From manufacturing and retail to imports and exports, IBISWorld analyst Raghu Rajakumar offers a detailed snapshot of the Australian footwear industry.
Australian footwear producers face a tough environment.
The dominance of low cost foreign competitors, tariff reductions and import penetration has seen the structure of the industry change. The industry also faces skilled-labour shortages, accelerated industry reform and companies outsourcing production overseas. Finding a significant low cost footwear producer based in Australia is now a difficult task.
Despite these factors, as well as an expected spending slump in 2009, some firms have transformed themselves into efficient, innovative or branded footwear suppliers and are competing successfully globally.
A shrinking manufacturing base
The Australian footwear manufacturing industry has severely shrunk over the past ten years. Total production fell from 14.4 million pairs in 1995/96 to 8.1 million in 2000/01. According to IBISWorld projections, by the end of 2008/09, only 3.1 million pairs will be made in Australia.
Footwear manufacturing is labour intensive as it is difficult to automate completely. This lends itself toward small operations and the industry is a mixture of a few large firms and many small establishments. Together, the industry's four largest players, Pacific Brands, J Robins & Sons, Strathig Holdings and Blundstone accounts for around 31.2 per cent of the industry. Many of these companies source much of their footwear from overseas.
It has proven unsustainable to compete globally on products like athletic footwear or basic boots, with even iconic brands like Blundstone shifting much of their operations offshore. Most labour intensive manufacturing has already been relocated to low wage cost countries, especially in the Asia Pacific Region and the rate of outsourcing in the industry is reaching a plateau.
Surviving local manufacturers include companies like RM Williams, who sell locally produced boots for up to $1875 a pair. Another example is J Robins & Sons, Australia's only large scale women's fashion shoe manufacturer. It competes successfully because it converted itself into a team-based, quick response manufacturer. After significant investment, the company's factory is divided into cellular manufacturing, mass customisation and flexible specialisation areas. So, while a pair of shoes sourced from China may have a lead-time of many months, the same pair from an efficient, local company like J Robins & Sons can have a lead-time of only one week.
The industry is shrinking but remaining participants are focusing on efficiently produced or high 'value added' footwear. As a result, profit margins are expected to rise. This is aligned with government reform goals on manufacturing and industry restructuring. Improving competitiveness by reducing operating costs has been a priority with more capital investment in infrastructure and reduced reliance on unskilled labour. As part of this strategy, many businesses import footwear components such as sewn uppers for final assembly locally, further reducing labour requirements.
Operators are becoming more specialised. Many manufacturers narrowed their product range to supply niche markets. Larger operators have concentrated on developing styles that respond to specific lifestyle niches such as Australia's casual and informal lifestyle. Industrial footwear manufacturers have also successfully positioned their products on a platform of high safety standards. Local consumers have responded positively to these efforts and export volumes have also increased on the back of high quality safety work boots.
Rising retailer buying power
Nervous consumers are expected to hold off on discretionary purchases as the Australian economy slumps over 2009. While Christmas spending in 2008 held up strongly, as unemployment rises over 2009, Australians will limit spending, not only on footwear but across the entire retail division. IBISWorld expects revenue in the footwear retail industry to rise by only 1.0 per cent over 2008/09 while growth in the department stores industry will be a low 0.6 per cent.
Despite an expected slow retail market over 2009, larger retailers and department stores now take a more active part in the global supply chain and are able to put additional pricing pressure on suppliers and also demand quick turnaround times. The industry has become increasingly globalised, with manufacturers in Asia supplying the bulk of footwear to retailers and adding pressure on local suppliers.
Footwear retailing in Australia is also fragmented. The four largest players are the Colorado Group, which retails under Colorado, Diana Ferrari, Mathers Shoes, Pairs and Williams; Rebel Sport; Betts Group, which retails under Betts & Betts and Cecil Bros; and RCG limited (The Athlete's Foot). Together, these companies account for around 45.0 per cent of the retail market. Other significant retailers include Payless Shoes, Footlocker, the recently restructured Figgins Holdings, Rivers and Nine West. Nike also has retail outlets but is primarily a wholesaler.
Import penetration
Local manufacturers only produce a small portion of footwear bought in Australia with imports increasing their share of the domestic market. According to research by IBISWorld, imports should constitute a staggering 75.3 per cent of the domestic market in 2008/09, up from 63.7 per cent in 2003/04. China is the biggest footwear supplier to Australia. More than 65.0 per cent of footwear entering Australia originated from China in 2007/08 and nearly 60.0 per cent of all footwear in the world was manufactured there.
Italy and Vietnam are also leading sources of imported footwear. With increasing wage costs and constraints to Chinese manufacturing output levels in 2009, the rise of Vietnam demonstrates how China itself is vulnerable to wage competition. It is hard for Australian footwear to compete with Asia on price but it is just as hard to compete with Europe, especially Italy at the high priced end of the market. The 'made in Italy' tag is a significant 'value adding' component. Australian exporters who aren't trying to compete with China or Italy are finding markets. While a global economic downturn will see Australian footwear exports suffer in 2008/09, in 2007/08, exports grew by 6.1 per cent, the first year of growth since 1998/99.
Importers benefited from tariff reductions. Imports rose by 10.2 per cent in 2004/05 when the footwear tariff fell from 15 per cent to 10 per cent. When the tariff is reduced to 5 per cent in 2009/10, the spike in imports is not expected to be as high. While players in the industry have a right to be apprehensive, the nature of the industry has changed with most remaining producers in Australia competing in completely different markets to low cost Asian competitors. On the other hand, operators that relied on converting mass subsidies and government assistance to inefficiently produce low cost footwear are expected to be phased out of the economy completely.