Looking back at 2019, one can sum up the state of the Retail industry with two words: “Disruption” and “Uncertainty” and many agree that 2020 will be no less volatile. Undoubtedly, there are seismic shifts that are redefining the Retail world but as we enter the next decade, what are the immediate trends that are likely to shape retail supply chains in 2020?
Amidst the technological transformation that is redefining everything - from customer behaviour to product design - over the next decade, we believe that the following 5 key themes will have the most significant impact on Retail supply chains in 2020. These themes will drive much of decision-making around hiring and organizational change.
1. Trade War
The U.S-China trade deal in January marks a step in the right direction. Despite this, uncertainty still looms over what has become an increasingly confrontational trade relationship. The continued uncertainty has accelerated the shifting of supply chains out of China. At the same time, sourcing strategies are under constant review, while production and sourcing costs are increasing. The tariff war is far from over and it continues to hurt brands, retailers, logistics providers, and companies throughout the supply chain
Unlike China, which has a highly developed manufacturing infrastructure, many of the new sourcing countries are struggling to meet quality measures in the face of new volume demands. This has caused companies to go back to basics when it comes to onboarding new suppliers and ensuring expectations are being met.
As you move to other factories in South East Asia, there will be quality issues, production delays and increases in shipping via airfreight. These are the challenges that will come along with off shoring any sourcing or massive production, and that will continue to eat into margin and create more complications.
Vietnam has been the main beneficiary of the US-China trade war as a cheaper and reliable production hub. However production capacity is limited and many foresee a bottleneck taking place in the next 12-18 months.
Many Major Fashion Brands that are investing in operations in Vietnam are also struggling to find good talent comparable to what is available in China or Bangladesh. There is a real dearth of local professionals with international manufacturing expertise, as well as the ability to collaborate and communicate effectively with Design and Development teams in the Retail capitals of the world. We forecast that this trend will increase in 2020 and beyond.
2. The Battle for Margin
In 2020, supply chains will have to continue improving efficiency if there’s any hope of offsetting the costs that come with these trade uncertainties and tariffs.
Whether you operate an office in Shanghai, Hong Kong, Ho Chi Minh or Dhaka, or use partner agencies elsewhere, will depend on what is the most cost effective solution for your business. Factors to consider are proximity to your supplier base, ease of regional travel, availability of talent, tax benefits, and admistrative flexibility. What we are discovering is that the salary gap for talent between locations is closing very fast, so cheaper personnel costs are no longer a long-term rationale for relocating your sourcing operation.
In 2020, we are likely to see increasing localization in Asia on the back of shrinking of Sourcing & Production teams in the US and Europe. Moreover, we estimate that there will be a steady growth of functions in Asia within strategic sourcing, product development, costing, engineering, technical and quality assurance. Entire end-to-end production operations based in Asia speaking directly to Design and Marketing situated closer to the customer are also becoming more likely.
As companies look to reduce costs, it is going to be about rethinking the back office, giving greater responsibility to factories overseas and leaving big cities for showrooms designed to sell. There is going to be a lot of re-organisation of product supply chains to ensure the most cost effective structure that is both ‘Lean’ and ‘Agile’.
In 2019, we saw an expansion in strategic costing functions in Asia. We believe this trend is likely to continue, as anything that is likely to impact margin will come under pressure in 2020, so greater visibility of end-to-end costs will become paramount. Whether its wages set to rise in certain countries, or increasing raw material costs as the demand for more sustainable alternatives, supply chains will very likely spend more in the coming year.
According to President of The Sourcing Journal, Edward Hertzman, “Raw material costs are going to eat into margin, as well as logistical costs, cross border commerce and returns. Fulfilment companies will have a hard time trying to figure out, when you buy something online and return it, does it go to a store or does it go to a fulfilment center.
Hertzman says - "There’s still a lot of costs doesn't see any place in the industry where there is likely to be relief when it comes to margin. What’s more, the fact that apparel and footwear companies can’t get the markdown equation right as they battle with inventory imbalances, will likely continue to squeeze margins in 2020.
“The single largest expense to any retail supply chain is not tariffs nor returns, its markdowns,” Hertzman explains. “And until retailers get inventory levels under control, they are going to continue to have margin compression everywhere.”
3. Sustainability to Traceability
In the past several years, consumers have become increasingly aware of fashion’s impact on the environment. As a result, many are deciding to spend their money on cleaner, more conscious brands.
In December 2018, nearly 50 industry-leading brands signed onto the UN Fashion Industry Charter for Climate Action and have pledged to meet science-based targets for emissions and resource-use etc. In 2020, we expect to see more companies across the value chain—brands, retailers, and manufacturers—setting science-based climate change targets.
According to the McKinsey Retail Survey, sustainability will be 2020’s single biggest challenge for the industry and simultaneously its single biggest opportunity.
The critical focus for 2020 should be honing in on a clear definition of sustainability and communicating that message to customers, many of whom currently indicate that they cannot distinguish brands that are sustainable from those that are not.
In fact, ‘Green-washing’ has become a major problem, as many brands are over-exploiting the interest in sustainability, using it as a buzzword marketing strategy whilst still maintaining the existing wasteful model of production. Greater transparency is called for by consumer groups who demand to know the water footprint, carbon emissions and factory workers’ right and welfare of the garments they buy.
Ensuring the integrity and trust-ability of this information will be a major challenge going forward. We estimate that there will be an increasing investment in sustainability and compliance functions in Asia going forward. However, as brands and retailers work toward their 2020 or 2025 sustainability goals, they will not be able to leave traceability out of the conversation.
The President of Sourcing Journal, E. Hertzman, believes in the concept of “Traceability”, a word that should replace sustainability as the big word of the year in 2020. “Without traceability, you can’t be sustainable,” Hertzman claims. “This needs to be the topic that’s discussed in 2020—how are we going to prove that we’re sustainable and build a business that could be sustainable at scale?”
4. R&D Materials Revolution
In response to demand, brands and retailers are looking into low-impact inputs for the products they are putting into the market.
According to McKinsey Retail Survey, 67 percent of respondents indicated that more innovation in sustainable materials will be on the agenda for their company in the coming year. Globally, companies filed eight times as many fiber innovation patent applications in 2019, compared to that of 2013, which is further expected to rise. Silks and cellulose are also expected to become the biotech focus, experts in the report found.
In 2019, we saw a spike in new vacancies for in-house Raw Material experts who are bridging the gap between fabric innovation and product design - another trend of which is forecasted to grow over the next year onwards. We expect that R&D will increasingly focus on materials science for new fibers, textiles, finishes and other material innovations to be used at scale.
There is a big push in moving away from petroleum-based plastics, dyes and polyesters, which seems to be pioneered by smaller brands and/or start-ups. Heading into 2020, many predict a heavy adoption of natural materials like organic cotton, hemp and linen, by mainstream brands. Additionally, other bio-based fibers are due to take prominence - for instance the wood pulp-derived Tencel Sorona - a performance fiber made from fermented sugars, as well as fibre from recycled plactics, while increased innovation in new materials continues.
5. The New Reality for retail
The reality is that 2020 will likely see more store closures, as traditional companies may continue to lose out, with more finding themselves on the road to bankruptcy. Simultaneously, over the past two years, the average fashion tech IPO has seen a 27 percent decrease in stock price following public debut. Investors are beginning to look away from digital hype and for signs of “real profitability potential,” McKinsey said, resulting in the continuing trend of stock price decrease.
In fact, 55% of fashion executives intend to focus on a localized brick-and-mortar stores, and personalized customer experience, which will mean a ramped-up presence in neighborhoods with small format stores that speak to the local community.
Personalized customer experiences and reduced friction in the customer journey was also a key trend in 2019, which saw a massive investment is fulfilment capabilities. Both Amazon and Walmart invested heavily in warehousing and distribution, with Amazon Prime providing faster delivery, while traditional operators like FedEx struggled to keep up. Moreover, Kroeger supermarket invested more in digitalization in a partnership with Ocado, the online grocer in the UK, pioneering A.I and robotics in its fulfilment centers.
The physical landscape of commerce is being changed. Warehouses are taking over from shopping malls, and property investors such as Black Stone and Pro Logis are moving heavily into logistics and warehousing as an expanding asset class.
More importantly, our consumer model and mindset has changed, according to Mary Portas, an English Retail Consultant and Broadcaster. We are already in a new era of consumerism, which she calls “The kindness economy”. While high-street retailers continue to blame a poor economy or the rise of online shopping as the culprit, the new era can be attributed to the changing value system of customers.
No longer obsessed with abundance, better, and cheaper products, todays customers look for meaning in the customer experience and identify with brands that represent unique and authentic deeper values. “The triple bottom line is people, planet, profit - in that order” according to Portas.
The indicators are everywhere, Portas explains. “We now have a real backlash against fast fashion and discount retailers and even Black Friday! We are seeing a rise in recycling, upcycling, vintage, secondhand. We’ve got global marches, we’ve got a real mistrust in large organizations and on the back of that, a rise in volunteering”.
There is a lot of discussion surrounding transformation and change in the retail sector, but fundamentally, businesses are not changing fast enough as we still see old cultures, old philosophies and old practices that dominate the boardrooms of the biggest companies in Retail. Inevitably, those that do not evolve will eventually disappear or become less relevant.
In 2020, those that focus and succeed in product innovation, creating unique customers experiences and achieving genuine sustainability goals, will come out better prepared for the challenges of the future.
- Raconteur publication # 0 6 4 1 1 7/ 1 2 / 2 0 1 9, Future of Retail
- McKinsey & Company - Annual State of Fashion Report Nov 2019