In 2020, the sourcing industry may not face any new challenges.
Instead, it will be about dealing with the leftover pressures that plagued 2019, which the industry hasn’t yet been able to alter or address.
“I think a lot of companies are going to continue operating as they do,” Sourcing Journal president and founder Edward Hertzman said. “I think there’s going to be a lot of hidden costs that are not discussed. People going to try to move product out of China as they’ve been doing. But as you move to other factories, there will be quality issues. There will be delays, there will be increased air freight. These are the challenges that come along with moving any sourcing or any massive production, and that will continue to eat into margin and create more complications.”
In short, 2020 will be marked with more of the same challenges that roiled the sector in the outgoing year.
“For the next year or two years, we’re going to just be in this period of uncertainty, which is going to create some difficulty for brands when it comes to figuring out trading tactics,” Hertzman said.
Here, Hertzman highlights what 2020’s threats will be and how they stand to impact sourcing for the apparel and footwear sector.
Trade and Trump
Though the industry dodged a set of December tariffs that would have hit the remaining China-originating apparel and footwear, and China said on Monday it would lower tariffs on 859 American products—including some cotton fiber and fabrics, plus men’s and women’s cotton coats—punitive tariffs remain on a lot of Chinese imports, and trade between the two nations in 2020 is far from settled.
“2020 is going to be an election year, so ultimately I imagine not much in terms of policy is going to change in a significant way,” Hertzman said. “Could there be some posturing back and forth? Could there be some threats? Yes, but ultimately, Trump does not want to risk a huge economic downturn.”
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Whether there’s a major deal with China in the new year or not, whatever the election brings in terms of the country’s leader, the battle over trade relations won’t go away.
“Both parties [Democrats and Republicans] have indicated they want to be tougher on China and I think this is going to continue to create sourcing obstacles moving forward,” Hertzman said. “Now, since we’re not going to have a clear answer in 2020, that’s going to create further uncertainty amongst companies and how to plan.”
From a capital expenditure point of view, it’s challenging for companies to determine where best to invest when President Trump has threatened tariffs—albeit briefly—on Mexico, rolled back Generalized System of Preferences (GSP) trade benefits for India and already called out Vietnam for its unfair trade behavior, meaning the place most companies are turning to as they unwind themselves from China, could be next up for Trump’s threats.
“If you think about it, all the major stakeholders that we do business with or where we manufacture, are potentially at risk, so it makes it very, very confusing and difficult for a sourcing executive to really figure out how to diversify their supply chain,” Hertzman said.
Costs
In 2020, supply chains will have to continue improving efficiency if there’s any hope of offsetting the costs that come with these trade uncertainties and tariffs.
And while chasing the cheapest product isn’t the solution, Hertzman says there’s value in exploring new setups and partnerships.
“Do you need to have your own office in Shanghai and India and Dhaka? Can you have partners elsewhere and is that a way to reduce costs?” he posed.
In 2020, he said, the line items may be different as companies look to added outsourcing or reverse sourcing. They’ll also be looking at localization.
“I think we’re going to see companies shrink their presence in places like New York and California. What really needs to be present here is sales and a certain level of design,” Hertzman said. “We’ve seen such growth and sophistication in some of these emerging markets that you can have product development and design there, you could do fit there, you can do QC there—you could run much of your back-end operations there.”
As companies look to reduce costs, he said, it’s going to be about rethinking the back office, giving greater facility to factories overseas and leave big cities for showrooms designed to sell.
“I think the way in which product is being delivered is going to change a lot next year and moving forward,” Hertzman said.
The battle for margin
Every single thing that impacts margin will come under pressure in 2020, according to Hertzman.
Whether its wages set to rise in certain countries or increasing raw material costs as the sector skews more sustainable, supply chains will spend more in the coming year.
“Raw material costs are going to eat into margin, [and then there’s] logistical costs, cross border commerce, returns—fulfillment companies are really trying to figure out, when you buy something online and return it, does it go to a store? Does it go to a fulfillment house?” Hertzman said. “There’s still a lot of costs and I don’t see any place in our industry where there should be a relieve when it comes to margin.”
What’s more, the fact that apparel and footwear companies can’t get the markdown equation right as they battle with inventory imbalances, will further squeeze margins in 2020.
“The single largest expense to any company is not a tariff, it’s not a return. It’s markdowns,” Hertzman explained. “And until we get our inventory levels under control, we’re going to continue to have margin compression everywhere.”
Scaling sustainability
The new year will bring new focus on sustainability efforts as companies increasingly realize they can’t move forward without figuring out how to leave smaller footprints.
But as brands and retailers work toward their 2020 or 2025 sustainability goals, they won’t be able to leave traceability out of the conversation.
“Traceability, I believe, in 2020 will be the word that should replace sustainability as the big word of the year because without traceability, you can’t be sustainable,” Hertzman said. “This needs to be the topic that’s discussed in 2020—how are we not just going to say the word sustainable, but how are we going to, in fact, prove that we’re sustainable and build a business that could be sustainable at scale? And ultimately, it’s going to be the responsibility of the fabric providers, of the ingredient companies, of everyone to figure out how to make this more affordable…It just needs to become the status quo.”
Realities for retail
For retail, 2020 will again mean more of the same.
“There’s going to be more store closures or businesses moving online. There’s going to be more DTCs to pop up, there’s going to be confusion throughout the industry,” Hertzman said.
And amidst that, traditional companies may continue to lose out, with more finding themselves on the road to bankruptcy.
“I’m really tired of going on an earnings call or going to a conference and hearing these executives preach that they’re turning around their businesses or they’re doing something different when, in fact, quarter after quarter, we’re seeing that there’s no real change. And, you know, that’s the reality,” Hertzman said. “As long as we have old culture and old philosophies and old practices dominating these companies, you could [invest] however you want. You could change your logo, you could change your ad campaign. But the fundamentals of the businesses are not changing. And therefore, I don’t know why we expect the results of these companies to change.”
The year ahead
“To me, 2020 is just going to be a year of confusion,” Hertzman said.
A lot of companies, he added, are claiming to do a lot of things—be it making improvements to inventory management, embracing more RFID, turning to on-demand manufacturing and 3D design and AI. But much of this has done little more than create noise for companies that still can’t get product right and foot traffic up.
“Every year we add another layer of difficulty to our businesses…and it’s just becoming very confusing and overwhelming. We have to do so much more, spend so much more, invest so much more, hire more to essentially get a lot less than we used to get,” Hertzman said. “For some of these service providers who have figured out how to solve a major problem, there’s huge opportunities there. But I think being at the head of retail operation or brand operation right now and having to navigate all of this is confusing.”