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Stabilization in 2012 Settles Apparel Concerns, But May Lose Ground to Late Year Turmoil

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he economy continued its slow climb back from the Great Recession in 2012, but industry experts said that uncertainty in the latter half of the year was injecting some jitteriness into the final outlook with the critical holiday season still to be finished.
Experts said focus in the waning months of 2012 shifted from the election that dominated much of the year to the so-called fiscal cliff talks. Those negotiations between President Obama and Congress seek to avert spending cuts and tax increases agreed to during earlier budget talks that are set to take effect in 2013. The uncertainty cast a pall over what many hoped would be a solid holiday season for apparel companies and effectively ensured that any further legislation that could benefit the industry will not move until at least 2013.
In general, according to a recent report from FTI Consulting, 2012 was not a terrible year for retailers or the apparel sector. While spending levels have yet to reach pre-recession levels, the retail sector has proven resilient despite economic uncertainty on a grand scale and real economic hardship on a household level for many. Consumer confidence also proved surprisingly resilient, showing improvements in recent months which could bode well for the holiday season which straddles 2012 and 2013.
According to industry sources, consumers are still shopping but there is a new sense of austerity in many households. Based on information from the U.S. Census Bureau, FTI estimates that retail sales at clothing and clothing accessory stores in 2012 are likely to reach $239 billion, a 5.5 percent increase over sales levels in 2011 when retail sales came in at $227 billion. According to FTI’s analysis, sales in the category over the previous four years showed the impact of the downturn and the gradual recovery that followed. Sales totaled: $221 billion in 2007; $216 billion in 2008; $205 billion in 2009; and $214 billion in 2010.
Political and Economic Uncertainty
Growth in the apparel sector has not been robust, but it has improved since lows during the downturn. However, some industry observers point out, that growth could be eroded if the government does not properly deal with the looming fiscal challenges.
“There is real anxiety about what might happen to the stock market and what might happen to what is believed to be a good holiday selling season if it becomes obvious that Washington cannot come up with a deal,” said Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel.
With the fiscal cliff talks on going through the holiday shopping season, and likely to push right up against the year-end deadlines, sources said it’s hard to predict how the talks will play out and whether a grand deal will be reached that clears all the issues on the table or a piece meal approach is taken again.
“I’m not sure we’re going to get some calm unless it is all cleared up. If we kick the can down the road we will continue to see volatility,” Hughes noted. “Apparel companies do not like that.”
However, not everyone thought the negotiations around the fiscal cliff would have a direct impact on the economy. For many, including Rick Helfenbein, president of Luen Thai USA, the biggest impact the fiscal talks in Washington had on the landscape was to tie Congress and the administration up following the November elections, instead of allowing them to focus on other, potentially more important, legislation.
“No one wants to see Congress being dysfunctional, but that is the impression being given. They can’t get out of their own way,” he said. As a result they have passed relatively few pieces of legislation despite maintaining large staffs, sitting on committees and continuing many of the traditional Congressional activities, he pointed out. “How could you have done so little?”
Consumer spending has not yet reached pre-recession levels in many categories, Hughes noted, which means there is little wiggle room if shoppers get jittery again. “Consumers aren’t totally relaxed back to where they were before the downturn. Imports have been weird; in general they were down for much of this year. We are not yet in a place that works for us as well as we would like.”
It is challenging to look ahead in terms of broad economic trends, said Kevin Regan, senior managing director in FTI Consulting’s corporate finance/restructuring practice. Going off the metaphorical fiscal cliff is seen by many as the path to an assured recession, but even if that is averted companies are trying to figure out if the economy will see any radical improvement from the recent trend of very slow growth. Companies have been playing it safe, which is likely to continue, given the country has been running at 2 percent GDP growth for years, Regan noted.
“There is no reason to expect it to improve. We have been in this half speed growth mode for a while, there is no reason to expect that to change,” Regan said.
Trade Outlook
On the trade front, President Obama has touted new deals with Panama and Colombia that took effect during his first term, but many in the industry said that trade has been relegated to a low priority thus far. The Trans-Pacific Partnership was much discussed in 2012 as an example of the administration’s focus on trade, sources said, but realistically it is likely to be dealt with in 2013 or later. Arguably, The deal would not have a major impact on the apparel industry, since Vietnam is the only major apparel source country currently included in the potential agreement.
TPP talks scheduled for December were one of the many issues shoved to the back burner by a focus in Washington on the fiscal cliff talks, Hughes said, adding it was hard to see how negotiators will break through the “molasses of negotiations” to reach a consensus. Being past the U.S. elections should help ease the log jam some, she noted. The elections in November 2012 made any real movement on trade issues all but impossible for a significant part of the year.
Congress was able to move some trade related measures. In August the third-country fabric provision of the African Growth and Opportunity Act, seen as an important element of the preference program for apparel producers, was renewed. Simultaneously some technical fixes were made to the Central American-Dominican Republic Free Trade Agreement. Other moves, including Russia shifting closer to permanent normal trade relations status, were also accomplished, but many of these are things that should already have happened, sources pointed out.
Additionally, further uncertainty was injected into the late months of 2012 when workers in the Los Angeles port, where significant amounts of apparel from Asia enter the U.S. market, went on strike and ground imports to a halt. The Los Angeles port strike was concluded in early December, but the threat which it posed for a significant portion of 2012 “had people skittish all year,” Hughes said. The strike itself proved very disruptive for many companies, sources noted. With the strike safely in the past there is some hope in the industry that customs issues and other barriers that have made business challenging for importers will be addressed in 2013.
Sourcing Trends in 2012
In terms of sourcing decisions, company strategies shifted during 2012 from a frantic shift to move production out of China because of rising labor and material costs, among other factors, to a more nuanced “China plus two” approach, Helfenbein said.
“There was a mad rush out of China, but it stabilized earlier in 2012. The rush stabilized because two things happened: one was the price of raw material dropped and two the economy in Europe started falling off their own cliff. That tempered the mad rush out of China,” Helfenbein said.
As Chinese manufacturers became more amenable to price pressures it soothed the waters and made many companies less frantic to pull all their sourcing and find a new place to put it, he said.
“More mature makers, as the year progressed, started thinking more strategically. Versus a one year rush, let’s have a five year plan and decide what we want the sourcing structure to look like five years from now,” Helfenbein noted. Many companies sat down with their better suppliers to determine a long term sourcing matrix.
Heading into 2012, Helfenbein said there were several different approaches to sourcing, most of which involved shifting production around internally in China or sourcing primarily from China and maybe one other country. That evolved to a “China plus two” diversified approach, he said.
Takeaway
Overall, in 2012 some of the volatility and uncertainty challenging the apparel sector settled down, but there are still many potential road blocks and hurdles that could torpedo growth in 2013. The pace of the recovery following the Great Recession has hardly been robust, and many industry experts worry that the recovery is still relatively fragile. Economic and political uncertainties are no longer wreaking havoc with sourcing decisions in the way they were for some firms at the start of the year, but things are far from settled, which could impact how companies approach 2013.

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