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Publisher’s Predictions: 2017 Will be Another Roller Coaster Year for Sourcing

The new year has hardly even started yet but it’s already setting up to be another roller coaster year for the apparel, textile and footwear industry.

Last year, the most controversial thing I said was that bringing apparel manufacturing back to America is all hype, and my references to the Big Short, a movie about a few men who bet against the entire real estate market also turned some heads. I criticized the way half of today’s companies source. I implored my Wall Street friends to short traditional retailers and bet big on off-price. I saw and continue to see a retail bubble.

You cannot survive by discounting every weekend, paying higher costs of goods and competing against new and innovate retail models.

All you have to do is speak to any wholesaler and ask them who their favorite accounts are, and they’ll mention the big three: TJX, Burlington and Ross. Off-price channels just continue to expand and outperform their competitors. They have more product available, better brands for consumers to select from, and the off-price channel doesn’t come with the same negative connotation it once had. Everyone from Saks to Macy’s wants a piece of this pie—so am I wrong to think traditional brick-and-mortar retailers are in trouble?

Some analysts thought I was being overly bearish on retail and, yes, there are innovative companies like Adidas and Amazon who had banner years. But if you look at a rundown of the last 10 years according to Yahoo finance, JCP lost 83 percent of its market value, Kohl’s 59 percent, Sears 95 percent and Macy’s 46 percent.

The question now, is after such a bleak decade and a fairly lackluster year, what will 2017 look like?

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In a snapshot, we are going to see rising costs across the supply chain. Retailers will continue to push their factories for cheaper product as they look for ways to lower retail tickets. They will try to reengineer their supply chains in order to deliver fewer units across more styles, and they’ll demand their factories deliver these goods faster and faster to keep up with fickle consumer demand and preferences.

Some retailers will try to sell off real estate or close underperforming stores to get a quick jolt to their stock price, but the retail longevity isn’t that simple—all that does is make some shareholders quick money but it doesn’t ensure any future for the company.

Here’s a look at my predictions for the apparel sector in the year ahead.

There’s no telling how Trump will affect the industry

It’s still way too early to predict what the effects of President-elect Trump’s potential policies will be, though I have a feeling it will be business as usual. Trump may try for some quick wins, but any major tariff changes or trade agreement adjustments will take time and likely not play a role in 2017 business. Either way, here are a few things it may be wise to keep a close eye on.

For those importing and exporting to and from Mexico into the United States, the fluctuation in the Mexican peso will have a direct impact on sourcing in Mexico. It will be interesting to see how Trump uses NAFTA as leverage to negotiate with Mexico for things like his infamous wall. As a sourcing executive, Mexico is on my lists of countries to monitor.

Trump has mentioned imposing a 45 percent tariff on apparel and textiles from China. I am sure Trump himself knows this is beyond comprehension, and I strongly doubt this will happen. He likely knows America—and any country for that matter—can’t absorb China’s production capacity, and China, despite Trump’s threats, is way too important to American business to sabotage relations to this extent.

From an overall business perspective, any tax breaks he gives to corporations will benefit retailers and wholesalers. A less aggressive overtime and minimum wage policy (whether right or wrong in ethical terms) may help companies’ payrolls, but unless Trump has a plan to Make Sweaters Great Again or a task force to ban all friends and family sales and return this country back to full-price purchasing, this industry needs much more than a few percentage points of savings in profit (if there even are any).

TPP may have been a hot topic, but only a select few were going to benefit big

Don’t lose sleep over TPP.

While some companies may have benefitted from the now left-for-dead trade deal, the rest were going to struggle with yarn forward regulations. And if they weren’t already doing business in Vietnam, they probably would have missed the boat if it passed.

Vietnam needed the investments made as a result of TPP anyway, as the demand for manufacturing continues to increase, and the more capacity they have and more vertical they become, the more competitive the country will be. There may be some disappointed footwear and activewear firms and some manufactures out there who were already counting their duty savings, but I am still very bullish on Vietnam as a sourcing destination. With or without TPP.

And for those who thought it was going to bring manufacturing back to the USA, I think everyone knows my position on that.

Subscription and box business will have a rough year

With the expectation of an outlier here or there, I am quite bearish on this space.

The acquisition per customer, the return rates and the over, overinflated valuations leave me scratching my head. The two poster children in this space, Birchbox and Trunk Club, continue to generate negative financial press. Boxes—and now store extensions of these brands for affluent shoppers who already have too much stuff, doesn’t seem like a necessary business. Maybe if you could send a box to a guy in the Midwest with a slim fit wrangler jean, a pair of Rockports without a square toe to wear to work, a chino that isn’t as baggy as 90’s Jnco jeans, then maybe we can solve the issue of a customer in need who hates to shop.

Not sure the math works there though.

E-commerce sites, pitched and valued as tech companies, will struggle for survival

Every time I log onto to Facebook, I see a new direct-to-consumer brand promoting itself.

It’s either a luxury product for half the cost because they eliminated the middleman, or they are solving a 100-year-old void in the market, like a T-shirt (note the sarcasm here).

Direct to consumer businesses do not trouble me, in fact, building a distribution channel straight to your customer has never been more important. What bothers me, though, is that having a Shopify site and an Instagram account does not make you a tech company. But some of these startups receiving venture capital money are being valued as tech companies instead of apparel businesses, and that just doesn’t add up.

What scares me even more is that the aggregate of all these funded websites are chipping away at conventional retailers and brands. So, traditional business models are being eroded, little by little, by the sum of these tiny companies—most of which won’t be here in three years anyway.

Is the industry just cannibalizing itself into extinction?

Costs of goods will continue to rise

Withholding any natural disaster or massive political disruption, I would expect single digit increases in supply chain costs in 2017. And here’s why:

Raw materials: Based on all conversations I’ve had and reports I’ve gathered, raw materials (both cotton based and synthetic) should be relatively stable in 2017. Plus or minus a few percentage points in either direction, I would not expect this to create problems in your supply chain. For more on this, here is a recent article we posted that provides excellent insight into 2017 predictions for cotton.

Shipping costs: Coming off a year of extremely low shipping costs, compounded with the Hanjin Shipping bankruptcy, will result in higher shipping costs moving forward. Much of these increases may have already been realized in the fourth quarter of 2016, but don’t look at it as a massive increase, but a return to what prices were years before. Either way, this won’t help LDP costs.

Rising labor costs: Wages will continue to increase across all sourcing countries. Bangladesh just experienced five days of strikes as workers wanted a 300 percent increase in pay. While this standoff hasn’t yet proved successful, this type of behavior will only continue into 2017.

What’s more, increasing wages don’t stop at the factory floor.

Good leadership and middle management executives in developing countries are often the hardest positions to fill. This is not a typo: Some of these offices are headed by expats or locals making anywhere from $10,000 to $20,000 a month. Not only is this a respectable salary anywhere in the world, but in Bangladesh, it’s equivalent to seven-figure living in NYC.

Compliance: This isn’t a new revelation but the costs for factories to comply to new standards and invest in energy savings measures, water purification, lean manufacturing, etc. are expensive and need to be paid for. And if brands want to align with factories that are of the highest standards offered, then they will have to pay. And although it’s still a small percentage of customers, the amount looking into transparency, compliance and the environment are increasing, so brands really have to consider their factory partners.

There will be changes to how we source

Rise in customization: As customers increasingly demand personalization, companies will continue to experiment with customization formulas. Make the product overseas? Send components to the USA and set up shop here to put the pieces together? I expect companies like Nike and Adidas to perfect this for the rest of us. Expect a lot of start-ups and venture capitalist money to go into companies and service providers looking to figure out scalable customization (an oxymoron, I know).

Need for speed: We are definitely in a see now, buy now, wear now mindset, and operating on six-month production calendars won’t work for anything other than core basics.

While companies study supply chains like Zara’s, what they fail to understand is the culture shift required and the near shoring initiatives they’ll have to put in place to get smaller units of fashion into the stores quicker.

The ability to recreate a fast fashion supply chain will be difficult for many as moving out of China and into new regions will be difficult. And changing the product development, design and approval process from months to weeks will be a cultural shock for many.

European invasion: I expect to see more fast fashion retailers and international hypermarkets—whether it’s more of the Inditex Group, more Primark stores or Lidl or KIK—entering the U.S. this year. Beware of the European invasion. If you think product is cheap now, some of these retailers may redefine price as we know it. These retailers will put even more pressure on a heavily depressed retail environment and make you question your entire buying matrix.

In short, there’s a lot to keep an eye on in 2017

It may seem that I tell a pessimistic tale, but we aren’t going to stop shopping or wearing pants anytime soon, so fret not. However, change is happening.

We are ushering in a new political era. Let’s keep our minds open. Whatever happens, it affects us all, so the industry will share the same benefits as well as disadvantges together.

Who will be the iTunes and the Ubers of the apparel industry? If we learn anything from other industries, it should be that change often happens from the outside. This means, for existing powerhouse retailers, there must be a conscious effort to revamp the supply chain, reconnect with core customers and invest in necessary technology. And not yesterday’s technology, the technology of the future.

It may be a difficult time for our industry, but it is certainty one filled with opportunities for those willing to embrace the challenge.

Happy New Year and cheers to a prosperous (and chargeback free) year!


Edward Hertzman, Sourcing Journal founder and publisher