Manufacturers, brands and retailers in the post-covid world
We can be optimistic that consumers and companies will continue to buy and sell products as the world recovers from, or perhaps learns to live with, covid-19. It seems unlikely, though, when it comes to denim, and clothing in general, that we will just pick up from where we left off.
When Stefano Aldighieri, president of Another Design Studio, spoke at the ‘What Next For Denim’ webinar by Denims and Jeans, in May this year he said it was essential that the denim industry start “looking at the definition of partnership again”. Mr Aldighieri has seen the denim industry from every angle. Now the president of Another Design Studio, his career started at an Italian denim mill and has since included included roles such as design director for Levi Strauss & Co and creative director for 7 for All Mankind. Right now, as so many customers “have shifted into panic mode”, he says, “partnership is out the window”.
The covid-19 pandemic has made clearer than ever the interdependence of every link in the denim supply chain. When lockdowns began, consumers dramatically slowed their spending; as a result, fashion retailers found themselves with clothes they could not sell. Many of those retailers thus began cancelling or halting orders from their suppliers. Suppliers, who typically acquire fabrics and raw materials up front, found themselves in possession of worthless, completed and in-progress orders, nothing in the pipeline, in debt to their own suppliers and unable to pay their workers. Partnerships, it appears, have indeed gone out the window.
Cancel culture
A report on the impact of covid-19 on workers and businesses at the bottom of global garment supply chains, published in late March by the Center for Global Workers’ Rights (CGWR), said that more than half of Bangladeshi suppliers had seen most of their in-process or completed production cancelled, despite contracts with buyers. Some 72% of buyers had said they would not pay for raw materials already purchased and 91.3% refused to pay for production costs. More than half — 58% — of factories had to close down most or all of their operations.
In late April, the Bangladesh Garment Manufacturers and Exporters Association reported that export orders worth almost $3.2 billion had been cancelled or suspended, affecting 2.28 million workers. In response to these catastrophic numbers, the Worker Rights Consortium (WRC) — an independent labour rights monitoring organisation — has been working with CGWR to maintain an up-to-date account of which companies are or are not cancelling, halting, or demanding discounts for existing contracts. The resulting tool, the Covid-19 Tracker, seeks to answer the question: which brands are acting responsibly toward suppliers and workers?
The tracker divides companies into categories depending on whether they have or have not made commitments to pay in full for orders completed and in production. In some cases, the entry includes additional information about the companies’ relative financial health and why their decisions seem particularly unjust; one major company, for example, was said to have cancelled more than a billion dollars in orders in March, then went on to pay a $109 million dividend to shareholders the following month.
Disaster movie
WRC is not alone in highlighting the problem; the devastating impact of abandoned contracts has been widely covered, with Mostafiz Uddin emerging as a face of the devastated Bangladeshi fashion manufacturing industry. Mr Uddin, founder of Denim Expert, is a well-known pioneer in textile manufacturing, in his country and globally. His denim factory, built in 2009, was designed with then-unprecedented safety standards. He is outspoken on issues of sustainability (Denim Expert was the first in Bangladesh to be part of the Sustainable Apparel Coalition, the UN’s Framework Convention on Climate Change and ZDHC) and social responsibility (among his 2,000 employees are transgender, disabled and minority workers). He has the credibility and the platform to be a voice for the bottom of the supply chain.
In May, Mr Uddin told UK newspaper, The Independent, that Arcadia Group, whose brands include Topshop and Miss Selfridge, had cancelled orders with Denim Expert for hundreds of thousands of pieces of clothing — and he’d been informed that items already shipped would be subject to a 30% discount. This, Mr Uddin said, would wipe out his mark-up of 5%-10% (his company’s competitive wages and sustainable operations leave only small margins). At the same time, he said the Edinburgh Woollen Mill Group (EWM) had cancelled orders with Denim Expert for tens of thousands of pieces and said they expected discounts of 70% on millions of pounds worth of pieces already made. (Arcadia and EWM have disputed some of Mr Uddin’s descriptions and Peacocks, a retail chain owned by EWM, has said that when the pandemic hit, the company had already paid for the majority of future stock.)
Talking to The Guardian in June, Mr Uddin said he felt like he was in a disaster movie. He had, at that point, managed to pay his workers and employees for March, April and May by taking out loans from the bank, and borrowing from friends and family. In addition to voices like Mr Uddin’s and the WRC’s tracker, social media hashtags like #payup have helped to spread stories of broken links between retailers and manufacturers.
Badge of honour
The pressure seems to be paying off. While H&M and Inditex led the way, promising early on to honour their contracts, Gap and Levi’s more recently made reversals on early decisions to cancel orders. Gap, according to WRC, was originally on the naughty list because it had cancelled some orders, imposed significant discounts on others, and extended payment terms without providing low-cost financing to affected suppliers. However, in early July, Gap reversed its approach and agreed to pay in full for all orders previously subject to cancellation or discounts.
“Given that the corporation has faced more severe challenges during the crisis than those confronting some of its competitors, and given the large volume of orders at stake,” says WRC, “it is to Gap’s credit that it has made it a priority to honour its obligations to suppliers and workers related to past orders.”
Trust is low
As stores begin to reopen in many countries, commerce is slowly reawakening and the supply chain is coming back to life. But the repercussions remain. Suppliers and banks are now wary of the manufacturers; manufacturers are now wary of some of their major customers. “I understand that when your back [is] against the wall, you have to try to save your skin and it’s easier to look at the immediate problems that you face now,” says Mr Aldighieri, “but all these partnerships we’ve been talking about are pretty much moot right now.” He feels the denim industry needs partnerships more than ever, from the brands and retailers through to finished product factories and textile suppliers. “We all have to work together because that’s the only way to get out of this,” he says. “We can’t keep passing the buck down the line and just allow the lowest part of the operation to suffer the most. That’s just not right.”
The myth of seasonality
If pandemic-induced cancellations revealed glaring vulnerabilities in the current manufacturing norms, they also generated new ideas about what manufacturing should look like moving forward. Both Mr Aldighieri and Mr Uddin have said the industry needs to move toward producing lower quantities of clothing. Piles of unpurchased and undelivered jeans and fabrics have risen higher than ever in these recent months, but the problem of waste predates covid-19.
“We will have to look into rationalising fabric and garments because it’s quite frankly out of control,” says Mr Aldighieri. “How many fabrics have you made over the history of your company – maybe 15,000? How many of those are really, truly different fabrics? We end up looking at incredible amounts of stocks and inventories piling up all over the place.” There’s nothing implicitly wrong with this, he adds, but he feels the denim industry should re-examine the belief that product “has to be new at all cost”.
Much of this comes from the idea of seasonality, which he believes is an unnecessary construct as the same jeans can be worn year round. “We’re going to be forced to look at these things more rationally and a reduction in quantity will come as a consequence,” he points out. The answer is not to suddenly raise prices on everything, he warns, as many customers cannot afford to buy expensive clothes. But the consumer should be better educated: “We’ve [let consumers] believe it was okay to buy disposable stuff. People should realise that it’s not. If you buy cheap stuff, you end up spending a lot more because you’re going to have something that is not going to last.”
Moving to lower MOQs
Mr Uddin wants to see a shift toward lower minimum order quantities (MOQs). In an editorial for India’s Daily Star, he writes: “Covid-19 has brought forward many conversations that should have been happening anyway. We are producing too much clothing and we have to slow down.” Lower MOQs, he says, will allow suppliers to be more flexible in their offerings and able to respond to demands for smaller, niche products. Smaller batches would also accommodate some of Mr Uddin’s other expectations for the future of manufacturing: consumer habits and priorities are changing and it will become more difficult to forecast volumes.
Furthermore, he anticipates manufacturers will need to offer shorter lead times. “A rationalisation of the industry at our end is inevitable, and suppliers will have to respond accordingly,” he writes. “Those who survive in the new landscape will be the cream of the crop.”
The coming months are going to be challenging for the manufacturing sector, he says. “We have all spent the past few months licking our wounds as orders have dried up and customers have failed to pay their bills,” Mr Uddin writes in his editorial. “To survive and to be successful it’s essential to have close cooperation and partnership between buyers and manufacturers. Problems need to be solved together and successes should be shared together. Only then it will be possible to be powerful and flexible.”
Ongoing retail battle
The challenges are likely to remain not just for months, but for years. In comments at the end of July, Dr Tedros Adhanom Ghebreyesus, director-general of the World Health Organisation, said this pandemic is “a once-in-a-century health crisis, the effects of which will be felt for decades to come”. It is already clear that none of the big fashion retail groups, all of whom sell large volumes of denim, are emerging unscathed from this first wave of covid-19. And if Stefano Aldighieri is correct and the volume of garments that we make and consume needs to decrease, the blows will continue to land on retailers because, obviously, this will also mean a fall in the volume of clothes they sell.
Any weaknesses that those large retail groups already had in their armour are now showing up as starkly as indigo dye in a bank of snow. Changes in the way they operate that they were planning to bring in over this decade are happening sooner, some of them at top speed.
Online to be 25% of Inditex sales
At the top of the fashion retail tree with sales revenues of around $33.5 billion in 2019, Inditex experienced a 44% fall in revenues in the first quarter of 2020. In this period, almost 90% of Inditex’s 7,400 stores around the world had to close. The group’s home country, Spain, was one of the hardest-hit by covid-19 in the first half of the year and Inditex used its transportation links to bring 150 million pieces of personal protective equipment into the country from China. It donated equipment worth €25 million.
Over the first quarter, its online sales increased by 50% in the quarter and in the month of April, online sales registered growth of 95% compared to the same month in 2019.
Since then, Inditex has talked consistently of recovery and its plans for the future. It makes it clear it will have fewer shops; it says it intends to “absorb” between 1,000 and 1,200 of its smaller, older stores into a network that will, in the end, comprise between 6,700 and 6,900. The stores that remain, and new stores it opens in the next few years, will be bigger and more integrated with the group’s online sales efforts.
Those that it “absorbs” (this, obviously, just means “closes”) will mostly be stores that bear the names of brands other than Zara (Inditex’s other brands are Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe). The group has said it will invest €2.7 billion in this transformation between now and 2022. By the end of that time-frame, online sales, which currently account for 14% of all group revenues, will represent one-quarter of all Inditex sales.
H&M reacts to rapid change
The covid-19 experience so far of the world’s second-largest fashion retail group, H&M, mirrors this. The Swedish group achieved sales revenues of $26.7 billion in 2019. In the first six months of its current business year, spanning the period from December 2019 to May 2020, it reported a fall in sales of 23%. In the second quarter, March to May, the decline was 50% year on year. By mid-April, around 80% of H&M stores around the world were temporarily closed. However, in the first half, online sales increased by 50%. H&M began 2020 with around 5,000 stores. It had a programme of closures in place already, but as a result of covid-19, it will “increase the pace” of this programme. By the end of this year, it will have closed 170 stores, although it will also have opened around 130 new ones.
In late June, chief executive, Helena Helmersson, said sales had begun to recover and at a faster rate than H&M expected. She said that, to meet “the rapid changes in customer behaviour caused by covid-19”, the group would accelerate its digital development, “optimising the store portfolio and further integrating the channels”.
State of emergency
Third in the ranking, and following hot on the heels of Inditex and H&M, is Japanese group Fast Retailing, parent group of Uniqlo. For the business year ending in August 2019, this group posted revenues of $20.9 billion. Its sales in the first nine months of the current financial year, the period from September 2019 to May 2020, registered a decline of 15.2%, and for the covid-affected third quarter, the fall was 39.4%.
Many of its stores had to close or open only for reduced hours during this period, which coincided with Japan’s Golden Week, the days in late April and early May when a number of festivals coincide, travel is popular and retailers enjoy one of the busiest periods of the year. Usually. “We didn’t incorporate the declaration of a state of emergency in Japan into our business estimates,” Fast Retailing has said. As in the case of its rival retailers, it witnessed an increase in online sales of almost 50% in that third quarter.
It insists business is picking up across the board now; since mid-May stores have reopened and customers have returned. Same-store sales in Japan for the month of June registered growth of 26.2% year on year.
Perhaps we will see the return of heaving high streets and packed stores, of frequent leisure and business travel to other cities and other countries, with shopping one of the most popular visitor activities. But perhaps we will not. This is about survival of the fittest and it seems clear from the immediate actions of major retail groups that the fittest will have fewer physical shops than they have now and that they will continue to put strategies and technology in place to try to make the most of the move to online shopping. It is, however, too soon to say what the new landscape that Mostafiz Uddin refers to will look like.
