Outlook 2017 – Challenges and opportunities

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Dealing with intensifying volatility remains the biggest challenge for 2017

2017 is shaping up to be another uncertain year for the apparel industry and its supply chain, according to first feedback from a panel of executives consulted by just-style. Prospects for volatile and uneven growth, Trump’s trade policies, and tensions between the US and China are seen as the biggest challenges – as well as presenting opportunities for retailers and brands to rethink their business models.

Marc Compagnon, president of LF Sourcing and executive director of Li & Fung Limited:
The two constants in 2017 will be uncertainty and the continuation of disruptive macro trends such as demographic shifts, rapid advancements in technologies, the pressures of e-commerce and fast fashion on incumbents, the need for manufacturers to upgrade their capabilities, as well as political uncertainty.

Uncertainty also brings opportunity for retailers and brands to rethink their business models and how they operate. Take digitalisation for example: Digitalisation will help companies enable speed and innovation within their organisations and supply chains, and focus on the demands of consumers through data. This will help them get the relevant product to the consumer at the right time, and at a fair price.

Dr Achim Berg, partner at McKinsey & Company and co-leader of McKinsey’s Apparel, Fashion & Luxury Group:
Dealing with intensifying volatility remains the biggest challenge for 2017. Many lingering issues from 2016 that will contribute to volatile and uneven growth next year – the UK’s exit from the EU and the pending departure negotiations, and a new US government, for example. As volatility becomes the new normal, the apparel industry will see all dimensions of its business affected: overall consumer demand, flows of tourism, price adjustments and exchange rate arbitrage, and labour and resource costs.

The biggest opportunities lie in digitalisation of the value chain – from concept design to the way brands engage with their demanding and connected consumers. In a recent global survey, 62% of executives noted that they will invest in omnichannel integration, e-commerce, and digital marketing.

While 2016 may have been a year in which many businesses focused on costs, the focus in 2017 will be on sales growth – and technology is one of the most significant levers that will be used to achieve it.

Matthijs Crietee, secretary general at the International Apparel Federation (IAF):
In 2017 one of the big challenges is how to make technology count. Digitalisation and big data are great tools to bring supply and demand closer together, to fix the fashion system, to make it more profitable and sustainable. However, they are all difficult to implement because the use of the technology requires cooperation of different players in the supply chain.

One of the related challenges is to teach current and future managers the right skills to deal with these new technologies. Technology implementation is about people, about their knowledge and their management skills. If the industry is not able to implement the technology available, it becomes vulnerable to big technology companies from outside of the industry such as Amazon taking large chunks of market share quickly.

Improving the image of the industry is also a big challenge, and part of this works through the ability to better communicate the efforts the industry is taking to create more responsible and sustainable supply chains. Advances in technology and management systems will create opportunities for companies to be more transparent to their customers about their supply chains.

Finally brand identity and distinctiveness will not only be focused on the aesthetics of good design, but also around the values that the brand represents. Mission focused brands, brands that embrace a cause, brands that stand for distinct values, or have a social mission behind them are becoming more and more powerful. Brands like TOMS Shoes, Patagonia and Warby Parker who talk about their causes and link consumption to support these causes give consumers reason to buy, create strong brand loyalty and emphasise doing well and doing good.

Guido Schlossmann, president and CEO of Synergies Worldwide Sourcing:
The biggest challenge is to develop products demanded by the customer and to have the right combination of attractive products and shopping related services. I am talking about having your customer or customer data help you to design their own products, using and professionally executing omnichannel sales and providing end-to-end consumer delivery services/options. Furthermore it will be pivotal to transform your organisation to survive, compete and succeed in a discount-focused environment.

Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware:
Uncertainty in the global economy will pose one of the biggest challenges to the apparel industry in 2017. Apparel business is buyer-driven. A great number of studies have suggested economic growth is by far the most effective and reliable predictive factor for apparel consumption. Unfortunately, it seems apparel companies will have to deal with another year of economic volatility and weak demand in 2017. For example, according to an International Monetary Fund (IMF) forecast released in October 2016, global economic growth in 2017 is only expected to recover to 3.4% from 3.1% in 2016.

There is no particular excitement among major apparel consumption markets either. The outlook for the US economy in 2017 is complicated by the strong US dollar, the Federal Reserve’s monetary policy, and the uncertain trade and tax policy to be adopted by the new Trump administration.

Economic growth in the EU region next year will continue to be hindered by the unknown fallout from UK’s referendum on leaving the EU, pervasive geopolitical uncertainties, high unemployment rates and rising protectionist tendencies. Japan’s economic growth is projected to be as low as 1.0% in 2017 according to the Organization for Economic Co-operation and Development (OECD). And China’s economic growth this year could slow again to 6.5%, which would be the slowest pace in more than 25 years.

Reflecting these trends, we might see a stagnant growth or even a decline of global textile and apparel trade in 2017 as well.

Nevertheless, companies’ continuous investments in technology and innovation will create exciting new opportunities for the apparel industry. Particularly, growing areas in the apparel industry such as 3D printing, wearable technology, digital prototyping and e-commerce have made many ‘non-traditional’ players now interested in fashion, including technology giants like Google and Apple. I think we can expect the apparel industry to become even more modern and high-tech driven in the years to come.

The changing nature of the apparel industry will also increase demand for talents from an ever more diversified educational background, such as engineering, physical therapy and business analytics.

Mike Flanagan, CEO of apparel industry consultancy Clothesource:
The biggest challenge by far will be the threats to the established apparel industry from the ruling parties in the US and China. Both have set themselves on a collision course with the philosophy that’s underpinned this industry for the past half-century: opening international trade under internationally-shared rules.

  • Since June 2016 (before Trump was their party’s nominee as president), America’s Republicans have been campaigning for the US to adopt ‘distance-determined’ profit taxes: a philosophy that disallows the cost of imports when calculating a company’s liability for tax, and typically means most apparel retailers importing direct will have up to 90% of the their profits confiscated. Their aim – independently of Trump – is to tax imports out of existence.
  • China appears equally determined not to have anyone else influence how it makes trading decisions. In 2001, when it joined the World Trade Organization (WTO), the major Western countries insisted on a special system (one prescribed for non-market economies) for determining appeals at the WTO against allegedly unfairly cheap Chinese exports. China believes that system was meant to expire in December 2016. The US, EU and Japan all agree China’s done practically nothing to reduce its government’s interference. China insists the tougher rules affecting its exports should have expired in 2016, so it has launched a legal challenge. It’s highly unlikely there will be a peaceful outcome.

It’s impossible to determine how quickly this will start to affect US apparel importers or foreign importers of Chinese apparel. But there are huge prospects for damage to almost everyone involved in global trade – and some likelihood of benefits to China’s competitors.

All that, of course, is quite separate from the damage Trump’s policies can do – all of which are likely to cause problems years before Britain finally works out how to leave the EU without destroying its economy.

As far as US imports and Chinese exports are concerned, their governments appear determined to upset the deals the world has developed, mostly through the WTO, over the past 50 years. And it’s highly likely things will start happening during 2017 – but no-one can really envisage what and when.

Rajiv Sharma, group chief executive at Coats Plc:
The wise words of Benjamin Franklin – “by failing to prepare you are preparing to fail” – are as relevant to today’s global brands as the start-up supplier. However, the challenge is understanding what sort of issues to be prepared for. The acronym VUCA (volatility, uncertainty, complexity and ambiguity) was coined originally by the military but is gaining much wider use as it effectively sums up the challenge of identifying challenges, in particular in relation to political, economic and social factors.

From the political and economic perspectives, it will take much of 2017 – and beyond – for the full implications of both Brexit and the US election on international trade agreements, such as TPP, to become clear. European elections during 2017 could well add even further complexity.

From the social perspective, the challenges lie in understanding the changing consumer demands of internet and high street retail and their differences. We are likely to continue to see movement from the bricks and mortar side of the high street to the internet side, and vice versa; the key is responding to the shifting business models and supply chains they each demand.

These external factors are beyond the control of apparel companies, but the pressures they exert on margins that are already squeezed is direct. So the opportunity is in identifying the most efficient and appropriate response. Much of the apparel industry comes down to manufacturing speed and productivity, so closing that gap between manufacturing and consumers by taking time out of the supply chain has always got to be front of mind.

As we enter a new inflationary age in 2017, the opportunities will be most effectively seized by those both able to forecast variations in demand and quick and nimble enough to respond.

Julia Hughes, president of the United States Fashion Industry Association (USFIA):
From the US perspective, the biggest challenge right now is the transition to the Trump administration. Honestly, anytime there is a new administration, there is a lot of uncertainty, though this year there is a bit more than usual considering the rhetoric against trade and imports. Uncertainty is not only unsettling to consumers, but also to the brands and retailers who sell to them.

In addition to the anti-trade rhetoric giving the industry some anxiety, we’ve seen surprise cabinet picks, tension between the new administration and Congress, and questions about which campaign promises will be honoured, and which will not. We know the Trans-Pacific Partnership (TPP) is on the back burner, and brands and retailers wait to see what will happen to NAFTA, one of the most-utilised free trade agreements by our industry, and other trade agreements and negotiations, as well as the US relationship with China.

But, business continues – and there are some opportunities, especially in terms of making regulations more business friendly. For too long, brands and retailers have juggled conflicting rules and regulations in the United States and around the world, in areas such as labelling, testing, and compliance. The new administration has an opportunity to work with business and Congress to untangle the mess of conflicting state and national regulations.

We remain hopeful that the Trump Administration will understand the issues facing our industry – after all, Donald Trump and his daughter Ivanka Trump are in the business of importing fashion and accessories from around the world, too.

Rick Helfenbein, president & CEO of the American Apparel & Footwear Association (AAFA):
The biggest challenge for apparel and sourcing in 2017 will be ‘perfunctory versus regulatory.’ The industry will no longer be able to count on what we did in the past as perfunctory. Rules of the road will definitely be changing, along with the regulations that govern them.

Past history for change in the apparel business was generally reflective of how an incoming US president dressed. Eisenhower wore the Lacoste shirt for golf, and casual suddenly was in. President Clinton bought suits off the rack, and ‘dress up’ collided with main street. Flash forward to today, and apparel history will reflect less on how the president dresses, and more on the how the president thinks about trade and taxation. For whatever it’s worth, president-elect Trump is always dressed well, but he’s very consistent and generally has only two ‘looks.’ He either wears an (expensive) suit, white shirt, with a red or blue tie; or if he’s casual, he wears khaki pants with a white knit shirt and a hat (usually red).

The supply chain will disrupt under our new leadership, and the apparel and footwear industries will be forced to adapt.

The lingering questions are relatively easy to understand – but the answers are much more complex:

  • Will NAFTA (the North American Free Trade Agreement) become the 23-year-old vehicle that needs to be remodelled, or will NAFTA be sent to the scrap heap? (Unlikely);
  • The Trans-Pacific Partnership (TPP) has died a slow, but painful death. Will TPP resurface as 11 mini trade deals for the US? (Possible);
  • Supply chain navigation will change. New laws and tariffs will dictate the flow of goods, and thus planners must work on a much longer-term strategy for planning a successful year.

Opportunities in 2017 will be the ‘feel good’ factor of the booming stock market, leading to more consumer purchases at retail.

With additional customers, more online presence, and fewer physical stores (due to additional imminent closures), it seems like 2017 could shape up to be a great year for retail. The real challenge will come in 2018, when everyone will likely have to scramble to develop their new supply chains.

Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA), and lecturer at the Wharton School at the University of Pennsylvania:
On the world stage, the tension and potential East-West schism is the greatest worry both to the apparel industry and to business in general. If the relationship between the US and China deteriorates, it will naturally have impact on trade and the development of markets.

For the industry, dealing with on-line and international growth will be critical. System integration, last mile fulfilment, and inventory optimisation are all possibilities for margin optimisation.

Our industry will also have to make more tangible progress towards sustainability, circular economy, and a socially responsible supply chain.

For individual brands and enterprises there are new opportunities with wearable systems, smart forecasting, and values-driven branding.

There is a blurring of the lines with wearables. Apparel systems should take a page from our phones and watches. We have crossed the lines between art and science. Our apparel will be smart, connected, and multi-functional. Apparel companies need to think about clothes and the new lifestyle of the consumer. So there are new opportunities with integration.

Data analytics, fashion trend prediction tools, inventory forecasting and other systems to improve inventory productivity, reduce lost sales, and drive margin improvements are all important for the near future. A lot of these tools are at a level of maturity where they will disrupt the traditional way apparel is designed, bought, and inventoried.

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