Inside Sourcing

To survive through Q1 2023, retailers and suppliers will need to redefine how they collaborate in order to reduce risk for both parties.

The Situation in December 2022

The biggest challenge that both brands and suppliers are facing right now is the still high levels of inventory.

Despite retailers’ efforts since late July to clear some of the excess stock, warehouse inventory levels (relative to sales) remain well above last year. At the same time, retail sales are lackluster, with only a few brands reporting significant sales growth – and even fewer showing a profit.

Heavy discounting that is expected to continue through January will do little to shore up retailers’ bottom lines.

A backed up pipeline is bad news for suppliers as orders are likely to decrease and price pressure will be back in full force.

Then there’s the issue of potential retail bankruptcies, even slower payment of orders – and a consolidation of suppliers. In other words, things are likely to get worse before they get better.

The good news is that the logistics issues that plagued the industry during the pandemic are settling down. Carriers have tried to support higher rates, but the serious drop in demand has forced them to back down.

Likewise materials prices are easing up as demand continues to remain soft.

Right now it’s interest rates that are causing concern, making carrying costs for retailers and brands most costly as well as risky. For suppliers, who are already working with reduced margins, rising interests could be fatal for some.

To survive through Q1 2023, retailers and suppliers will need to redefine how they collaborate in order to reduce risk for both parties.

While retailers and brands are inclined to push harder on suppliers when times are tough, if they push too hard they might find themselves scrambling to find new factories. Not an optimal position to be in under the current situation.

5 Signals We’re Watching

Excess inventories. Will retailers be able to get stock levels to where they should be in early Q1 2023?

Logistics level off. Rates and capacity are close to pre-pandemic levels. Could low demand force carriers to compete for containers?

Consumers cope with inflation. While most consumers are reducing spending, will this lead to a greater shift to value retailers or by investing in apparel with greater durability. This will be particularly relevant for middle income consumers.

Can suppliers continue to finance brands? Payment terms have been pushed so far out that factories have become financial institutions – but without the advantage of earning interest or having collateral to back what are essentially loans.

Evolving China. With Mr. Xi firmly in place and early signs of a relaxation of Zero-Covid, what might working with China look like in the next few months.

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CHINA

EXPORTS China’s garment industry registered steady expansion in terms of revenue, profits and exports in the first nine months of this year, data from the Ministry of Industry and Information Technology showed.

The combined operating revenue of the country’s 13,155 major apparel enterprises reached $148.85 billion in the period, up 2.2 percent year on year, according to the ministry.
These companies raked in total profits of $6.84 billion in the January-September period, up 1.8 percent over one year ago.
During the same period, garment exports of the sector surged 14 percent year on year to $118.5 billion, the data showed.

COMPETITIVENESS China has made developing its domestic market a top priority. In a report delivered at the opening session of the 20th National Congress of the CPC, Xi Jinping, general secretary of the CPC Central Committee, stressed the need to integrate the implementation of the strategy to expand domestic demand with efforts to deepen supply-side structural reform.

Experts said the proposal has outlined the path for China to ensure stable economic growth and lift the quality of development in the coming five years, with a focus on expanding demand in areas that are in line with high-quality development goals and matching the demand with a better-structured supply system.
Cheng Shi, chief economist at ICBC International, said this integration has become necessary for boosting domestic demand because the principal contradiction facing Chinese society has transformed into one between unbalanced and inadequate development and the people’s ever-growing need for a better life.