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How to Navigate an Uncertain 2023 Amid Mixed Signals and Course Corrections

Uncertainty is the only certainty there is and knowing how to live with insecurity is the only security.

This oft-quoted adage perfectly sums up the outlook for 2023, where conflicting headlines, geopolitical crises, mixed demand signals, a new Congressional makeup, and a consumer struggling with inflation and shifting priorities all lead to an uncertain coming year.

To help companies get a jump on what’s coming, Sourcing Journal created 2023 Industry Outlook, a unique 4-part webinar featuring one-on-one chats with experts discussing logistics, materials, retail and trade, with prescriptions to stabilize the shifting sands beneath our feet.

Speakers include, from left: Jon Devine, senior economist, Cotton Incorporated; Ronald J. Sorini, principal, Sorini, Samet & Associates, LLC; Glenn McMahon, managing director, Retail Practice, Getzler Henrich & Associates; and Vincent Iacopella, executive vice president, Growth and Strategy, Alba Wheels Up. The webinar was moderated by Edward Hertzman, president and founder of Sourcing Journal. Below, a recap by topic:

Material Matters

Inherently volatile and at the mercy of climate change, materials rode quite a roller coaster in 2022. Droughts in Texas and floods in Pakistan devastated cotton yields, for example, and while no one can predict 2023’s weather or geopolitical stability, Cotton Incorporated’s Jon Devine reminded people to remain calm and look at the full picture. “What sometimes gets lost is that when one country has a bad crop, other areas might do ok, so there are offsetting factors.”

What the market can focus on, and thus better plan around, is how much cotton is being planted. “The weather we don’t know, but plantings we do,” he said. “Cotton hasn’t been able to keep up with corn and soybean markets, so we expect cotton acreage to be down for the coming year—5 to 10 percent.”

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But if supply and demand drive cotton markets, what happens when depressed supply is coupled with demand scarcity? “Demand is always in the driver’s seat,” Devine said. “You need people to bid up prices, and that only happens with high demand. The USDA dropped their global consumption forecast by about 3 million bales, and depending how deep we go, I think we could see prices drop back down into the 70s.”

Another hot topic for materials is what to do with garments at their end of life. While some garments are recycled back into fibers for new clothes, many companies overlook the other options. “If you’re starting with apparel, you don’t have to go back into apparel,” Devine said. There’s potential for garments [being turned into] insulation, composting, etc. We can find a sustainable end use garments after postconsumer.”

Talking trade

Coming off a midterm election where Republicans took the U.S. House of Representatives, there is anticipation about what the new political configuration means for trade in 2023 and 2024.

“No matter what your politics are, that’s a good development for trade,” said SSA’s Ron Sorini, noting the company’s phones are “ringing off the hook now” with anticipation for 2023 and 2024. “There’s a lot of pent-up demand on free trade right now, and it’s become less partisan,” he said. “But the one thing that’s unanimous, is that it excludes China, because concerns about China are growing.”

There was pressure to relieve some of the tariffs on consumer goods, said Sorini, but there’s going to be more of a rebalancing. “I think the White House basically said, ‘Hey, let’s wait and see. Let’s get beyond the midterm elections. I expect we’re going to see [a] comment period, which I encourage everyone that’s affected by China tariffs to make use of that through January 17.”

Regarding the Uyghur Forced Labor Prevention Act, there have been more detentions, and companies can’t afford to not take things seriously, especially now that the U.S. Customs and Border Protection’s budget was increased almost threefold to $80 million for enforcement.

“You’ve got to think about using the technologies out there—DNA technology, tracing, etc., because it’s absolutely essential to know where your raw materials are coming from,” he said. “Think about tagging your cotton, because a lot of cotton goes around the world before it gets to the yarn spinner. There’s got to be a way to distinguish that because there’s going to be a feeling both in CBP and in Congress that people are going to cheat and [those institutions are] going to want to hold people’s feet to the fire.”

Lowdown on Logistics

While the logistical nightmare of getting goods from point A to B has calmed down a bit, the unpredictability of container prices has adding to the anxiety.

“We had some customers in the middle of 2022 who said, ‘Look, we will pay a little more to know what the price is going to be for a full 12-to-24 month period, just so we can budget for it,’” said Alba Wheels Up’s Vincent Iacopella. “They obviously don’t want to pay $15,000, but they would pay more than what the market rate is now just to have some stability.”

But companies should enjoy the low container prices and spot rates while they can, as they won’t last forever. “Eventually the inventory will correct. Whether there’s a change in demand or not, inventory will correct as there’s a lot of inventory in this country and then demand for capacity will rise,” said Iacopella, who predicts a “15 to 18 percent decrease in transpacific capacity in 2023. The correction is that people are going to deplete North American inventories and that when they are at more manageable levels, whether demand goes up or not, there’s going to be a [need] for more inventory and certain parts of the economy.”

Back on terra firma, the rail industry averted a strike, but labor issues continue across the board, especially as developments continue in automation for trucks, warehouses and the like.

“Personally, it’s very hard to come out against efficiency and automation, but when you’re in labor discussions, and people are concerned about displaced jobs, it does come up,” said Iacopella, adding this has led to creative suggestions made in the past couple of years, specifically in L.A. Long Beach, specifically related to local port operations that find a third way, a retraining of labor. “Labor versus automation. It’s a huge issue but doesn’t have to be a binary choice.”

Retail’s new reality

Inventory excess is the resounding industry challenge right now, as retailers got burned by over-ordering when demand was strong coming out of the pandemic, and now they’re paying the price as piles of merchandise lead to huge discounts and eroded margins.

“When the economy started to open back up, we saw the brands and retailers buy inventory like drunken sailors,” said Getzler Henrich’s Glenn McMahon. “I was a little bit surprised that big players like Nike and Lululemon just really went deep and heavy into inventory. It’s counterintuitive to think, but inventory control and supply control are actually a benefit for a brand. It has long-term value, because you can charge premium prices, you’re not discounting and promoting, and you’re driving margin. Our advice is to manage the inventory very, very conservatively. It’s not a bad thing to be out of inventory.”

But while consumers “got off the promotional drug” and were trained to pay full price when stock was scarce during the pandemic, that mindset has fully flown out the window as holiday sales averaged 30 percent off, often starting well before Cyber Week and as early as September and October.

Such discounting and shuffling overstock to off-price retailers just leads to brand dilution. “You know, Retail 101 is that your first markdown is your cheapest,” McMahon said. “I’m a big advocate for moving through inventory to improve working capital, but the surprising thing to me was some of these big brands that have been hugely successful, misjudged or were ill prepared for the looming recession and inflation.”

Things are tightening, however. Even off-price stores like TJ Maxx have been getting to the point where they can’t take any more inventory, and banks have been getting a lot stricter as to what they’re willing to lend toward, he said.

On the channel level, online sales across Cyber Week reached $281 billion globally, at a 9 percent increase year-over-year in the U.S., balanced out by lighter foot traffic at stores. It’s all part of a great reset, with many consumers shopping in-store for the experience of it but going home and ordering online.

But pure DTC companies have it tougher. “The cost of consumer acquisition has gone through the roof, and first-party data is obviously the name of the game right now,” McMahon said. Challenges in that space have driven in-store popups as brands seek alternatives beyond just online.

‘We are paying the price now’

At the end of the day, even brands and retailers who saw the writing on the wall had a hard time exhibiting restraint while Wall Street and VCs demand never-ending growth. “I think until the KPIs change a little bit we’re just encouraging bad, bad behavior,” said Sourcing Journal’s Edward Herztman. “And this is not one retailer. This is industry wide. But when the money’s flowing and everyone’s getting rich and the bonuses are great, we try to ride that roller coaster. But we are paying the price now.”

The smart advice, agree panelists, is to invest in technology to be better equipped for hiccups going forward, at the material level, the supply chain level and the retail level.

“It’s going to be an interesting next 12 to 18 months because these companies are going to be forced to focus on operations where before it was always about product,” Hertzman said. “It’s going to be more about about operating a profitable business because the free money is just not going to be there anymore.”

To view the full webinar on demand, click here.