by leveraging incremental gross margin gains made via global sourcing.
A year-over-year sourcing analysis by HSBC of several mass retailers revealed some significant changes. For example, Wal-Mart has increased its sourcing from Latin America by 5.1 percent while decreasing its sourcing from China by 2.1 percent.
“Wal-Mart’s acquisition of Carhco in Central America, plus its strong business in Mexico, means that it is the strongest Latin sourcing company in the world and that, for the first time in 2006, it is sourcing more of its nonfood business from Central and South America than from North America,” the analysts said in the report. “China decreased a couple of points, while India and other Asia gained by more than that.”
For Target, other Asia and North America showed the largest gains in sourcing by country, rising 3 percent and 4.3 percent, respectively; China declined by 6.3 percent.
One retailer that has increased its sourcing from China is Gap Inc. In 2006, the company sourced 3.9 percent more goods from that country than in 2005. “It looks like Gap is moving to lower-cost sourcing, which may help protect gross margins while sales are soft,” the report said.