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Sourcing Scoop: Former Brooks Brothers Managing Director on Pricing, Protectionism and Profits

The list of ills pressuring the sourcing sector isn’t a short one, but according to one industry expert, it’s pricing that rises above all.

In short, as director of Ecco Consultant Limited and former Brooks Brothers managing director Massimiliano Martinello, told Sourcing Journal at a meeting in Hong Kong, what’s happening in the industry right now is “schizophrenic.”

What’s going on with pricing

For one—when it comes to pricing—it’s rising in China. In Cambodia and Bangladesh and Myanmar where workmanship is cheaper but logistics costs are higher, there are no raw materials.

“You have big players who have huge numbers who can utilize these situations,” Hong Kong-based Martinello said. The rest, however, end up reeling from the rising costs. “You also have markets that are saturated…then you have normal players that still have to work in China because of the flexibility.”

These soaring costs have sent sourcing executives into the arms of Africa, but more than the perceived cost savings from cheaper labor and energy, higher logistics costs, longer lead times and a culture not yet entirely attuned to manufacturing, companies are finding sourcing in Africa perhaps more complicated than initially expected.

Plaguing prices even further are exchange rate fluctuations, the costs of materials and rising cotton prices, to name a few.

“There’s a lot to be worried about, but on the other side, this is what we always had,” Martinello said. “What’s happening is something that’s been happening the last five years, just with a different speed.”

For now, and despite its rising costs, China remains high on the relevance list for Martinello.

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“Key players for me are China and Chinese companies that are investing overseas in Ethiopia, Myanmar, Vietnam, Cambodia,” he said.

What’s going on with trade

Whether the border adjustment tax will be or won’t be remains a question, but either way, it’s worrying, according to Martinello.

Firstly, T-shirts won’t suddenly start being mass-produced in America because the price of a T-shirt could end up in the $15-$20 range.

“The U.S. and China have a trading volume of almost $500 billion of imported goods,” Martinello said. “You cannot believe that tomorrow even half of it is produced in the USA. There are no factories, there are no workers.” Passing the BAT would also kill the retailers.

China is now in the midst of its 100-day deadline to “take action on trade” but for now the very public rhetoric doesn’t seem to have harmed less public business relations.

“Of course you can have people who are critical of what’s happening, but I don’t see the Chinese suddenly stopping doing business with America because of what Mr. Trump says about America,” Martinello said.

What the rampant uncertainty stemming from America’s new administration has done, however, is halt momentum.

“Everybody is worried, everybody is questioning what it’s going to be, so everything slows down. And I find this is the worst part of all this game,” Martinello said. “There’s uncertainty and postponing projects. On the other side, you have Europe that is completely sleeping. China has slowed down, so even there everybody is a bit unconfident.”

What’s going on with speed to market

Part of Martinello’s role at Brooks Brothers was helping the oldest men’s clothier in the United States start to get better oriented to the current market and the current customer, a big part of which is digitization.

“Let’s say today you have 44-48 weeks from the starting of an idea to the garment in your shop,” Martinello said. “We target that one day the market can arrive at 19 weeks, 20 weeks.”

The thought is far from far-fetched as many companies are already doing it and things like 3-D printing and self-knitting machines and virtual fitting are making it increasingly possible for those that aren’t.

Savvy companies are also getting in the habit of cutting back on volumes and inventory, and on the logistics side, many are using technology to improve fulfillment efficiency. Some are even using technology to automatically reorder products that are selling well and get them shipped.

“Brooks Brothers has an amazing warehouse where everything is automatic, there’s a sorter, a code reader, we have robots to select, pick up and do things,” Martinello said. “Technology comes out every day with something new, so even there you can save weeks.”

What’s missing among all this technology and all this data, though, is the study of what doesn’t sell. Companies are quick to look at best sellers and why they’re good and when to reorder them, but the other side of the coin shouldn’t be lost on them.

“It is difficult to automatically get the data of what the customer didn’t buy because it’s not available,” Martinello said. But if you take subscription boxes, companies should be looking at what got sent back, what out of that box didn’t work for the customer. In stores, associates should be looking at what consumers tried on and didn’t buy and adding that information into the data pile. “That is something I think is very interesting to study.”

What’s going on with Brooks Brothers

Retail has been tough going for most companies and Brooks Brothers hasn’t come away unscathed.

According to Martinello, customers are still visiting the stores, but they’re buying less, and traffic has been good in new stores where Brooks Brothers is trying to create an experience, like at its locations with in-store bars and cafés.

Separate from experience, Martinello said Brooks Brothers is benefitting big from the older customer.

“You have a world that’s becoming older and older and a world of people that are starting to leave work earlier,” he said. “You have 80-year-old people traveling around the world and they don’t want to wear something Lululemon because it’s not for them but they still want to wear something stylish.”

What’s the outlook for sourcing?

Vietnam, despite a defunct Trans-Pacific Partnership, still has quite a bit of appeal for Brooks Brothers and for Martinello. “Orders are big but fragmentation is very big,” he said of Vietnam.

Much of Brooks Brothers material is imported from Europe to ensure high quality, but a lot of the product is made in other parts of Asia.

“We produce a lot in Malaysia and Thailand where very few people are producing,” Martinello said, adding that the suppliers in both countries are professional, equipped with current technology and their productivity is often higher than the average, while their prices are cheaper than China. “If TPP was approved, Malaysia could be a very interesting for sourcing categories in the high level, like shirting and polos where you can have a high automatic operation.” But opportunities in Malaysia and rising costs aside, China is still king, according to Martinello.

The problem for sourcing is that costing is all open and no one is making a huge profit anymore, Martinello said. “That is the real sickness of this business. The margins are so low for everybody that we struggle.”

The only way forward is to improve efficiency and to reeducate—namely the consumer.

“If customers want a better product at the same price and companies want to make enough margin to survive, companies have to allow the factory to survive and innovate itself,” Martinello said. “It’s increasing productivity and increasing the efficiency, and that is something that brands and suppliers have to do together.”