The Industry Changes Overnight

October 30, 2009

In this month’s Harvard Business Review, on page 20, it says, “Managers may believe that industry structures are ordained by the Good Lord, but they can – and often do – change overnight”, Peter F. Drucker, “The Discipline of Innovation”, HBR, May-June, 1985.

1985, huh.

Where were you in the ‘apparel’ industry in 1985, a mere 24 years ago? How many department store chains existed regionally and nationally in the US? How many US apparel factories, owned by brands and independent contractors, did we have (and where were these producers located)? Can you remember all the textile mills, many of which were easy to spot from I-85? And, how easy was it for you to get a pair of Levi’s?

Well, it changed and its changing. As the bumper sticker says, “SHIFT HAPPENS”.

When I came into this industry with IBM in 1990, and did my research to learn the job, I began giving talks about the big 3 trends I found – Globalization (this was 4 years before NAFTA but they were already lobbying for it); Consolidation (we were seeing brands buy brands and retailers merge); and Computerization (VERY self-serving, because this was my job – and my hero back then and into today remains Alan Brooks of NGC, one of the industry’s earliest application software innovators).

Well, you can give this same talk today can’t you. It goes like this - the world is flat; there’s Walmart and not-Walmart; and the internet has set you free.

But the key takeaway for me is the phrase, “Managers may believe that industry structures.....”. Are there industry structures? Really? That would imply there are strategies, there is clarity, there is some stability and predictability. Is there? Or are we still chasing the low cost needle in what-have-you-done-for-me-today mode? For those few who go back to 1985, there is the conviction, as Mark Twain put it so well, “history does not repeat itself, but it does rhyme”. Here is how it rhymes for one.

An AAPN member wrote me a personal email saying, “Many merchants are only used to costs going down. The customer has been trained to this also - they now believe that each year they will be able to get more features and higher quality at a price lower than the year before. But the cold reality is that inflation is coming. And in this current economic environment with unemployment still increasing, it will be difficult for the customer to swallow a higher retail price. So the retailer will be challenged with margin pressure. We have not had to deal with an environment like this in decades - most retailers have never dealt with it due to their age. We are all naive if we think we will be able to continue to obtain lower costs. We are going to have to pay more, plain and simple.”

These comments segue nicely into those Marshal Cohen of NPD made recently at MAGIC, “Retailers don’t know enough to know where the problem is in the chain. They are just now figuring out they do not have the answers and many are getting in over their heads. The advantage is in sourcing and production. There needs to be a new measurement for senior management – not how cheap you got it but if it sold. Retailers are stunned when things get stuck in a part of the pipeline they don’t understand, and this crosses all departments like it crosses the whole chain. Sourcing knowledge – the lack of understanding of sourcing is the issue – this is where you reach out to the people who do know, the professionals.”

Well, these retailers are in luck. The professionals they seek are right here in AAPN, some 600 of them from 180 organizations across all 40 links in our chain. One email from us to them and within minutes, definitive answers back to you. Today, in the internet age, one proven form of an ‘industry structure’ is our instant network of skilled and experienced professionals that gets results. It is how we tie them together that sets us apart.

Since 1981, AAPN continues to find and receive, centralize, accumulate, consolidate, analyze, interpret, distribute then add to our unique library of exclusive industry insights from owners and executives on the ground floor, some of whom go all the way back to 1985. So, yes, the industry does change overnight.......but we catch it in the morning.

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Global sourcing in a world less flat

October 28, 2009

There is passage in an article in McKinsey which says, “Security, safety, and environmental regulations could become new forms of protectionism.” In other words, we will not source from your country because we do not think it is safe or healthy.

Does this mean the opposite could also be true, “that we WILL source from your country because we assign VALUE to the level of safety, security and compliance we see there”. In other words, we are delighted to pay more – higher value means lower risk!

What are the chances of that? Has the needle reached the lowest cost country left on this planet? Will inflation begin to increase the costs of sourcing and the costs of products and the price of garments at the same time high unemployment rocks the very definition of the ‘typical’ American consumer?

As an executive wrote us here earlier today, “Many (retailers) are only used to costs going down - look at the long history of retail prices going down year after year. The customer has been trained to this also - they now believe that each year the cost of a garment will be lower and they will be able to get more features and higher quality at a price lower than the year before. But the cold reality is that inflation is coming. And yet retailers and consumers still have the expectation that retail price tags will remain the same, not increase, and the cost of the garment will be less.”

Interesting challenge isn’t it. How to balance the ever-shifting risks of buying with the abstract chances of it actually selling.  

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The San Andremart Fault

October 15, 2009

Two tectonic plates are colliding in the apparel industry, one sliding beneath the other, that is causing all sorts of trembling and destruction around the world, in nations, and in factories.

One plate is all of the costs of the apparel-producing nations and regions themselves and the owners of the production within them.

The other plate is unrelenting pricing pressure from apparel brands and retail.

The nation plate is the heavier of the two, consisting of massive public sector investments in what only the country can do – infrastructure, roads, finance, energy, logistics, et al – and what the private sector must do – investments, compliance, sustainability, modernization. Back ‘in the day’, all apparel factories did was sew and margins were enormous. Now all they do is invest and the margins are slim to none.

The customer plate is characterized by this quote from the article In Recession, China Solidifies Its Lead in Global Trade, October 13, 2009, NYTimes, “The buyers are getting more and more tough in bargaining for lower prices, especially American buyers....They offer $2.85 per pair of jeans for a package of a dozen, when the reasonable price is $7.”

$2.85 for a pair of jeans. Is this possible? All that denim? The special thread? The zippers? The tags? The pocketing? Cutting? Sewing? Finishing and finishing and finishing some more? The cafeteria? The benefits? The wages? Water treatment? The energy costs? $2.85?

I call this the San Andremart Fault, not that it is the fault of any one mart. But there is fault. And the plates are most definitely colliding. And Asia has every plan to be the big one left standing.

Do you read the China Daily News? We do ever since traveling there several years ago. One sample article is http://www.chinadaily.com.cn/cndy/2009-10/15/content_8795284.htm

Another article is titled "Integrated travel network crucial to masterplan" which lays out how China is linking together its various production regions. They have spent $20 billion on roads each of the last 5 years with no end in sight. You have to see them to believe them, and we have. The fact they have a masterplan and are so successful in implementing it should be a huge cause of concern to those regions in the ‘land of not-China’.

Yet another article is "Future 'city clusters' envisioned for vast economic heartland". These are the supply chain cities they are already famous for building such as ‘tire city’, and ‘golf club city’ and on.

And finally we saw where China, Japan and South Korea are now actively in talks to establish an "East Asia Community". There go those pesky Asian Five Year Plans again – plan your work, work your plan. Can you imagine a US/Canada/Mexico/Caribbean/Central American/Andean ‘Community’ that would work as the Asians intend to create theirs? What a chase mode, fast fashion, full package, screamingly fast replenishment production machine that could become.

So, given all of this, I ask you, is the problem in this hemisphere the plates or is the problem the faults? And of whom?
 

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