Consumers have grown accustomed to annual declines in the price of clothing. Since 1995, clothing is one of the only items that has beat inflation, and a t-shirt today costs less than it did a decade ago. This has been facilitated by a race around the world for low-cost labor, but those days are coming to an end.
Prices in China are rising, and prices in Bangladesh are likely to rise, following new labor and safety agreements. But, the import numbers say, production has not been moving out of those countries. Firms have made due by squeezing margins and searching for the lowest-cost makers. Some production has moved to cost-competitive countries such as Vietnam and Cambodia. But overall, the total labor force in countries outside China will not be able to replace a significant portion of the 40% of U.S. imports China contributes.
In the long term, Callieri says, sourcing firms and retailers will need a better approach to delivering low cost production than just squeezing margins or finding low cost labor.
“Obviously at some point you’ll run out of alternatives to get to lower cost through going where the wages are lower. Potentially there has been less focus around more thoughtful opportunities to address cost,” says Callieri.
The next step, he says, will involve retailers working more collaboratively with their supply chain, from the cut and sew guys to the mills and fabric providers. Best practices in management and manufacturing, as well as joint process opportunities, will help control costs for a few years. Ultimately, though, costs will rise.
“What that means is that in the next five years, it’s not like prices will suddenly start to spike. If you’re a typical consumer, you’re now used to buying a $6 or a $9 t-shirt. If retailers start increasing their prices and that shirt is now $10, $11, $12, $20, you’re going to expect more,” he says. “So what we might see is a combination of a shift in prices with better quality, or some sort of guarantee.”
The labor supply in Southeast Asia is already largely tapped, as evidenced by rising labor prices in Vietnam, Cambodia, Bangladesh, Pakistan, and even Burma. The next most likely candidate for increasing apparel manufacturing is India, but India lacks the infrastructure and open investment climate that made China boom.
Africa is one candidate, for firms that continue to pursue the low-labor cost model, says Callieri. “I think the possibility of places like Kenya and other countries in the region could potentially become interesting in the future as providers.”
But the question for Africa continues to be one of stability and reliability of supply.
“To take a great example, Madagascar was a significant exporter of apparel product, but they’ve had political trouble in the last few years, and they lost some of their duty exemptions under AGOA. Whether Madagascar resurges or not is about their ability to be stable and have reliable supplies.”
China will remain the dominant supplier in the medium term. According to Callieri, their cost in SMEs (square meter equivalents) has stayed stable, allowing them to keep playing in the same space despite rising wages. This is partly due to close links to between manufacturing and milling.
If prices go up, more value will have to be given to the consumer. On an individual retailer level, firms that can deliver that value will be the ones that succeed. On a country level, places that can maximize collaborative relationships and balance cost and quality will prosper. But, says Callieri, “On aggregate, you’ll see an increase in cost.”