We’ve given you the lowdown on key trends and players luring buyers to Fashion Exposed. Now IBISWorld general manager Robert Bryant analyses the key issues affecting clothing wholesalers at the trade fair.
The weak Australian economy and the increasing phenomenon of wholesale bypass - that is, the move by retailers to source directly from manufacturers - are wearing out the usually strong profit of the local clothing wholesaling industry.
Australian clothing wholesaling industry revenue growth weakened in the face of the economic slowdown as demand from downstream clothing stores and department stores fell.
The fortunes of the industry depend on factors which affect spending at the retail level, such as household disposable income, unemployment levels and consumer sentiment. Another issue facing the clothing wholesaling industry - and the wholesale sector in general - is wholesaler bypass.
Overall, IBISWorld estimates that industry revenue will increase at an average annual rate of 1.2 per cent over the five years to 2010-11.
The economic downturn: The Australian economy experienced a downturn in 2008-09, although it avoided a recession. Consumer sentiment declined sharply for the financial year, constraining discretionary spending.
However, household disposable income increased in 2008/09 due to the Federal Government’s two economic stimulus packages, as well as lower interest rates and petrol prices. This acted to support retail spending for the period.
More specifically, Australian expenditure on clothing at the downstream retail level weakened in 2008/09, which flowed on to weaker demand for wholesalers.
Based on Australian Bureau of Statistics data, retail spending on clothing, footwear and accessories fell by 1.0 per cent over the 12-month period. This followed growth for the previous two years.
However, the clothing and soft goods retailing industries outperformed other segments in the June quarter of 2009. IBISWorld estimates that these factors combined saw industry revenue growth weaken to 0.5 per cent for the financial year.
The Australian economy improved over 2009/10 and consumer sentiment increased during the first half of the year. Consumer confidence was boosted by falling interest rates, recovery of the residential property market and the news that Australia had avoided a recession.
However, consumer sentiment fell several times in the second half of the financial year, following interest rate rises by the Reserve Bank of Australia. Also, household disposable income growth weakened during the period due to the absence of further Federal Government fiscal stimulus payments and this constrained growth in spending by households.
The September quarter in 2009 saw a 3.5 per cent decline in seasonally adjusted volumes of clothing, footwear and other personal accessory retailing. Despite this, IBISWorld estimates that industry revenue increased by 1.4 per cent for 2009/10 as confidence improved. This growth is expected to continue into 2010/11.
Falling prices: The price of clothing and footwear at the Australian retail level has fallen over much of the five years to 2010-11, as imports from countries with lower production costs rose. According to ABS data, prices fell by 1.4 per cent in 2005-06 and by 0.7 per cent in the following year.
While prices rose the following three years to 2009/10, increases were a marginal 0.8 per cent, 0.9 per cent and 0.3 per cent respectively - lower than the overall consumer price index for those years.
As a large portion of domestic demand is met by imports, the value of the Australian dollar affects costs for wholesalers. The value of the Australian dollar rose over much of the five years to 2009/10. This acted to reduce the relative price of imported products.
Falling profits: IBISWorld expects the profitability of the Australian clothing wholesaling industry to fall from 8.1 per cent of revenue in 2003/04 to 6.4 per cent in 2010-11. One of the biggest factors constraining profits over the last five years was the ongoing consolidation of the industry’s retail client base.
The continuing reduction in the number of retail buyers, the growth of large chains as well as the use of category management practices weakened the negotiating strength of clothing wholesalers.
Also, these trends are changing buying patterns as more large retailers elect to purchase from companies with sufficient supplies to meet their nationwide needs. Manufacturers and retailers are often large importers of clothing and increasingly the wholesaling function is bypassed as retailers negotiate directly with overseas suppliers or agents.
The Internet is making it easier for retailers and individuals to independently source goods from overseas. As Internet usage rises, industry products are becoming more accessible for purchase. This is further reducing the profitability of apparel wholesalers.
Industry outlook: As the Australian economy strengthens further from the downturn experienced in 2008-09, clothing wholesaling industry growth will also improve.
The industry will continue to be affected by factors which drive consumer spending at the retail level. Growth in demand and revenue for clothing wholesalers will also be aided by population growth. Wholesaler bypass will continue to be a factor that will affect the industry over the next five years, with some retailers opting to purchase directly from the manufacturers.
This trend will act to constrain industry revenue growth over the five years to 2015-16 and IBISWorld forecasts that industry revenue will grow at an average annual rate of 1.7 per cent over this period.
Australian specialty clothes stores and department stores will remain the major markets for clothing wholesalers. IBISWorld forecasts that revenue for downstream clothing retailers will increase over each of the five years to 2015-16, with the recovery in the general economy well on the way by the beginning of the period.
The improving conditions are expected to boost demand for clothing at the retail level, which will flow on to higher demand for wholesalers. This in turn will boost industry revenue. IBISWorld forecasts that industry revenue growth rates will fluctuate between 1.5 per cent and 1.8 per cent over the five-year period to 2015/16.
Wholesaler bypass and international trade: A major trend constraining growth in the Australian clothing wholesaling industry is wholesaler bypass. Many large retailers purchase clothing products directly from local and overseas manufacturers. This acts to reduce demand for the independent wholesaler.
However, smaller retailers continue to be major users of the wholesale part of the supply chain. Wholesalers may be negatively affected by the increasing use of direct Internet purchases of clothing by consumers. Indications are that retail trade via the Internet has seen strong growth in recent years as consumers become more willing to purchase products online.
ABS data shows that 72 per cent of Australian homes had Internet access in 2008/09, up from 16 per cent in 1998. The proportion of people using the Internet to purchase goods and services rose in 2008-09.
However, the major reasons cited by those who did not use the Internet to purchase goods or services were that they had no need; they had security concerns; or a preference for shopping in stores. E-commerce is expected to continue to grow over the five years to 2015/16. This trend may act to reduce demand for clothing wholesalers.
The majority of Australian demand for clothing will continue to be met by imports.
IBISWorld estimates that imports of clothing will increase over the forecast period, albeit at slower rate than the previous five years.
Any appreciation of the Australian dollar against other major currencies will make imports less expensive for Australian buyers, benefitting importers and wholesalers.
Industry employment and profits: Employment in the Australian clothing wholesaling industry is forecast to rise at an average annual rate of 1.5 per cent over the five years to 2015/16.
There will be a greater need to invest in training and skill development due to the adoption of new technology and more sophisticated wholesaling systems. Some of the industry’s largest players employ trainers in full-time roles already.
However, there will also be growth in industry-specific training courses focusing on logistics, supply management and marketing. IBISWorld forecasts that wages will increase at an average annual rate of 1.2 per cent over the five-year period.
The price of clothing at the Australian retail level fell - or grew at only a marginal rate - over much of the five years to 2010/11. IBISWorld expects that price competition will continue at the wholesale and retail level, constraining growth in industry revenue and profit margins as industry operators reduce prices in order to maintain market shares.
Increasing concentration at the retail level will continue and larger retailers will bypass the independent wholesaler. As such, IBISWorld believes that profit margins will not improve significantly over the next five years to 2015/16.