Implications for firms in apparel, textile industry

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For companies involved in the design, production, or distribution of apparel and textile products, the new trading environment offers some great opportunities as well as greater uncertainty. The trick will be to take advantage of the opportunities while planning for the risks. The good news is that, for any given company, many competitors will be in the same boat.

The principal impact of the ATC will be lower apparel and textile costs for retailers. Given the various risks discussed, it is difficult to know by how much costs will fall. Yet any drop in costs will have different implications for different kinds of retailers.

For those retailers for whom low prices are their principal competitive advantage, the ATC will be beneficial. Discount oriented retailers will either pass on the cost reduction to consumers in the form of lower prices, or they will maintain prices and obtain an improvement in their margins—or some combination thereof. What they decide to do will depend on the price sensitivity of demand and the intensity of competition. If demand is highly price sensitive, they will lower prices thereby spurring increased volume. If not, they will witness margin improvement. Or they may choose to maintain prices but improve product quality. The latter strategy would enable discounters like Wal-Mart to improve the brand equity of their apparel selection and thus become more significant destinations for apparel shoppers.

For other less value-oriented retailers, the ATC may be more problematic. Department stores and high-end specialty retailers depend on high margins and relatively low volume. Given the highly competitive environment in which these retailers operate, it is unlikely that any one of them will attempt to maintain prices. Instead, there will be a general price decline. Yet these retailers do not compete principally on the basis of price. Thus demand is not highly price sensitive. The result will probably not be a strong increase in volume. Instead, there will be a hit to margins. For these retailers, the challenge will be to redouble their efforts at clear differentiation and branding. Only by engendering greater customer loyalty will they be able to resist price cuts.

In summary, for retailers as well as textile and apparel brand managers, the ATC creates several imperatives that are worth noting:

* Make a big bet on China. Even though there are substantial risks to doing business in China, on balance China is a very appealing place to source apparel and textile products. Any significant player on the global stage ought to be there.

* Make a few other big bets. With the end of quota chasing, retailers and brand managers needn’t source goods in a multitude of places. Yet they should source in a few strategic locations if only as a risk avoidance strategy.

* Focus on quality. Costs will surely come down regardless of what importing countries do. It is simply a question of how much. Yet at the end of the day, most branded companies will best their competitors not simply through pricing but through quality and product differentiation. Therefore, sourcing decisions ought to be made on this basis as well as cost considerations.

* Participate in consolidation. The most successful companies in this industry will possess economies of scale. Even if a producing or importing organization lacks critical scale, it can participate in scalar efficiency by contracting with large, vertically integrated organizations that can assist with all aspects of sourcing.

* Take note of emerging market brands. As China and other emerging countries move up the value chain, some of their indigenous brands will emerge as world-class sellers with global reach. For global retailers, these could be part of a differentiated portfolio of brands. They could offer the ability to provide consumers with low prices as well as innovative fashion. For branded apparel managers, these new brands could represent competition—or perhaps acquisition targets.

(Editor’s Note: This was a Deloitte Research study that looks at the changing landscape of the worldwide garment industry in the face of the lifting of trade restrictions in January this year and the potential reverberation of such action on global trade. The report was written by Ira Kalish, the Global Director of Consumer Business at Deloitte Research. The Saipan Tribune re-printed the study with permission from Deloitte Touche.)