It hasn’t been smooth sailing for footwear sourcing in this shifting retail landscape, and with imports faltering and duties per pair rising to new highs, brands are looking to reorient themselves in new ways and spaces.
In a 2017 Global Footwear Sourcing Assessment released by the Footwear Distributors and Retailers of America (FDRA) Tuesday in conjunction with its Footwear Sourcing Intelligence Summit in New York City, said footwear sourcing has evolved as companies respond to different dichotomies across the supply chain.
[Read more from the FDRA Footwear Summit: Keen: Here’s How to Make U.S. Footwear Sourcing Cheaper Than China]
The state of U.S. footwear sourcing
Between 2009 and 2015, U.S. imports of footwear increased every year, reaching a record high in 2015. But last year, footwear imports dipped 5.9% (only the third annual decline in 18 years) and they’re expected to decline further this year.
“A key contributing factor behind this recent retreat is that the average duty paid per pair for these imports continued to rise, resulting in higher average landed costs and higher prices paid by consumers,” the report noted.
The year-over-year average duty paid per pair of shoes rose a record high 2.5% in 2016, according to FDRA. That translates to an average of $1.20 paid in duties per pair, and 2016 marked the seventh straight year that duty paid on imported footwear increased.
What’s more, FDRA noted, “early 2017 data suggest the average duty per pair will climb again this year to another unprecedented, and unwelcome, high.”
These duty upticks are directly related to higher average landed costs of footwear imports.
“Any annual increase or decline in average duties per pair saw a similar increase or decline in the average landed cost of footwear sixteen of the last eighteen years,” according to the report.
Naturally, duty increases have also spelled higher prices at retail, which has helped to stifle already sapped demand.
“Beyond duties, the industry has not yet found the proper calculus when it comes to inventory and price,” the report noted. “Further complicating pricing, consumers are demanding discounts even on new products. It will take some time for each brand to adjust its models to this new marketplace paradigm.”
And the new marketplace paradigm is made harder to adjust to when footwear duty rates remain substantially higher than duties on other goods.
The average import tariff rate on non-agricultural industrial goods is 2 percent—and half of those goods enter the U.S. duty free anyway. Meanwhile, the average duty rate on U.S. footwear imports is 11 percent and constantly climbing.
“This wide gap implies that footwear importers, retailers and consumers are forced to bear an unduly burdensome share of U.S. tariffs,” the FDRA report said. “What’s more, both average duties per pair and average duty rates on footwear imports have risen each of the last few years to their current records, suggesting this already-burdensome weight on the industry has grown even heavier, crimping demand and profitability along the supply chain.”
Key suppliers for U.S. footwear are shifting
Though China will likely hold firm in its position as the largest supplier of footwear to the U.S. market, its share of that space is shrinking every year.
In the last seven of nine years Chinese footwear shipments to the U.S. have fallen, and in 2016 imports from China fell to a 13-year low at just 1.7 billion pairs. The country’s share of U.S. footwear imports has fallen from 87.2% a decade ago to an 18-year low of 72.4% in 2016.
“The reasons behind the lost Chinese trade are not so straightforward or simplistic as to be labeled ‘just less cost competitive,’” FDRA said. On the contrary, the average landed cost of footwear imports from China has been less expensive than footwear from other countries in the last 20 years. Really, the report continued, “a broad range of issues are at play, ranging from supplier diversification and offshoring to product differentiation and specialization elsewhere to China’s efforts to phase out low-end exports in favor of promoting the service sector and high-tech manufacturing.”
The shoes that aren’t coming from China are largely coming from Vietnam, which saw its exports jump 12.9% last year to $558.1 million, and Indonesia is the third largest supplier of footwear to the U.S.
“Interestingly, while China has lost share even with average landed costs well below the rest of the world, Vietnam has gained share even while having average landed costs higher than the rest of the world. This fact implies there is more at play than just competitively-priced footwear to explain trends in import penetration,” FDRA noted.
The report continued, “Vietnam has become a great sourcing country for many brands, but it has also freed up capacity in China. Smart brands are using this to their advantage and are negotiating lower production costs with factories in China’s traditional shoe making hubs.”
But noting that Vietnam can’t continuously sustain the growth it’s seen, FDRA said rising wages and a limited workforce could mean Cambodia and Bangladesh start to see some “spill over” as companies look to shift around their sourcing.
U.S. demand for footwear to slow
Americans have spent so many years loving shoes and filling their closets with them that demand may be starting to plateau.
U.S. shoe store sales grew 4.2% in 2016 to $35.9 billion, marking the seventh straight year of record-setting performance. But so far this year, conditions aren’t looking as positive, which could hint at little to no growth in 2017.
“What’s more, per-capita demand for footwear imports is on track to sag again in 2017 to less than 7.2 pairs per American, the fewest since during the recession in 2009 and second fewest in 14 years,” according to the report. “With closets already full and consumption at record highs, footwear demand (and imports) may see little near-term cause for optimism.”
Trade’s effects on footwear
The Trump Administration has been setting out to put America First in trade, but FDRA thinks the footwear industry could suffer at the hands of potential new policies.
The Trans-Pacific Partnership, which Trump withdrew the U.S. from in January, would have had the potential to save more than half a billion dollars for footwear consumers and companies, according to FDRA.
Though the proposed Border Adjustment Tax (BAT) may be all but dead, it’s not dead enough yet, and if implemented and an across the board 20 percent tariff takes effect, it could increase footwear prices for millions of American consumers.
[Read more on the latest with BAT: Retailers Won’t Rest Until BAT is Officially Dead]
When it comes to the NAFTA renegotiations set to kick off on Aug. 16, FDRA is hoping the Administration will rethink rules of origin.
“The current rule of origin is too restrictive, as it requires the upper to originate in North America, and the footwear must contain 55 percent regional-value content in both labor and materials,” the report noted.
And as FDRA president and CEO Matt Priest added, “A NAFTA 2.0 with less restrictive rule of origin for footwear could be a win-win for everyone. Increased production and factory jobs in Mexico, lower costs on shoes for Americans and Canadians and more good paying jobs in trucking, warehouses, and at retail.”