The continued uncertainty in Europe over Brexit, rising wage pressures in low cost sourcing countries, low commodity prices, weak freight transit and major currency fluctuations are shaping a rather grim sourcing and supply chain outlook, according to CBX’s Q3 2016 retail sourcing report. In fact, the aforementioned results are in line with EKN’s own Q2 2016 retail private label sourcing study that indicates significant headwinds being felt by retailers in terms lack of speed to market, global commodity price sensitivity, high merchandise unit costs, among other business pressures.
While other uncertainties across economic indicators, manufacturing activity, currencies, transit and commodities are evident, CBX’s report indicates that Brexit’s true impact will play out in the next two years. It remains to be seen how Brexit will impact retailers and their trading partners that do multi-country sourcing or deal in trading with or through UK and other European countries.
The report provides useful synthesis of varied economic and supply chain indicators that can impact overall retail branding and private label private sourcing. The data has some particularly useful insights and implications for apparel, fashion, specialty and other softlines companies that source products from low-cost international countries through their own buying offices or agents. Nearly 1 in 2 retailers (45%) source through their own international operations or buying agents like Li & Fung1.
Among the top 8 global sourcing impact points covered in CBX’s report, most do not indicate a positive Q2 performance. Moreover the outlook towards forward looking macro-economic measures (i.e. infrastructure, labor etc.), manufacturing indices and freight demand scenarios do not seem that positive either, except for a handful of emerging economies that are low-cost sourcing destinations. Only a few far east Asia-based low-cost manufacturing countries are indicating positive signs in terms of manufacturing activity and other improved macro-economic indicators.
From the CBX study it is evident the purchasing manager’s index2 is showing a stagnant global manufacturing index. With the exception of a few European countries, Russia, Vietnam, Indonesia, and a handful of others, all other countries including China and Brazil are showing a manufacturing slump. From an apparel and softlines retailer’s perspective the only positive sign here is the uptick in activity in low-cost manufacturing countries such as Vietnam and Indonesia.
In the report, the global competitiveness index3 provides a ranking of countries across measures such government regulations, labor market efficiencies, among others. The data denotes that a few of the emerging economies which are important sourcing locations such as Philippines, Vietnam, Bangladesh and others have made significant gains on this index, while China remained relatively flat. It is also likely that China’s competitiveness has slipped due to average 7%-40% labor wage rate increases in the last 6-12 months.
In terms of transportation and freight traffic in the supply chain4, rates on key Asia-European trade lanes and Asia-North America trade lanes continue to suffer with an over-capacity of ships, weaker consumer demand and a continuing slide in the Chinese economy, impacting exports.
From a currencies and commodities prices perspective, even as the dollar remains strong vis-à-vis other global currencies, the uncertainty over Brexit impact will continue to drive at least some uncertainty on procurement, financial transactions and buying decisions of retailers and their trading partners. Lastly, overall weak commodity prices for oil and other raw materials shows a general soft demand scenario especially among apparel and textile companies. This could change if oil rises above $50 threshold in 2016 and domestic demand picks up in some of the bigger markets such as North America and Western European regions.
Our upcoming blogs on this topic will discuss these issues further.
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1EKN Private Label Sourcing Survey, 2016
3World Economic Forum (WEF)