How global supply chains are falling out of fashion

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  • Benetton moves production away from Asia as shipping costs rise
  • To boost manufacturing in Eastern Europe, Turkey, North Africa – CEO
  • Reshoring helps control the supply chain, shortens lead times – CEO
  • The clothing and consumer sectors are facing many similar issues.
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MILAN, Sep 30 (Businesshala) – Fashion brands like Benetton are increasingly moving away from sprawling supply chains around the world and low-cost manufacturing hubs in Asia, in a shift that could prove to be an enduring legacy of the COVID-19 pandemic .

Italy’s Benetton is boosting manufacturing in Serbia, Croatia, Turkey, Tunisia and Egypt with the aim of halving production in Asia by the end of 2022, bringing production closer to home, chief executive Massimo Renon told Businesshala .

Rennon gives an insight into the economics that influence a trend that has plagued much of the industry as strained supply lines have increased shipping costs and times, undermining a business model that has been around for the past 30 years. has proved popular.

“It is a strategic decision to have more control over the production process and transportation costs,” he said, adding that the group has already shifted more than 10% of production this year from countries such as Bangladesh, Vietnam, China and India.

“Today a shipping container that used to cost $1,200-1,500 may cost $10,000-15,000, with no certainty of the delivery date.”

The ten-fold jump in sea freight costs is driven by a lack of available vessels, as many were rendered unusable during the pandemic, coupled with rebounding consumer demand, said Renon, whose company does most of its sales in Europe, but produces have shifted to lower-wage countries since the early 2000s.

This shipping dispute is plaguing many companies in the clothing, and wider consumer, industry. Hugo Boss also wants to bring manufacturing operations closer to their markets, for example, while Lululemon, Gap and Kohl’s say they will rely more heavily on much more expensive air freight to avoid running out of stock during the holiday season. .

Rennon, who took over Benetton last year, is faced with the task of reviving the fortunes of the company, which made a name for itself in the 1980s with its signature bold colors.

He said that even though production costs have been 20% lower in Vietnam and Bangladesh versus Mediterranean countries, that gain was offset by a longer run due to supply disruptions.

“From an average lead time of 4-5 months, today we can get up to 7-8 months (from Asia) given the shortage of ships.”

Conversely, when clothing is produced in Egypt, deliveries to warehouses and stores in Europe can be shortened by 2 or 2-1/2 months, Renon said. He said that in case of woolen garments, which it produces in Serbia and Croatia, it may take only 4-5 weeks.

In those two countries, as well as in Tunisia, Benetton plans to increase production at its sites, while in Egypt and Turkey it is working with suppliers.

‘More things go wrong’

However, strategies differ in the clothing industry. According to the 2020 annual report, market leader and owner of fast-fashion pioneer Inditex, Zara, holds relatively close to 53% of its production in its domestic markets Spain, Portugal, Morocco and Turkey.

By comparison, its main rival H&M depends on Asia for about 70% of its production, according to analysts. Critics of this approach say it puts the company at a disadvantage to nimble rivals in terms of getting new fashions into stores.

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

For players who decide to move manufacturing closer to their markets, or “nearshoring,” the investment involved means that a reversal is unlikely in the near future.

Advisory firm AlixPartners said the shift toward more regional or even national supply chains was here to stay.

“The more global supply chains there are, the more things can and do go wrong,” it said in its report on the disruption caused by COVID-19.

New Hugo Boss CEO Danielle Grieder said this month that he expects more goods to be produced in the future where they were sold. He added that the company has its own manufacturing facility in Turkey, parts of the shoes are produced in Italy, and produced made-to-measure suits at its headquarters in Metzingen, Germany.

“We will expand this (nearshoring) significantly. Then we can react faster to trends and more flexibly to constraints. It’s a real competitive advantage,” he told Manager Magazine.

looking up at the sky

In some countries, such as Vietnam, factory closures have added to the pressure. Nike, which makes half of its footwear there, cut sales expectations last week and warned of a delay in the holiday shopping season.

Lululemon said this month it was working on moving production out of Vietnam, where possible, to reduce the woes of its supply chain by increasing its use of air freight and prioritizing production for major fall holidays. was working for

Gap says it is also investing in air freight as it deals with delayed inventory deliveries due to shipping congestion and factory closures in those countries due to the pandemic.

It’s not cheap though; Juda Levine, head of research at global freight booking platform Freightos, said carrying a full ocean container load of freight by air is eight times more expensive, while for smaller shipments it is about five to six times more expensive than current ocean freight rates.

Data from research firm Cargo Facts shows that retailers are primarily looking to use the Hawaiian option for smaller and higher-margin products such as apparel, computers and accessories and small home goods.

Other factors also play a role in the flow of emerging industry from Asia.

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

Real wage growth worldwide grew between 1.6% and 2.2% in the four years before the pandemic, with the Asia-Pacific and Eastern Europe regions overtaking the rest of Europe and North America, according to the International Labor Organization. Global Salary Report 2020/21

“The cost gap has narrowed significantly,” said Lorenzo Novella, a director at Alixparters in Milan specializing in retail, adding that high turnover among factory workers in China has also made service levels less reliable.

Benetton CEO Rennon said customers are now prioritizing quality over price.

“The rock bottom price race among apparel companies today seems to be secondary. Consumers are more quality conscious, and want their garments to last longer,” he said.

For family-owned Benetton, located in Italy’s northeastern Veneto region, the production shift is part of a drive to return to profitability. The chain, which has about 4,000 shops, 1,500 of which are directly owned and others operated by franchisees, has reported annual losses for the past eight years.

Efforts to turn it around have been hampered, even though Renon said the group believed it could be a “very good Christmas” and be back in black soon.

Reporting by Alyssa Anzolin and Sylvia Alosi; Additional reporting by Emma Thomson in Berlin, Corina Rodriguez in Madrid, Anna Ringstrom in Stockholm and Siddhartha Cavalle in Bengaluru; Editing by Praveen Charu

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