It’s been a challenging year for fashion retailers. Industry analyst Raghu Rajajumar takes a look at how players in the wholesale sector fared.
Retailers and wholesalers remain cautious about the short-term outlook for the Australian economy, despite a better than expected performance to date. Demand for clothing and footwear wholesaling still remains weak in the face of an economic slowdown.
Lower interest rates and the government’s economic stimulus packages helped boost retail trade somewhat in 2008/09 but the textile, clothing and footwear (TCF) wholesale sector only grew marginally over the year.
High-end fashion spending was particularly hard hit over the year, with items once seen as ‘must-haves’ put under closer scrutiny by consumers. There was also an enormous amount of pressure on retailers and manufacturers to drop prices.
Consumer perceptions became paramount for retailers and wholesalers over much of 2009. The majority of Australian consumers who were able to retain their jobs were actually much better off this year than last year.
Consecutive interest rate cuts, lower petrol prices and a prolonged period of discounting by retailers saw consumer purchasing power rise significantly.
Despite all this, the impact of falling consumer confidence on wholesale sales was noticeable, with plummeting sentiment helping keep discretionary spending low and forcing most retailers to discount their ranges. This compares to about a year and half ago when a lot of retailers and brands tried to secure the luxury market and fashion boutiques and chain openings were regular.
Pacific Brands, as well as other significant TCF wholesalers in Australia like Gazal and Mercury Brands, struggled in 2008/09 with much lower profit margins and capital difficulties. After falling significantly in 2008/09, IBISWorld expects average profits will remain low over 2009/10.
Most fashion operators were well aware of the need to woo frugal buyers by discounting without sacrificing tomorrow’s prestige. Along with this, wholesalers and retailers were forced to implement a wide range of strategies to boost their bottom lines.
Many operators overhauled their supply chains and implemented cost-saving measures last year but pressure on margins will remain in 2010 as consumers remain nervous.
The effects of government stimulus payments to consumers peaked in the June quarter of 2009 and next year will remain a tough trading environment for TCF retailers and wholesalers.
The largest player in the clothing wholesale industry in Australia is Pacific Brands. The group dealt with strong public criticism when it announced plans to offshore the remainder of its manufacturing operations.
While it plans to remove itself from local manufacturing in order to remain a strong viable operation, IBISWorld expects its market share in Australian clothing wholesales will increase to about 11 per cent in 2009. This is expected as it further focuses on enhancing distribution and delivery capabilities in Australia.
This industry is highly polarised with a few, large participants at one end of the scale and many small participants at the other end of the scale. Industry concentration is likely to increase as companies merge and consolidate operations, such as the PAS Group’s recent consolidation of several companies.
Global supply chains
IBISWorld estimates import penetration will continue to increase over the next few years but at a much lower rate then the last five years.
Imports already dominate the Australian market. Despite the planned tariff reduction in 2010, the rate of import growth is expected to plateau as the market reaches capacity.
In 2008/09, a staggering 82.5 per cent of women’s and girls’ clothing and 74.1 per cent of men’s and boys’ clothing imported into Australia originated in China. Over the year, despite muted domestic demand from Australian consumers, footwear imports grew by 15 per cent, with a combination of low-cost and mid- priced imports from China making up 68 per cent of total imports.
Apart from trade, labour and supply chains in the industry are becoming increasingly internationalised.
The internet and related communications technology has interconnected supply chains and product delivery around the world. This has further globalised supply chains in the apparel and footwear industry with both small and large companies operating in various international locations.
A globalised supply chain existed well before the advent of internet technology but the speed of conversion from design to manufacture to wholesale has ramped up over the last few years.
Now more than ever, product design, strategy and marketing are often done in developed countries while manufacturing often takes place in other parts of the world.
Fifteen years ago, a wholesaler had a more clearly defined role in ensuring distribution between supplier and retailer was performed at maximum efficiency.
Today, the ability to select sources and production in line with required inventory levels, sales and budgets may require overseeing operations, teams and marketing campaigns in various locations around the world.
Along with this, a greater collaborative working style between companies, buyers and product developer is becoming more important as larger retailers increasingly manufacture their own brands. Meeting targets on price, quality and delivery for wholesalers was always important in this industry.
Now, the ability to manage relationships with Chinese factories and suppliers to ensure product lines are replenished at the shortest possible lead times, whilst still ensuring lowest possible cost, is just as important.
Rising retail buying power
A great constraint for the traditional wholesaler in this industry will be the fact that large retailers, manufacturers and designers will continue to be substantial importers of clothing. For example, Levi-Strauss, Esprit and Saba are all wholesalers and retailers. Others, such as Pacific Brands, are wholesalers, importers, retailers and manufacturers.
The level of concentration at the retail level is also increasing and is enhancing the ability of retailers like Wesfarmers, David Jones and Woolworths to bypass the traditional wholesaler and purchase imported clothing by direct negotiation with overseas manufacturers.
IBISWorld estimates that concentration in the Australian retail market is increasing, with Wesfarmers and Woolworths combined projected to control about 25 per cent of the entire retail sector in 2009.
Despite this threat, the clothing wholesaling industry is still expected to grow consistently. IBISWorld forecasts that over the next five years, revenue in the industry will grow at an average annual rate of 2.2 per cent a year to reach $6.85 billion in 2014/15.
Demand for branded, design-led apparel is expected to remain strong among Australian retailers. Many retailers that buy directly from manufacturers still don’t have the design and product development expertise and infrastructure that a competitive wholesaler can provide.
Retailers attempting to by-pass the wholesale function can risk losing the strong branding, product and market expertise as well as the cross advertising benefits a dedicated wholesaler can provide.
Raghu Rajakumar is a textile, clothing and footwear industry analyst at IBISWorld.