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USFIA: Brands are Bullish, But Cost Headwinds a Concern

Optimism is returning to the fashion sector.

But it’s happening in fits and starts, according to a newly released report from the United States Fashion Industry Association (USFIA).

The benchmark study, based on a survey of 31 executives at leading U.S. fashion companies from April to June, revealed that 85 percent feel at least somewhat optimistic about the next five years. While that number is more than one-fifth higher than it was during darkest days of the pandemic, logistics issues, trade risks and sub-optimal supply chains must be addressed in order to ensure a full recovery.

“The economic recovery means there are inflationary pressures throughout the economy—and the fashion industry has not escaped,” Julia K. Hughes, USFIA president, wrote. “After Covid, the biggest concern today is higher costs throughout the supply chain. The survey finds that ‘almost everything becomes more expensive in 2021.’”

Dr. Sheng Lu, associate professor in the department of fashion and apparel studies at the University of Delaware and the voice behind the report, noted that 2020 saddled brands with unprecedented cost pressures. During the early days of the pandemic, trade volume was cut by more than half, he said, which had “never really happened” before—not even during the 2008 financial crisis.

After just a couple of months, though, trade began to see a “really robust” boom based on unexpected consumer interest, he said. And while spending was up, sourcing locales across the globe continued to see second and third waves of the coronavirus, impacting their ability to produce and ship goods and deepening the chasm between supply and demand.

“Covid is very different from a financial crisis,” Lu explained, noting that an economic downturn often follows a more predictable recovery trajectory. This time, though, “It’s been Covid that set the agenda—and that means there are a lot more uncertainties out there.” By May of this year, U.S. apparel imports skyrocketed 131 percent from a pandemic trough in March 2020.

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Surges in sourcing costs have been among the most significant concerns for U.S. fashion companies this year. Almost all (97 percent) of respondents said they expect the cost of sourcing to rise further throughout 2021, and more than one-third project a “substantial increase” from 2020.

The cost of both goods and services—from raw materials and textiles to shipping, logistics and labor—will continue to balloon, 70 percent of executives said, attributing some of that pressure to currency value and exchange rate changes.

U.S. inflation has also reached peak levels for the past 13 years, USFIA wrote, and the global container shortage—created by a backlog of shipments at ports across the globe—is likely to persist until 2022. Lu expects to see textile and raw material prices remain solid through next year, while the U.S.-China trade war, which has saddled brands with tariffs on goods made in the country since 2018, shows little sign of a speedy resolution.

Almost 90 percent of survey respondents said the trade war’s continued impact directly contributed to sourcing costs over the past year, causing American fashion brands to pay an average import duty rate of more than 23 percent for apparel. That’s up from a 16.5-percent rate in 2017.

What’s more, far fewer Chinese vendors are willing to help American brands by absorbing the additional sourcing costs generated by the tariffs, Lu said, since they are facing cost pressures of their own related to materials and labor.

Despite widespread industry chatter about diversification and nearshoring, Lu’s survey of U.S. fashion players showed that companies are prioritizing their relationships with key vendors rather than expanding their networks. While more than 60 percent of respondents said in 2018 that they sourced from 10 or more different countries or regions, just 36.7 percent said the same in 2021. This consolidation has become even more common within larger organizations that employ more than 1,000, he said, and many companies plan to whittle down their networks even further by 2023.

By contrast, the percentage of companies that plan to diversify their sourcing bases to include more countries and vendors fell to a record low of a little over 16 percent—compared to one-quarter in 2019 and almost one-third the year prior.

“Asia still dominates—especially China,” Lu said, despite last year’s initial disruptions to production due to the spread of the pandemic. In fact, almost all of the top 10 most sought sourcing destinations are Asia-based, the research showed, with China leading the pack (93 percent), Vietnam following closely (87 percent) and India (77 percent) and Bangladesh (73 percent) both vying for sizable slices of the sourcing pie. The most popular sourcing equation remains “China plus Vietnam plus many” others, Lu said.

China and Vietnam however, once the two undeniable predominant sourcing leaders, now together account for 20-40 percent of most U.S. fashion companies’ total sourcing volume, down from 40-60 percent over the past few years. The one non-Asian outlier among the top 10 countries is Guatemala.

Companies are dubious about casting too wide a sourcing net, but they are still looking to limit their exposure to China to a certain degree. When asked about the most critical challenges facing their businesses this year, finding a new sourcing base outside of the country ranked No. 4 on executives’ lists. While most companies plan to continue to source from China in the short-to-medium terms, 63 percent said they plan to decrease their footprint in the country over the next two years.

Few other countries can match China’s low cost, speed to market and production capacity, but Lu believes that non-economic factors like the allegations pervasive of forced labor across the country’s supply chain have “significantly hurt” its chances at remaining a preferred sourcing base. In fact, more than 85 percent of companies plan to up their business in other Asian countries, from Bangladesh to Indonesia, the Philippines, Vietnam, and Cambodia.

Notably, USFIA wrote, the Western Hemisphere is gaining momentum with American brands. In this year’s survey, more than two-fifths of respondents said they source from U.S.-Mexico-Canada Trade Agreement (USMCA) members—a 38-percent increase from 2020—while 63 percent source from Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) members, up 8 percent from the year prior.

Despite the tailwinds allowing countries like Mexico and the Dominican Republic to gain traction, respondents noted that these countries’ products must become more price competitive. They must also strengthen their capacity to produce raw materials and textiles, while making rules of origin laws less restrictive, in order to encourage further collaboration with U.S. brands.

Despite being hit with massively impactful operational and financial challenges over the course of the past year, U.S. companies are doubling down on sustainable commitments, Lu added. “Two things really strike me: one is the plan to allocate more operational budget to the issue of sustainability,” he said, “and the second, is that this year, a record high percentage of respondents say they’ll try to strengthen their third-party certification programs.”

More than 80 percent of surveyed companies said they plan to spend more on sustainability and social compliance over the next two years, up 10 percent from last year. About one-third of respondents are now calling for clearer regulation and guidelines to aid in supply chain mapping and transparency.

U.S. companies believe that trade policy can also contribute to efforts to address climate change, the study’s research showed. In particular, respondents believe that lower tariffs on sustainable imports would incentivize brands and retailers to think along more eco-friendly lines. Reducing the cost pressures of sustainable sourcing and enhancing “regulatory coherence” with trade partners would also make it easier for brands to fund the shift, they said.

As many as 92 percent of brands and retailers said they plan to increase hiring—especially for roles like supply chain specialists focused on sustainability, data science and social compliance—over the next five years. Amid a year full of never-before-seen challenges, the increased interest in these measures is a “very encouraging sign,” Lu added.