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Between Covid and Tariffs, Fashion Execs Face Disruption on Every Front

COVID-19 disruptions in sourcing and the uncertainty facing the industry weighed heavily on respondents to the United States Fashion Industry Association’s (USFIA) seventh annual Fashion Industry Benchmarking Study.

The survey of executives from 25 leading fashion brands, retailers, importers and wholesalers exhibited the lowest level of confidence in the five-year outlook since the inception of the report. A year ago, 64 percent of survey respondents were “optimistic” or “somewhat optimistic” about the outlook for the next five years. This year, that dropped to 57 percent, while almost one-third of executives said they were “somewhat pessimistic” or “pessimistic.”

USFIA said another key finding of the survey, conducted in conjunction with Dr. Sheng Lu, associate professor in the University of Delaware Department of Fashion & Apparel Studies, was the severe supply chain disruption to U.S. fashion companies–100 percent of executives reported “supply chain disruption” as the most significant impact of the global pandemic on their business operations.

These disruptions were not concentrated in one area of the supply chain. Many respondents saw disruptions to the apparel factories that make their products struggling with a labor shortage, contracted factories short of textile raw materials or facing a substantial cost increase in shipping and logistics, and barriers to conducting regular factory audits due to coronavirus concerns and limitations.

“Securing textile raw materials and production capacity has been highly challenged due to the need to implement extended payment terms,” one respondent said.

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Despite all the COVID-19 related disruptions, sourcing executives are continuing the recent trend that as production moves out of China, the main beneficiaries are Asian suppliers. This year there is some evidence that reshoring for Made in USA production could increase in the next two years.

All executives surveyed were with companies that have their headquarters or major management offices in the U.S. This year, in addition to all respondents selling products in the U.S., more than 75 percent also sell products in Canada, Western Europe, Mexico and Asia. USFIA said these patterns reflect the global nature of the fashion business and U.S. industry’s close ties with markets and supply chain partners around the world.

The overwhelming majority of respondents reported “economic and business impacts of the coronavirus” as their top business challenge in 2020. That’s because COVID-19 has resulted in widespread sales declines and order cancellations among U.S. fashion companies.

Almost all respondents (96 percent) expect their companies’ revenue to decrease in 2020. As sales drop and business operations are significantly disrupted, all respondents said they have been involved in postponing or canceling sourcing orders. Nearly half of retailers said the sourcing orders they canceled or delayed go beyond the second quarter, while another 40 percent expect order cancellation and postponement could extend to the fourth quarter or beyond.

The study revealed order cancellations and postponements have affected vendors in China, Bangladesh and India the most. Executives said they are trying multiple approaches to mitigate the financial impact of COVID-19, including exploring alternative sourcing options, leveraging free trade agreement or trade preference programs, and taking advantage of customs rules like duty drawback and first sale for export.

The pandemic, together with the escalating U.S. trade war with China, has “exerted significant and broad impacts on U.S. fashion companies’ sourcing practices,” the report said. The “increasing production and sourcing cost” ranked as the fourth-most-important business challenge facing respondents in 2020.

For the second year in a row, respondents said “shipping and logistics” was their top cost concern in 2020, while 90 percent of respondents said the U.S. Section 301 tariffs against China have increased their company’s sourcing cost in 2020, up from 63 percent last year.

U.S. fashion companies are also not shunning sustainability in sourcing despite facing unpresented financial and operational challenges during the pandemic. More than 70 percent of respondents said they plan to allocate more resources to the area of sustainability and social compliance through 2022, which is higher than the 63 percent in the 2019 survey.

Executives identified “suppliers not being fully cooperative or willing to share information” as the top challenges for mapping supply chains. They also cited “the special nature of the textile and apparel industry” as hindering “visibility beyond the 1st tier supplier,” and many also have “insufficient internal budget/staff to map supply chain.”

In response to the changing business environment, U.S. fashion companies will continue to adjust their sourcing strategies. Executives said sourcing diversification is slowing down and more U.S. firms are switching to consolidate their existing sourcing base. Close to half said they plan to “source from the same number of countries, but work with fewer vendors,” up from 40 percent in last year’s survey.

Given the supply-chain disruptions experienced during the pandemic, U.S. fashion companies are more actively exploring “Made in the USA” sourcing opportunities to improve agility and flexibility and reduce sourcing risks, USFIA noted. Around 25 percent of executives expect to “somewhat increase” sourcing locally from the U.S. in the next two years, which is the highest level since 2016.

Respondents also demonstrated greater interest in using the U.S.-Mexico-Canada Trade Agreement (USMCA) for apparel sourcing purposes. For companies that were already using the North American Free Trade Agreement for sourcing, 77.8 percent said they were “ready to achieve any USMCA benefits immediately,” up more than 31 percent from 2019.