“Faster and more versatile fashion during each season is the key to creating an attractive offer for future customers and to achieving the desired success in today’s volatile market. Only if fashion brands move from the traditional and historical supply-centered approach to the new and updated demand-centered approach will they continue to be relevant to consumers, be able to increase sales and achieve planned end results. Constant cost increases in labor, production processes and raw materials at traditional supply origins add to the margin pressure that retail and fashion players currently face.
With this reality, moving from a sourcing strategy based purely on unit cost to one based on product profitability will generate a strong reason to initiate the inevitable shift to nearshoring for industry leaders and mass market retailers in Europe and the US”.
Continuing with the analysis of the McKinsey report we started in the previous post – The neo-relocalisation of fashion sourcing – we can conclude that: the neo-relocalisation of fashion production will occur, but it will not be a process free of complexity and setbacks.
Neo-relocalization, a new era through a paradigm shift.
The fashion sector is going through a decisive era of profound changes in the way of consuming, the channels and the supply, while enduring one of the greatest volatilities known to date.
1 – Trends created by Marketing vs. User Trends.
The current trends are ascending and this is a factor that contributes to greater volatility. A few years ago and not so long ago, trends reached future customers through the advertising campaigns of leading fashion brands. That’s how it was for decades; this “push” model worked for players in he fashion and retail sector. Today, in most (if not all) mass market segments, trends emerge from the street itself, from the users.
Consumers are taking in the different styles from social networks, Instagram, likes and the opinions of customers, their peers and not so much from the marketing gurus behind big brands. These people – whether they are “stars” or simply stylish consumers with large numbers of followers on social networks – are the creators of today’s fashion trends.
2 – Supply-based Model vs. Demand-based Model.
A much deeper and more detailed knowledge of the consumer is gaining relevance in the process of designing and developing the different styles. Even some of the more traditional “fast fashion” brands have not been able to move with sufficient speed and agility from the “push” model to the “pull” model, a new system in which products are developed, tested and produced according to demand.
Multi-brand retailers are putting pressure on fashion brands to increase their responsiveness, as the old pre-order model continues to lose ground to a new approach and openness to shopping during the same season. An example of this new paradigm would be to pre-sell models prior to their production, using 3D virtual designs and start manufacturing only after confirming consumer orders.
3 – On-line Channel Vs. Physical Store.
The volatility of sales today is amplified by customer preference for e-commerce and the emergence of new business models. The physical stores, which were once vital to showcase the product and boost sales, are now no longer correlated with the success of the fashion industry. The online channel facilitates the search for options since the future customer can analyze different options, observe various brands and compare collections on a variety of websites and can do it all in a matter of minutes from home or the workplace.
Fashion brands that sell only through the web often have a very versatile and agile supply chain that helps them manage this volatility more efficiently. Short lead times for product creation and development, small quantity sourcing and close production are the keys to this new model. These online platforms, such as Boohoo and Lesara, have emerged as a new generation of Ultra Fast Fashion players, surpassing the leaders of the first generation of fast fashion in terms of speed-to-market and growth rates.
4 – Stocks vs. Sustainability.
Many mass-market fashion companies and retailers are working to adapt to the nobel situation, but in the meantime, they continue to order their models in large volumes in bulk orders to sell based on plans generated months (or even more than a year) before the product reaches their stores.
Excess stock in stores and distribution centers, as well as increased levels and frequency of price discounts, are widespread in today’s fashion market. It is known that about 3% of unsold apparel is sold off. Consumers are increasingly aware of the environmental impact of this traditional, linear system of manufacturing fashion garments and accessories, and public protests and complaints about the liquidation of overstock are becoming increasingly powerful. About 78% of International Consultant respondents say sustainability will be a decisive purchasing factor for future mass-market fashion consumers by 2025.
More and more fashion industry players are including sustainability as an integral part of their business and are looking for solutions in the circular economy model. Adopting the position of a “truly circular fashion choice” is selected as a winning strategy by 2025 by more than 25% of respondents. Nearby production and automation are the most important enablers in the implementation of a circular fashion value chain.
5 – Sourcing in Asia vs. Nearshoring.
In the Asian sourcing system of just a few years ago, compliance, cost balance and production capacity were its fundamental bases. Today, the expectation is that more fashion brands will include within their sourcing and supply strategy the core triangle of nearshoring, automation and sustainability. What I have personally called: the neo-relocalization of fashion production.
The conjunction of these simultaneous changes in the marketplace means that agility and speed are now the goals pursued and achieved by the global leaders in the fashion industry and on-demand restocking has become the “decisive” capability. By reducing time-to-market, fashion brands can create their styles based on emerging trends, increase the number of their winning garments, and eliminate those unpopular from planning. And they can do it all during the same season.
6 – Fast Fashion vs. Ultra-Fast Fashion.
Until recently, a six-month collection development and production cycle was considered fast. Today, the speed of marketing has been reduced to no more than a month and a half and some retail players (the disruptive online platforms) are able to do it even faster. This does not mean that mass-market brands should consider applying speed models to their entire collections or product range. To be successful they will have to establish the break-even point within a multimodal sourcing scheme in which low-cost Asian origins and traditional production will continue to play an important role.
However, moving to a demand-driven model requires apparel brands to activate levers at all stages of the fashion cycle, bringing production back to consumers with nearby or local manufacturing that creates the possibility of shortening delivery times.
Over the past few decades, American and European fashion companies have shifted most of their production to China and other Asian countries to take advantage of drastically lower labor costs there. But the offshoring model is hardly compatible with the new need for speed. Shipping inventory from Asia by sea to Western markets usually takes 30 days. Such a long lead time eliminates any possibility of flexibility and differentiation. Air transport is an option, but it’s expensive; moreover, it’s not environmentally friendly, a consideration that will increase in importance.
The benefits of offshoring could be further reduced given the geopolitical tension that is causing uncertainty in trade agreements and the evolution of exchange rates. Tariffs (currently 9% to 12%) could increase and play a much more prominent role in the supply and production economy.
7 – Western Consumption vs. Eastern Consumption.
The offshore production of the supply sources of the mass market players in the US and Europe is also under pressure for other reasons, including the growing consumption of fashionable goods and clothing in Asia. While in the recent past the greatest demand for fashion came from the developed markets of the West, today the growing demand comes from other parts of the world, particularly the Southern Hemisphere and the Far East.
Asian consumers are buying more apparel than ever and their voracious appetite for fashion is far from satisfied: clothing sales in Asia are projected to grow by 6% annually, representing around 40% of global sales by 2025. This fantastic domestic demand has created competition for garment production capacity in Asia and changed the balance of exports. While we can conclude that there are still no substantial capacity problems, many Chinese manufacturers are shifting their focus and producing for the local market because demand is very high and financially more advantageous.
We will meet again in the next article where we will continue analyzing this interesting paradigm shift from fashion to neo-relocalization.
See you next time!