Australian fashion importers have been warned against placing finished orders in bond, with reports international players are engaging in the practice to cork excess inventory.
Logistics providers in southern China have recorded a sharp increase in the number of European and US retailers bonding stock in offshore warehouses. Melbourne-based Dean World Cargo, which offers supply chain solutions across China and South East Asia, has admitted its Shenzhen warehouse is carrying substantially greater levels of fashion product than in previous years.
The situation may indicate a broader trend within the Asian market with Shenzhen’s three ports now collectively exporting more than the key hub of Hong Kong. Trade figures show the Yantian port handled an unprecedented number of shipping containers, with as many as 20 million twenty-foot equivalent units (TEUs) per annum.
Managing director Bruce Haines confirmed the bonding trend was against the standard approach of “consolidate and immediately ship”.
“What is happening is that import clients are requesting stock to be held until absolutely required,” he said. “By holding goods offshore, they can feed stock in when required.”
Haines said the approach indicated worsening conditions in the northern hemisphere markets, with both seafreight and airfreight volumes also down substantially from previous years.
“I think the US and European retailers are not recovering from the global financial crisis as fast as Australia and therefore it’s taking longer to get their inventory levels back in balance,” he said.
“While [these] markets are down considerably, it appears Australia is in better shape and suppliers are indicating things should start to improve over the next four to six weeks.”
Bonded warehousing allows companies to manage onshore inventory levels and delay the payment of upfront duty and value-added taxes on imported goods. It also means avoiding costs on goods which may not have been sold and could reside in stock for months.
Haines said he believed US and European retailers would continue to embrace this strategy, but had yet to see a widespread move by Australian importers. Dean World Cargo services key national chains such as Just Jeans, Jay Jays, Suzanne Grae, Sportgirl, Sussan and Jeanswest.
“Australian importers, I think, reacted faster to economic conditions and took some steps a while back to reduce orders,” Haines said.
“As long as they keep their inventories in balance, then this strategy will not be required. As inventory holding costs are a major expense, reduced inventories are a major cost saving.”
Analysts at Macquarie Research Equities indicated Australian department stores in particular had responded quickly to changes in demand for product. While Myer and David Jones had both reported a growth in profit margins for the first half of 2009 for instance, US counterpart Saks reported a 45 per cent drop in gross profit.
Analyst Lisa Deng said excess inventory was the primary culprit behind the “ugly results”.
“Not only did [Saks’] luxury goods focus mean its volumes were more impacted than its peers, the six-to-nine-month lead time for luxury goods also meant it could not flex its inventory fast enough to respond to the downturn.
“In management terms, there was a ‘considerable disconnect’ between its inventory increase and sales trends. The company discounted heavily to clear stocks, which resulted in a significant decline in margins.” Australian Centre for Retail Studies program director Andrew Cavanagh said the picture was very different for domestic retailers.
“David Jones are on record as saying they were concerned about this year’s mid clearance sale as they didn’t have much to clear. Many other retailers have also made inventory management a priority over the past 12 months in particular. Because the recession here was not as deep as first anticipated, sales have been up on what was expected. As a result, a lot of retailers are now a bit skinny on stock.”
Cavanagh said he did not believe placing stock in bond was a viable solution for fashion retailers with excess inventory. In addition to the cost of warehousing, holding finished product could play havoc with seasonal and coordinated colour palettes and lose customers on the hunt for new collections.
“Customers are driven by the new, not necessarily the cheap. Putting finished orders in bond will also usually result in unfinished orders being delayed, deferred or cancelled. This can have a long-term impact on supplier relationships – they are doing it tough as well.”
The strategy could only really work for basics or everyday lines, Cavanagh said. “Proper planning, including contingency planning, is a much better strategy than delaying the execution of decisions that were made too far out in the first place. Build an efficient, flexible supply chain with the ability to change according to market requirements and you will not need to put stock in bond.”