Australian fashion wholesalers have struggled to perform under the challenges engulfing Australia’s retail environment over the last few years. Industry operators have found it particularly difficult to contend with the prevailing economic uncertainty since the global economic downturn, the weak retail environment, declining consumer confidence, weak discretionary spending and ongoing wholesaler bypass. These factors combined have slowed growth over the last five years to just 0.8 per cent per year on average to reach $9.2 billion in 2011/12. Despite these challenges, trading data suggests that clothing wholesale in Australia is expected to grow at 1.3 per cent in 2011/12. Over the next five years, IBISWorld expects the sector to grow 1.5 per cent on average to reach $9.9 billion. The fortunes of fashion wholesalers ultimately depend on clothing and accessories consumption at the retail level, which is in turn contingent upon household disposable income, unemployment levels and changes in consumer sentiment. The lingering impact of the global financial downturn on consumer behaviour has been the single biggest impediment for the retail industry as a whole in the last three years. When the global financial crisis hit, retail trade growth slowed as Australian consumers reigned in discretionary spending and redirected income towards debt reduction and increased savings levels. Increasing employment uncertainty further reduced consumers’ willingness to spend on retail items, with the national unemployment rate increasing in 2009 and 2010. Moreover, two Federal Government economic stimulus packages, lower interest rates and weaker petrol prices also failed to boost expenditure on clothing, which flowed on to weaker demand for wholesalers. Australian retailers are still experience difficulty in adjusting to a seismic shift in consumer spending behaviour since the economic downturn. Over the last five years Australians have increased their savings rate to a 25-year high and focused heavily on reducing debt levels. As a result, today’s consumers have become wary of opening their wallets and bargain hunting has become the new chic. Consumers have become used to price reductions and expect to purchase items at sales prices. They are also becoming increasingly discerning and comfortable with using price comparison websites and purchasing items online from domestic and international retailers. These changes in consumer behaviour have reduced sales at the retail level, thereby reducing demand for fashion wholesalers and placing immense pressure on the whole retail supply chain. Reflecting this new climate, revenue growth for Australian fashion retailers and wholesalers has been very weak and very slow. Given weakened market conditions over the last few years, many fashion retailers have realised that profits are being made on the supply side and have cut wholesale intermediary costs by sourcing products directly from manufacturers. As such, wholesale bypass is another major issue facing the industry, with many larger clothing retailers purchasing products directly from local and overseas manufacturers, thereby reducing demand for services provided by independent wholesalers. As wholesalers have been increasingly squeezed out of the industry, demand from the industry’s leading markets has declined as a source of revenue over the last five years. Department stores and retailers such as Myer, David Jones, Target and Kmart have increased direct purchasing from manufacturers or sourcing products manufactured to their own specifications. For example, Myer will further decrease wholesale purchases this year by lifting its global fashion outsourcing budget to $200 million and increasing direct trade with manufacturers through its two Global Outsourcing Offices in Shanghai and Hong Kong. Wholesaler bypass has lead to the ongoing consolidation of the industry’s retail client base, which has been one of the biggest factors constraining wholesaler profits over the last five years. The continued reduction in the number of retailer buyers, the growth of large chains and the use of category management practices have weakened the negotiating strength of clothing wholesalers, thereby straining profit margins. Overall, profit levels are forecast to fall from 7.9 per cent of revenue in 2006/07 to 7.2 per cent in 2011/12. Wholesaler bypass is expected to increase over the next five years, especially with large fashion retailers. This will further reduce demand, revenue and profitability for independent wholesalers. However, IBISWorld expects smaller retailers will continue to be major users of the wholesale part of the supply chain. Added to this will be the increasing use of direct internet purchases of clothing by consumers, which will also continue to push wholesalers further out of the industry. As consumers become more willing to purchase products online over the five years through 2016-/17, e-commerce will to continue to grow. This trend may further reduce demand and profitability for fashion wholesalers. A large share of domestic demand for clothing is met by imports and clothing wholesalers import a significant proportion of their products. Industry operator Pacific Brands sources the majority of its products from China and other countries such as Vietnam, Indonesia and Bangladesh. Local companies are either shifting away from manufacturing locally to manufacturing overseas, or exiting manufacturing altogether and sourcing products from low-cost markets such as China. For example, Pacific Brands closed its manufacturing operations during 2009/10. Over the first half of 2009/10, the company closed seven factories, including two in New Zealand. The company states that it is now sourcing products from overseas that are identical to those previously manufactured locally. Unfortunately, a recent decline in clothing prices in response to the rise of cheaper imports has done little to help industry profitability due to wholesaler bypass and tough price competition. Wholesalers operate in a very price sensitive market with constant pressure to offer retailers competitive prices for their brands, which means that valuable costs savings are often passed further down the supply chain to the detriment of wholesalers. Further to this, wholesalers have largely failed capitalise on the strong appreciation of the Australian dollar over the few last years that has encouraged growth in cheap clothing imports from countries with lower production costs. Looking ahead, industry profitability is likely to fall further as pressure from high cotton prices and wage growth in China is expected to translate to higher clothing prices in Australia. Global cotton prices have more than doubled over 2010/11 due to tight supply conditions and increased demand, reaching record levels. In addition, IBISWorld estimates average wages in the apparel manufacturing industry in China have increased by 42 per cent since 2006. This trend is expected to erode any protection a high Australian Dollar may give industry profit margins at the moment, and it may also result in the relocation of upstream manufacturing operations or sourcing goods from other more competitive, low-cost countries such as Vietnam, Pakistan and India. As the Australian economy continues to recover from the downturn experienced in 2008/09, industry growth will remain steady. The industry will continue to be affected by factors that drive consumer spending at the retail level, such as consumer sentiment, household disposable income and unemployment. Population growth will also drive industry revenue. Wholesale bypass will increasingly affect the industry over the next five years, with more retailers opting to purchase directly from manufacturers. This trend will constrain industry revenue growth over the next five years. IBISWorld forecasts that industry revenue will grow at an average annual rate of 1.4 per cent to total $9.9 billion in 2015/16.
