How Global Supply Chains Go Out of Style, Retail News, ET Retail

Fashion brands like Benetton are increasingly turning away from global supply chains and low-cost manufacturing centers in Asia, in a shift that could prove a lasting legacy of the COVID-19 pandemic.

Italian Benetton is bringing production closer to his country, boosting manufacturing in Serbia, Croatia, Turkey, Tunisia and Egypt, with the aim of halving production in Asia by the end of 2022, told Reuters chief executive Massimo Renon.

Renon provided insight into the economy behind a trend affecting much of the industry, as strained supply lines pushed up costs and shipping times, undermining a business model that has proven to be popular over the past 30 years.

“It is a strategic decision to have more control over the production process and also over transport costs,” he said, adding that the group had already transferred more than 10% of its production out of countries like Bangladesh, Vietnam, China and India this year.

“Today, a sea container that cost between $ 1,200 and $ 1,500 can cost between $ 10,000 and $ 15,000, with no certainty as to when it will be delivered.”

The tenfold increase in sea freight costs was due to the scarcity of available vessels, as many of them were inactive during the pandemic, as well as a resumption in consumer demand, said Renon, whose company achieves most of its sales in Europe but has shifted production to a lower level. wage countries since the early 2000s.

This shipping dilemma is upsetting several companies in the clothing sector, and more generally in the consumer sector. Hugo Boss is also looking to bring manufacturing operations closer to its markets, for example, while more immediately Lululemon, Gap and Kohl’s say they will rely more on much more expensive air freight to avoid stockouts during the season. holidays.

Renon, who took the helm of Benetton last year, is on a mission to revive the fortunes of the company that made a name for itself in the 1980s with its bold colors.

He said that even though production costs remained 20% lower in Vietnam and Bangladesh compared to Mediterranean countries, this advantage was offset by longer lead times caused by supply issues.

“From an average of 4-5 months, today we can reach 7-8 months (from Asia) due to the lack of ships.”

In contrast, when the clothes are produced in Egypt, delivery to warehouses and stores in Europe can be shortened to 2 or 2 and a half months, Renon said. In the case of woolen clothing, which it produces in Serbia and Croatia, it can take just 4-5 weeks, he added.

In these two countries, as well as in Tunisia, Benetton plans to ramp up on its own sites, while in Egypt and Turkey it is working with suppliers.

Strategies vary in the clothing industry, however. Market leader and fast-fashion pioneer Inditex, owner of Zara, bases 53% of its production relatively nearby – in its home market Spain, Portugal, Morocco and Turkey, according to its 2020 annual report.

By comparison, its main competitor H&M relies on Asia for about 70% of its production, according to analysts. Critics of this approach say it puts the company at a disadvantage over its more nimble rivals in terms of bringing new fads to stores.

H&M declined to comment before its quarterly results Thursday, while Inditex did not respond to a request for additional information about its supply chain.

For those players who decide to move manufacturing closer to their markets, or “nearshoring”, the investments involved mean that there is unlikely to be a reversal in the near future.

Consulting firm AlixPartners said the shift to more regional or even national supply chains is here to stay.

“The more global the supply chains, the more things can and will go wrong,” he said in his COVID-19 disruption report.

Hugo Boss new CEO Daniel Grieder said this month that he expects to produce more products closer to where they are sold in the future. He added that the company has its own manufacturing plant in Turkey, produces shoe parts in Italy and bespoke suits at its head office in Metzingen, Germany.

“We will expand this (nearshoring) considerably. Then we will also be able to react more quickly to trends and more flexibly to bottlenecks. It is a real competitive advantage,” he told Manager Magazin.

In some countries like Vietnam, plant closures have added to the pressure. Nike, which makes about half of its shoes there, lowered its sales forecast last week and warned of delays during the holiday shopping season.

Lululemon said this month that he is working to move production out of Vietnam where possible, increasing the use of air freight and prioritizing production for major fall holiday styles so alleviate problems in its supply chain.

Gap says it is also investing in air freight as it faces inventory delivery delays due to transportation congestion and factory closures due to a pandemic in countries from which it sources.

It’s not cheap, however; Shipping a full sea container of cargo by air is more than eight times more expensive, while for small shipments it is about five to six times more expensive than current ocean freight rates, said Judah Levine , head of research at the global freight reservation platform Freightos.

Retailers are primarily looking to use the overhead option for smaller, higher-margin products such as clothing, computers and accessories and small household items, data from research firm Cargo Facts showed.

There are also other factors at play in Asia’s nascent industrial drift.

Even before COVID-19, rising labor costs in the region were shaking its low-cost luster for Western brands.

Real wage growth around the world rose between 1.6% and 2.2% in the four years leading up to the pandemic, with growth in the Asia-Pacific and Eastern Europe regions surpassing that of the rest of the world. Europe and North America, according to the International Labor Organization. Global salary report 2020/21

“The cost gap has narrowed significantly,” said Lorenzo Novella, director at AlixPartners in Milan specializing in the retail sector, adding that the high turnover of factory workers in China also made the level of less reliable service.

Benetton CEO Renon said customers now also prioritize quality over price.

“The race between clothing companies for the lowest prices now seems to be secondary. Consumers are more quality conscious and want their clothes to last longer,” he said.

For family business Benetton, based in Italy’s northeastern Veneto region, the change in production is part of an effort to return to profitability. The brand, which has around 4,000 stores including 1,500 own and the others franchised, has posted an annual loss for eight years.

Attempts to turn the tide have been hampered by the pandemic, though Renon said the group was confident they could have a “really good Christmas” and be back in the dark soon.

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