The price of apparel sourcing is going up, even as low-cost alternatives to China — namely Bangladesh, Vietnam and Cambodia — increase their market share.
A new McKinsey & Co. survey conducted among 29 chief purchasing officers responsible for a sourcing value of $39 billion confirms that decades of apparel sourcing deflation have come to an end and apparel companies will now face a steady increase in sourcing costs.
“We have now reached a tipping point and it will become even more difficult to keep consumer prices stable,” said McKinsey partner Achim Berg, author of the study.
The value segment and large players are particularly affected, while the midmarket segment seems to have more margin room to maneuver, the survey, “Outlook on Expected Cost Development in Apparel Sourcing,” showed.
Of the Europe- and U.S.-based CPOs surveyed by McKinsey, 76 percent expect prices to rise by an average of 1.7 percent, independent of where they are sourcing. Among the survey participants, 14 percent expect a “strong” to “very strong” cost increase of more than 4 percent. The value segment and large players expect an average cost increase of 2 and 3.5 percent, respectively.
Increasing labor cost is seen as the main driver, followed by costs for raw materials and fabrics and yarns. Most raw material prices have seen some increases in the last year, after dropping to low points last year. Cotton is selling for about 80 cents a pound compared with 70 cents a year ago, while polyester staple is at $1.14 a pound from 85.5 cents and polyester filament is at $1.03 compared to 75 cents over the same period.
In addition, midmarket players appear to be facing a “supplier’s market,” with a shift of the purchasing power to their disadvantage, Berg noted. With 72 percent of the buyers surveyed planning to decrease the sourcing value share from China, in a phone interview Berg said when smaller midmarket firms look to shift production to countries such as Bangladesh and Cambodia, they face competition from larger volume companies even if they are willing to pay a higher price.
The expected sourcing price increase is seen as inevitable by leading CPOs, despite their strong efforts to prevent it. Many players have already shifted larger parts of their sourcing from China to countries with lower labor costs. However, recent tragic events in Bangladesh, for example, demonstrate some of the challenges involved in pursuing such a strategy, Berg noted.
Despite the challenges surrounding sourcing from these lower-cost markets, CPOs expect Bangladesh to remain the hot spot for the next five years, followed by Vietnam and Cambodia. Myanmar, which is emerging from sourcing exile, was cited by 31 percent of value and midmarket players as being a hot spot in the next five years.
However, concerns over compliance issues and labor unrest brought down considerably the percentage of respondents who cited Bangladesh and Cambodia as being the top growth countries for apparel sourcing, while India’s stature increased as a place companies would look to manufacture.
As for Myanmar, which had an import ban lifted from the U.S. last year as its undergoes political reform, Berg said, “When we asked a similar question two years ago, Myanmar did not even show up on the list. Now Myanmar shows up as number four on the list. Myanmar will be on the map, but given where it is at the moment, with a relatively small number of factories, and an overhaul of the economic system…it’s going to take time. I doubt it will happen in that five-year frame.”
Proximity sourcing was also cited as being more important, especially for midmarket companies. Overall, 69 percent of respondents said proximity was increasingly important, with 81 percent of CPOs of midmarket firms saying near sourcing was a growing factor in their strategies.
Berg said the survey and general trends in the industry indicate a more level playing field than there has been in several decades.
“China is becoming more expensive and companies have become more sensitive about risk,” he added. “Bangladesh will continue to be important and to grow despite the problems that have occurred there, and with the acknowledgment by the industry that conditions must improve.”
He said Cambodia is not in the same league as Bangladesh, Pakistan is difficult for political reasons, and India and Indonesia have never delivered on their promise. Sub-Saharan Africa, especially with the trade benefits of the African Growth & Opportunity Act, is a topic for U.S. players, and has received a serious commitment from H&M, but its lack of infrastructure and capabilities means its potential is a long way from being reached.
“So the sourcing caravan is moving but is challenged on where to move to,” Berg added.