This blog is based on an article which was first published on the Fashion United platforms 

As the pandemic and the war in Ukraine have placed intense stress on global supply chains, purely efficiency-based models have shown their limits in the fashion industry. Since then, luxury and fashion players have pivoted their business models to build their resilience for tomorrow, and beat the impact of inflation, while they also need to anticipate regulatory shifts in terms of sustainability to plan for the future.

Increased inflation places extra pressure on fashion businesses

After the pandemic revealed the limits and risks of the cost-based global fashion supply chains overreliant on China – which accounts for half of the global value of apparel and footwear production – the all-time high inflation seen in 2022 and 2023 has worsened the situation for market players.

On the one hand, brands and retailers have felt the pressure of the increasing cost of goods (COGS), while on the other hand, they do not want to risk eroding their volume sales by passing all these costs to consumers whose budgets are being squeezed.

Nearly 40% of global respondents stated their plans to decrease their spending on apparel and footwear in the next 12 months

^{Source: Euromonitor International Voice of the Consumer: Lifestyles Survey 2023}

The high inflationary environment has turned pricing strategy into a balancing act

The high inflationary environment has, in fact, turned pricing strategy into a balancing act. The Euromonitor International Apparel and Footwear Inflation Tool shows that, in the case of apparel, costs were generally passed on to the consumer during the first 18 months of the pandemic (March 2020-September 2021), but since then, brands have been absorbing these costs and sacrificing margins, with a 12-percentage-point gap, on average, between March 2022 and March 2023.

If the decreasing trend for COGS continues, June 2023 will be the inflection point and industry players will have to decide if it is time to recover some of the lost margin or if they should lower prices to gain volume sales instead.

Geopolitical considerations are driving a realignment of global investments

Political instability is further accelerating the need for international companies to reduce their reliance on China for production, due to the country’s answer to the war in Ukraine diverging from that of the US, and the uncertainty around its intentions towards Taiwan, not to mention the diplomatic damage caused by the Xinjiang cotton scandal in 2021.

In that context, the map for global investments is being redesigned while government initiatives also weigh in, starting with the US Government’s “Call to Action for Northern Central America”, launched in 2021. That call for action encourages regional sourcing and production in the textile industry, and now counts commitments of over USD3.2 billion from US-based private businesses.

More generally, since 2020, fashion players have been relying less on China and expanding their pool of suppliers to other manufacturing hubs in Asia – in particular, India, Vietnam, Thailand, the Philippines and Indonesia – but they are also seeking to develop proximity tracks closer to their end markets. For instance, US footwear brand Steve Madden has shifted 50% of its production to Brazil and Mexico to serve its core market, the US, away from Asia.

Another great example of the emergence of more regional supply chains is that of Spanish retailer Mango, which has developed alternatives to China through a “twin-track” supply chain. Asia is now the “long distance” track, producing basic pieces such as T-shirts, which usually take 6-8 weeks to be shipped to Europe. The “proximity” track consists of factories in Turkey, Romania and Morocco, where the retailer produces more trend-driven items aimed at the European market. The company is also looking to build a “proximity” track in Mexico and Latin America to serve the region and US market.

The new sustainability imperative fuels material innovations

Companies also need to anticipate new employment and environmental laws to plan for their future, since regulation in this regard is set to tighten, starting with the EU Strategy for Sustainable Textiles. This changing regulation combined with the growing scarcity of raw materials and their rising costs is leading fashion businesses to explore the potential of new materials.

Hence the flurry of new man-made biomaterial innovations that allow cruelty-free but also chemical-free and plastic-free claims. For example, Inditex has acquired 30% of Infinited Fiber Company’s annual future production volume of Infinna, a cellulosic fibre made from 100% textile waste, which can be recycled again, together with other textile waste, and is biodegradable. Simultaneously, the Spanish company has introduced the “Zara Clothes Collection Programme”, encouraging customers to return unwanted clothing in-store. Returned clothes are, for now, mostly sold as second-hand clothes on Zara Pre-Owned or given to charities, but could ultimately be used as raw materials, and allow more regional production if recycled fibres such as Infinna become mainstream, in the future.

Tomorrow’s supply chains look less global and more regional

Given the current market environment, and persistent impact of inflation on production and consumers, we anticipate that supply chains will continue to operate in offshore production environments where cost is important, but will also increasingly build quasi-independent regional supply chains in various parts of the world, to provide a hedge against future shocks.