As the pandemic and war in Ukraine have severely strained global supply chains, purely efficiency-based models in the fashion industry have shown their limitations.
Since then, players in the luxury and fashion industries have transformed their business models from using artificial intelligence to investing in bioengineered fibers or outsourcing some of their operations abroad (nearshoring) to strengthen their resilience for the future. At the same time, they need to anticipate regulatory changes related to sustainability to plan for the future.
Vulnerabilities uncovered in cost-based global supply chain
The pre-Covid-19 supply chain model of the textile and fashion industry clearly shows a strong geographic dependency on China, which in 2022 still accounted for almost 50 percent of global production volume, seven times more than the second largest producing country India .
Major manufacturing countries export a significant portion of their output, meaning global supply chains are overly dependent on a handful of key manufacturing markets – a model that has shown its limitations as luxury and fashion industry players move away from pure cost considerations move away and increasingly accommodate the need to ensure on-time deliveries.
Increased inflation puts additional pressure on fashion companies
Since the onset of the pandemic, record-breaking inflation has exacerbated the situation for fashion supply chains as brands and retailers have felt the pressure of rising cost of goods (COGS) while not wanting to risk their sales volume being impacted by passing on all of these costs to consumers whose budgets are tight decreases.
Almost 25 percent of global respondents said they plan to reduce spending on apparel and footwear over the next 12 months, according to the Euromonitor International Voice of the Consumer: Lifestyles Survey 2023.
The highly inflationary environment has therefore made the pricing strategy a balancing act. The Euromonitor International Apparel and Footwear Inflation Tool shows that in the case of apparel, costs were generally passed on to consumers during the first 18 months of the pandemic (March 2020-September 2021), but brands have since absorbed these costs and margins have sacrificed, with an average gap of 12 percentage points between March 2022 and March 2023.
If the downward trend in manufacturing costs continues, June 2023 will be the tipping point and industry players will have to decide if it’s time to recoup some of the lost margin or if they should lower prices instead, to increase sales.
Geopolitical considerations continue to drive a rebalancing of global investment
The political instability reinforces the need for international companies to reduce their reliance on China for manufacturing as the country’s response to the war in Ukraine differs from that of the US and the country’s intentions towards Taiwan are uncertain, let alone that diplomatic damage caused by the Xinjiang cotton scandal in 2021.
In this context, the map for global investment is being redrawn, with government initiatives also playing a role, starting with the US government’s “Call to Action for Northern Central America” in 2021. This call to action encourages regional sourcing and production in of the textile industry and now includes commitments from private companies based in the USA in the amount of more than 3.2 billion US dollars (approx. 2.95 billion euros).
In general, since 2020, fashion companies have become less reliant on China and are expanding their pool of suppliers to other manufacturing hubs in Asia – notably India, Vietnam, Thailand, the Philippines and Indonesia – but are also looking to produce closer to their end markets. For example, US shoe brand Steve Madden has shifted 50 percent of its production to Brazil and Mexico to serve its core market, the US, away from Asia.
Another good example of the emergence of regional supply chains is Spanish retailer Mango, which has developed alternatives to China through a “dual track” supply chain. Asia is now the “long haul” supply chain, producing simple items like t-shirts that typically take 6-8 weeks to ship to Europe. The “Near” track consists of factories in Turkey, Romania and Morocco, where the retailer produces more trend-oriented items for the European market. The company also wants to expand its sourcing in Mexico and Central America to establish a “proximity track” in the US as it plans to quadruple the number of stores in that market to 40 by 2024.
New sustainability imperative fuels material innovation and hopes for reverse sourcing
Businesses also need to anticipate new labor and environmental laws to plan for their future as regulations are set to be tightened, starting with the EU Sustainable Textiles Strategy. These changing regulations combined with the increasing scarcity of raw materials and their rising costs are prompting fashion companies to explore the potential of new materials.
Recently, there have been a number of innovations in man-made biomaterials that claim to be cruelty-free, chemical-free, and plastic-free. For example, Inditex has acquired 30 percent of the Infinited Fiber Company’s future annual production volume for Infinna, a cellulosic fiber that is made from 100 percent textile waste, can be recycled along with other textile waste and is biodegradable.
At the same time, the Spanish company launched the “Zara clothes collection program”, which encourages customers to return unwanted clothes to stores. The returned garments are initially mostly sold as second-hand clothing at Zara Pre-Owned or donated to charities, but could ultimately be used as raw materials, allowing for more regional and local production if recycled fiber production like Infinna is expanded in the future.
The supply chains of tomorrow look less global and more regional
Given the current market environment, we anticipate that supply chains will continue to operate in offshore manufacturing environments where cost is an important factor, but will also increasingly establish quasi-independent regional supply chains in different parts of the world to provide a hedge against future shocks . We also anticipate that biotech and fashion companies will continue to invest in textile recycling and upcycling to gain a competitive advantage as circular business models could be mandated by law in the next few years.
About the author:
Marguerite Le Rolland is Apparel and Footwear Industry Manager at Euromonitor International, a leading independent provider of strategic market research based in London, UK. In her role, Marguerite Le Rolland oversees industry research and is responsible for strategic analysis of corporate strategy, market and consumer trends, competitive intelligence, retail performance and opportunity analysis in the fashion industry. Her comments and analysis are regularly cited in the press, from Business of Fashion to Le Monde, AFP, Vogue Business, The Guardian, Telegraph and WWD. For more information about Euromonitor or to get in touch with the company, Click here
This article originally appeared on FashionUnited.uk. Translated and edited by Simone Preuss.