The largest groups of fashion distribution face a complex scenario in the first links in the value chain, that is, supply. The wages increase in Bangladesh puts even more pressure to the margins and leaves no way out: Ethiopia is far from the Asiatic country.
Less margin. If there is one element on which all the experts agree about the future of the fashion business, it is that the sector advances towards the reduction of margins, as demonstrated by the evolution of the giants of the sector. While until now the margins have been pressured by the distribution part, the evolution of the production costs in Bangladesh has an impact on the margins in the first links. The impossibility of finding a new production hub in the short term leads the industry to more than a decade of even narrower margins.
There is an event that has gone almost unnoticed to the sector and may be the trigger for the new paradigm shift in fashion sourcing: the wage increase in Bangladesh. In Spain, the cradle of fast fashion, this issue bothers entrepreneurs in a sector that moves within a setting of low prices and discounts, which survives with increasingly narrow margins and which must now address the rising cost of production. Technology is the answer, but as long as innovation does not reach the system, how will the margin be managed?
In Bangladesh, the tension in the factories increases. Last week, the unions in the country reported mass redundancies at the factories due to the demonstrations at the beginning of the year demanding a new wage increase. On January 1, the rise of 51% in the minimum wage in the country entered into force. But the union representatives consider that it continues to be insufficient regarding the local living standard.
Nowadays, according to the same sources, proposing a transfer of production to another market is practically impossible
Two factors indicate that the wage increase in Bangladesh will not only continue, but accelerate. On the one hand, H&M policies of bringing fair wages to its factories. Apart from the controversy over the scope of the concept, the Swedish group is leading the way in this direction. On the other hand, a recent report by the British Parliament that describes fast fashion as an “exploitative” industry.
According to sources in the sector, the rise in wages in Bangladesh is making that the fashion giants, having large volumes of production concentrated in the country, put its figures under review, because, although the impact per garment is low, the volume makes it remarkable.
Nowadays, according to the same sources, proposing a transfer of production to another market is practically impossible, since none exists with the same capacity as Bangladesh. Modernizing the Bengali industry is presented as the only option to reduce costs, an option for which no one is betting on due to the high investment it requires. Fifteen years will be necessary for another country to be at the current level of Bangladesh.
Ethiopia and the ‘neo-relocation’
Union pressure in Bangladesh along with social and political pressure in the foreign markets will hamper wage stagnation. Myanmar and Ethiopia are emerging as the new poles of fashion industry, but are still light years away from equating with Bangladesh. In fact, in the sector it is considered that both countries are today what could have been Bangladesh fifteen years ago.
Beyond the production cost, the strength of the Bengali textile industry (as well as the Chinese one) lies in two aspects: on the one hand, they have created a value chain around clothing to accelerate timings and, on the other hand, the country has invested in infrastructures. “In sourcing, it is not only about price, but also value in production: sustainability, materials or design, speed, agility and flexibility,” explains Gabriel Farías, expert in sourcing.
Ethiopia clearly stands out as the next Bangladesh. The investments it attracts are from Chinese, Bengali, Cambodian, Vietnamese or Egyptian industrialists seeking lower production costs. But the factories they are setting in the African country are not labour-intensive as they were three decades ago those of China and fifteen years ago those of Bangladesh, but they are automated factories and, in some cases, robotized.
“The panacea of the sector 25 years ago no longer exists and will not exist,” underlines Farías. Not even in Ethiopia. In recent decades, low labour costs have slowed technological innovation in textile factories and, above all, in garment factories. But now, in front of the paradigm shift, this process is accelerating.
The new factories that are launched in Ethiopia not only look for a technological basis to reduce risks or additional labour costs, but are adapting to a new reality of retail, which has stopped buying large volumes to focus on very short series. The automation and robotization of factories will allow accepting orders of 10,000 units, one thousand and even 500 units.
The rotation of collections spread among the retailers that seek to find the formula to escape from the discounts and promotions and sell as much full price articles as possible. Together with this, the advance of e-commerce, which puts even more pressure on the margins of retail due to the high logistical costs involved, but that nobody can leave behind.
The rotation of collections spread among the retailers that seek to find the formula to escape from the discounts and promotions
The formula of fast fashion, therefore, is getting more sophisticated towards ultra fast fashion with a view to achieving maximum flexibility in search of personalization. The objective is to eradicate stocks to avoid sales and discounts. In this sense, the technological innovation in the garment industry is looking for the formula to solve this equation.
This flexibility also emphasizes the approach of production to consumer markets, in the phenomenon that Farías describes as the industrial “neo-relocation” of textiles. For the European Union, fashion sourcing has been positioned since long ago in Turkey, Eastern Europe, Morocco and Portugal, four poles with a strong competition between them. Along them, the unbeatable Italy, which survives playing in another league, the premium and luxury markets.
This new production of proximity, therefore, will not be labour-intensive, but very advanced technologically to maintain the just in time outcome and the prices that the market demands with the least effects on the margin.
This new production of proximity will not be labour-intensive, but technologically advanced
Concentration: natural selection based on efficiency
But this change of scenery will imply a scourge to the current business structure in fashion sourcing because the pressure of retailers on their margins is transmitted to the whole supply chain. Each of the links transmits this pressure to the immediately preceding one.
The efficiency demanded by this new scenario of extremely narrow margins clashes with the fragmented and undefined structure of the textile industry as a whole. Although there are large verticalized groups, the bulk of the sector is formed by medium and small companies that are very specialized in their segments and, for now, the different phases of the supply chain are still light years away from being integrated.
However, industry experts observe a natural trend towards concentration in search of efficiency. The weakest players in this process of thinning the production structure are those suppliers that do not seek strategic partnerships to gain speed, agility and flexibility, as well as intermediaries. There are experts who exemplify it with the automotive industry, with very structured assembly lines and very sophisticated systems for the procurement of components.
Li&Fung presented a roadmap two years ago to turn around its supply process and adapt to the new fashion business order
Li&Fung presented a roadmap two years ago to turn around its supply process and adapt to the new fashion business order based on the omnichannel system, immediacy and personalization. Last year, the company partnered with American Softwear Automation to develop the first fully robotic T-shirt production chain. The rest of the operators of the fashion industry will be aligned within the next few years with the strategy that the Chinese titan of sourcing is drawing up since two years ago.
From outsourcing to internalizing, the other twist of retail
In an environment of increasingly narrow margins, regaining control of a part of the production is not so far-fetched. Thus, after decades of outsourcing production processes to adjust the system to the core business, in the new paradigm in which the fashion industry is entering, it is not discarded to internalize them again.
Regaining control of part of the production is not so far-fetched
Costs are the main advantage of the reincorporation of in-house manufacturing (as long as it is technologically advanced). In an environment that will increasingly dispense of intermediaries in search of a sourcing as seamless as possible, having control over the part of the production refreshes the margins, gives speed and flexibility. And we begin to see the first examples in this regard.
Adidas launched its first speedfactory in 2017 located in the German town of Ansbach, a fully automated and robotized production centre, equipped with simulation and data analysis software, devices and 3D machinery and robotics to produce moulded and customized shoes. The group launched a second one shortly after in Atlanta (United States).
A year earlier, the risk capital group Apollo teamed up with Nike to create vertical hubs that are fully automated in North America and Central America to manufacture customized products of proximity. In 2016, Fast Retailing, the owner of Uniqlo, formed a joint venture with the knitting manufacturer Shima Seiki to build a joint factory in China.
Luxury has also spent several years investing in reincorporating production into its structure. The giants of this sector not only make strategic acquisitions on some of their suppliers to ensure the supply of very exclusive items, but also choose to open their own factories.
For this year, the opening of two new Louis Vuitton factories in France is planned, destined to reduce delivery times to a week. Only in its country of origin, the company has 16 factories that add up more than 4,000 employees. Hermès, for its part, launched another factory this week in France to strengthen the production of leather goods.