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2013 Outlook: More of the Same, Mostly

Industry sources expect 2013 to look a lot like 2012. A slow-but-steady global economic outlook, combined with an administration in its second term and divided party dynamics in the U.S. Congress could give the apparel industry déjà vu.
The trade outlook for the industry is also fairly similar to a year ago, with many of the same priorities and negotiations still dominating the landscape. Companies are likely to pursue more supply chain diversification, as the global economic forces that have driven that trend for the last several years continue, experts said. Companies that have figured out successful survival strategies are unlikely to make any dramatic changes as long as their formulas continue to work.
“2013 will look very similar to 2012. Retailers have gotten really smart in the last couple years. They’ve been through a lot, they’ve developed very sophisticated supply chains, they understand the customer better, they’ve partnered with more manufacturers so the process is becoming seamless,” said Rick Helfenbein, president of Luen Thai USA.
In both retail and manufacturing, strong companies are continuing to grow stronger and weaker companies are continuing to fail. That survival-of-the-fittest trend will continue in 2013, he predicted.
Congress and the White House failed to come up with a deal to deal with all the pending fiscal challenges the U.S. faces before the end of 2012. Congress did finalize a deal that averted some of the worst consequences of the fiscal cliff, but sequestration and other issues may jeopardize the outlook for early 2013, according to industry sources.
Without a comprehensive deal, “2013 could be rocky,” said Julia Hughes, executive director of the U.S. Association of Importers of Textiles and Apparel.
“Right now consumers are generally off life support. We still have a ways to go to get back to the spending level that preceded the Great Recession,” said Kevin Regan, senior managing director in FTI Consulting’s corporate finance/restructuring practice. “There is nothing suggesting that things will be much better [in 2013].”
Consumers are likely to continue to try to manage their balance sheets better, and consequently so will apparel companies, he noted.
There are sevral economic and political unknowns that could cast a pall over 2013, Regan noted, including the outcomes of the fiscal talks, the roll out of many of the Affordable Care Acts provisions and possible changes to tax structures.
“There are a lot of unknowns [and] when there are unknowns the business world becomes more conservative,” Regan cautioned.
Caution has dominated the apparel industry in recent years as companies sought to trim their operations down to lean, efficient machines. The focus for apparel companies moving forward will be on shortening lead times, Regan said. Companies like Zara, Uniqlo and H&M are able to turn their orders rapidly by shortening lead times and getting merchandise into stores quickly. This lets them capture higher margin sales when demand is at a peak, he said.
“The focus on the part of the apparel industry is, ‘How do I shorten my lead times?’ There are a couple of chains that are the leaders. They’ve designed it over time and have become the leaders in how to do things differently. The thing is, most retailers don’t have the wherewithal or the investment capability to do what Zara in particular is doing,” he said.
The fast retailers continue to get even faster, Regan said, by turning inventories more and more rapidly and making supply chain management a science by managing inventories. In the U.S., he said, some retail chains that have not kept pace with their European fast-fashion cousins have turned to the major brands to help focus on getting product into stores quickly.
“The drive to reduce time will continue in 2013. Obviously it’s a strategic advantage. Every retailer is trying to figure out how to do things faster, better,” Regan said.
In terms of geographic sourcing decisions, apparel is likely to continue to come from the same top sources, Helfenbein said. China, Vietnam, Bangladesh and Indonesia continue to occupy the top four spots on the U.S. Commerce Department’s apparel supplier rankings.
“That is still going to be the landscape going into 2013. The only difference is we are seeing investment in planned property and equipment in two other nations not on that list: Cambodia and the Philippines,” Helfenbein noted. Cambodia is doing everything it can to attract business and the Philippines already has a skilled workforce, he said.
“There is a great deal of interest in supply chain and speed to market; the further away you get from the core market the less palatable sourcing becomes. People who are used to working in the Asia hub are doing everything they can to stay there,” Helfenbein said. “That’s the landscape. You’ll start to see a trickle down out of China in 2013 into more sophisticated hubs.”
Buzz in the media about places like Burma reflect genuine areas of interest, he added, but 2013 is unlikely to see any dramatic changes in the apparel sourcing landscape with respect to new source countries.
On the trade front there are several pending issues, including the yet-to-be-completed Trans-Pacific Partnership agreement. Industry sources said they don’t expect to see any real movement on the agreement out of the gate, but some said they remain hopeful the deal with gain traction. However, sources said a major shift in approach is unlikely given the Obama administration’s previous stance on trade
“TPP is certainly a hot issue in the industry. And an area where apparel brands and retailers are working together with the hope it can be concluded in 2013. I think that’s a goal. Personally I would feel better about concluding once the administration had trade promotion authority for these negotiations,” Hughes said. “I’m optimistic there’s a deal to be had… optimistic there will be a time in 2013, after TPA is approved with serious market opening etc. when a deal will be possible. We have to be always vigilant that negotiations don’t fall apart based on the number of parties at the table and the difficulty of finding consensus with that many at the table. “
The challenge with the TPP even if it moves forward, Helfenbein said, is that the only country the apparel industry really cares about in the deal is Vietnam, which already captures a significant portion of the non-China based production. Helfenbein said the TPP – which the Obama administration touts as its flagship trade deal – might not amount to much for the apparel industry.
“I am hopeful that during the second four years of Obama administration the administration will become more trade friendly. While they like to take credit for trade activity in the first four years anyone who studies it closely would see Colombia and Panama were done, but not at a rapid speed, at a very slow and cautious speed,” Helfenbein said. “They weren’t very keen as an administration on engaging in international trade. I can’t think of one thing that they did that would really get anyone excited about trade, especially in regards to the apparel industry.”
2013 may hold possibilities for the apparel industry to take some positive steps in the customs arena. The industry has been working closely with U.S. Customs & Border Protection to establish an apparel, footwear and textile Center for Excellence and Expertise, or CEE, Hughes said. The center would establish a public/private partnership to would help streamline the ports by centralizing decisions in one office. The physical headquarters would be in San Francisco, with staffed satellite offices around the country acting as sources of information and resources to solve problems, she noted.
Industry leaders met with CBP in late 2012, Hughes said, and expressed enthusiasm and support for moving the centers forward quickly. The centers would ideally increase efficiency and reduce port delays for participating companies, as well as expand expertise throughout the agency.
Looking into a crystal ball is a tricky business. Natural disasters, political uncertainty around the world, port strikes, and other sudden crises are impossible to predict. 2012 saw instances of all of those, along with standard issues like labor and raw material cost challenges, compliance issues and continued global economic uncertainty. On a positive note, however, industry experts point out that the apparel industry has been perfecting its survival strategies over the last several years. It should be well prepared to weather the storm of challenges 2013 may hold.

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