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Barclays: Nearshoring Can Offer ‘Material Profitability’ Even for Fast Fashion

The fashion industry has a long way to go before it can be considered ethical or sustainable, a new research note from Barclays says, but nearshoring and regionalization could make the journey less onerous, particularly in the face of continued logistical upheaval and inflationary pressures.

European and U.S. manufacturing first fled to distant climes, most of them in the Asia-Pacific region, because overseas labor was cheaper and production less regulated, analysts from one of Britain’s biggest banks said Friday. But the highly fragmented, opaque and linear nature of the garment supply chain has bred a profusion of social and environmental problems, including weak garment-worker rights, poor brand-supplier relationships, overproduction and toxic chemical proliferation.

The Covid-19 pandemic has also laid bare the risks of maintaining production sites so far removed from their target markets. Increasing geopolitical volatility, growing logistical bottlenecks and mounting freight costs have weighed heavily on companies whose bottom lines rely on speed and flexibility. It’s for these reasons that 71 percent of senior chief procurement officers surveyed by McKinsey & Co. said that they were looking to increase nearshoring by 2025.

Changing consumer expectations offer another argument for reverse-migrating manufacturing. “In the past, the fashion industry was defined by two clear seasons–Spring/Summer (S/S) and Autumn/Winter (A/W)–with bulk-bought designs launched at the beginning of each season,” analysts said. “Today, social media means that fashion trends change on a weekly, if not daily, basis. This makes it increasingly difficult for retailers with long lead times to predict trends months ahead of time.”

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Brands desperate to keep up with the likes of Shein, which reportedly has a three-day turnaround for the 600,000 styles it fetes at any one time, must shift toward a demand-led production model to “avoid sitting on masses of excess inventory that require discounting and expensive marketing to shift.” In any case, discounting fails to tackle the looming problem of overproduction, analysts said. Rather, it encourages it.

Fast fashion, despite its heightened desire to squeeze margins, isn’t a stranger to sourcing close to home. Boohoo famously (or rather, infamously) maintains a significant U.K. manufacturing presence. Zara owner Inditex sources roughly 65 percent of its orders from Portugal, Turkey, Northern Morocco and its native Spain, a tack that it says allows it to adhere to those countries’ higher social and environmental standards.

The faster turnaround time, which allows the retailer to respond to fashion trends, doesn’t hurt either. On average, Inditex pumps out 50,000 styles a year with very small production runs compared with most brands.

“Inditex’s proximity sourcing allows it to leverage very short lead times, with the process of getting garments from design-to-store only taking three-to-five weeks (typically, this can take up to a year),” Barclays said. “The company claims that the short lead times mean that it has only low-level inventory commitments and little product wastage—rather than producing large batches of products, it reserves capacity with suppliers and produces items based on consumer demand.”

On- and near-shoring aren’t without their sustainability risks, however, since abuses can also happen in local supply chains, analysts said. Still, a supply-chain reconfiguration presents an opportunity to address this in the face of increasing investor scrutiny and new and upcoming supply-chain due-diligence laws. Virtual design technology and digital printing can also play a “pivotal” role in enabling greater visibility, shorter lead times and eco-friendlier design.

Barclays said that the debate over whether nearshoring equals more expensive is “more nuanced” than it appears at first blush. Ocean freight rates, for example, may never return to pre-pandemic levels. The gap in labor costs, once a yawning chasm, is rapidly closing and, in some cases, can be offset through increased automation. On- and near-shoring can also result in fewer markdowns, enabling discount-reliant fast-fashion brands to go up against peers with close to 100 percent full-price sell-through rates.

Some companies are catching on. Last November, Asos said that it was looking to reduce its time to market, which varies between four to 12 weeks across different product categories, by 15-30 percent, in part by localizing its manufacturing “close to critical markets.” Boohoo recently opened its first factory in the English city of Leicester, where it plans to train workers and offer guidance to suppliers.

“We reiterate our view that the disruption presents an opportunity to re-configure supply chains and plan for a potentially more expensive logistical future, with sustainability rooted in decision making,” Barclays said. “We argue that near-shoring and regionalization is not necessarily the costlier option and actually believe [they] can offer material profitability and inherently sustainable benefits via lower production volumes and fewer markdowns.”