How Apparel Manufacturers Should Approach the Economy in 2013
February 20, 2013
California Apparel News
The presidential election may be behind us, but the economy is still in a slow-go mode.
This will be a year of trying to get back up to speed as consumers pay more taxes and rising gasoline prices mean the economy only grows at a 2 percent. Next year is when all the financial fireworks are expected to go off.
Meantime, what are manufacturers to do? Proceed cautiously and double-check their customers’ financial backgrounds or keep a lot of cash on hand?
A number of financial experts shared their insight on the upcoming year and how apparel manufacturers should approach it.
What economic speed bumps are manufacturers going to face this year, and how will it affect their ability to get financing?
The economy is still very fragile. There are uncertainties surrounding the fiscal cliff and its effect on the consumer (and his/her wallet)—as well as the economic impact of the implementation of the healthcare bill. Rising costs of raw materials and labor, especially in the traditionally cheaper China, will have importers and manufacturers needing to re-evaluate the cost/benefit analysis of producing goods—or as many goods—in China.
The manufacturers are going to need to continue to be vigilant with inventory levels and costs to be nimble and make changes if the situation warrants it.
Good businesses will always be able to find financing. However, businesses that hit speed bumps will need to look a little harder to get the financing they need. Due to our independence, when our clients do hit these speed bumps, we have the flexibility to help our clients over those speed bumps.
I expect some speed bumps to occur as the whole industry is feeling the uncertainty of the sluggish global economy. Some of our manufacturer and import clients have indicated that they have had positive conversations with retailers.
However, actual orders appear to be materializing slowly. The lack of firm orders puts greater strain on the suppliers as they have to make business decisions as to whether they will take the risk of building inventory without a firm order. In addition, importers that use letters of credit are also feeling stressed because of longer production lead times.
Cash flow is the life blood of any business, whether it is used to finance growth or to meet working-capital needs. When suppliers go to their lenders, they should have current financial statements and projections that have been reviewed by their independent accountant.
Approach your lender or factor with recent financials in hand and you will smooth the process when you are looking for financing. In addition, keep the lines of communication open with your lender, and that will help smooth out any potential speed bumps as well.
Two of the biggest challenges we see for manufacturers—not only at the domestic level but globally—include rising production costs in combination with slower economic growth.
While in the past, one could transfer production to other countries in order to increase profit margins, a demand for better working conditions and wages in countries of opportunity has increased, giving rise to higher production costs abroad.
Of course, the only way to cover increases in costs is to pass them on to the consumer, which is always difficult to do in a declining sales environment. Lower margins in conjunction with a slowdown in sales can increase the perceived risk of default from a lender’s perspective, thus hindering the ability for manufacturers to obtain necessary financing.
But, like us, there are plenty of funding companies that focus more on the underlying transaction and the client/factor relationship than operating performance and strength of one’s balance sheet.
Opportunities exist within all economic cycles, and manufacturers should be more aggressive in the search of more-creative sources of financing, together with seeking out ways to separate themselves from the competition in terms of their product offering.
I don’t see any major hurdles out there that would hamper manufacturers from obtaining their working-capital needs over the next 12 months. There is ample liquidity in the marketplace, although banks remain selective in deciding whom they are willing to support.
However, the financial-services sector remains highly competitive with ample alternative resources consisting of factors, asset-based lending companies, private investors and small independents fighting over choice deals in their core industries.
I don’t envision a lack of liquidity in the marketplace as an economic speed bump for 2013, but I am concerned about three major issues on the horizon that could affect the underlying business climate for the apparel sector.
Those are the uncertainty of the strategic direction of JCPenney, rising taxes and the nascent recovery of the housing market.
The first will have a more narrow impact on the industry, being confined to those current and future vendors who are looking to JCPenney to play a major role in their 2013 budgeting plans. JCPenney’s significance to the apparel trades in some respects is greater than that of other major retailers. Until JCPenney develops a successful strategy to re-connect to their core customer base, their vendors can anticipate a measure of volatility in the flow of business throughout the year.
On a broader scale, the other two “speed bumps,” as I see them, are the recent rise in both payroll and income taxes and the uptick in residential real estate purchases.
The first has a direct bearing on disposable income by depleting actual dollars from consumers’ paychecks and the latter in diverting funds from small- to larger-ticket purchases. Working together, they both could have a negative impact on consumers’ priorities and affordability as it relates to buying apparel, accessories, shoes and other smaller-ticket items other than necessities.
Therefore, I think the manufacturer is well positioned today to take advantage of the liquidity in the marketplace and find a compatible lender to service their needs but must be alert to the dynamics taking place in the retail sector, with government policy and emerging economic trends, to insure long-term viability.
I think all manufacturers should be mindful that we are not yet through all of our economic issues.
The year 2012 was an improvement, and I am optimistic and hopeful 2013 will be better. But issues still remain that can be seen as speed bumps or slowdowns to our industry, our domestic economy as well as the global economy.
The issues could cause manufacturers problems with all types of financing, including obtaining new financing, continued financing under current discretionary borrowing agreements and continued retail credit support, which are just a few types of financing that a manufacturer cannot take for granted.
On the domestic front, issues that can have an economic impact could include increased unemployment or stagnation of job growth, a drop in the stock market over an extended period of time, delay in resolving the debt-ceiling issue, a rise in interest rates, and lack of growth in the retail sector, resulting in credit issues with major retailers.
On the international front, issues that can slow our economy include continued problems in the Middle East, causing spikes in oil prices or the lack of supply of oil; unresolved economic issues in Europe; and a slowdown in the Asian economies.
All of these issues could have the effect of slowing down the U.S. or the global economy. When that happens, lenders in all shapes and forms tend to pull back and tighten the flow of capital. Short-term issues, or “speed bumps,” can be overcome through good management of resources and not putting your company in a position of so much leverage whereby a short-term issue becomes a business-survival situation.
At the end of the day our industry needs to see increased consumer spending, growth in the retail sector and continued consumer confidence. As long as these are consistent and moving in the right direction, business and the related financing issues should be fine.
Ultimately, the success of manufacturers is consumer-driven, and unfortunately the economy is still not robust.
Consumers are faced with shrinking disposable incomes due to higher gas prices, rising healthcare costs, impending tax issues, unemployment and underemployment. Those consumers with resources continue to reduce their expenditures and remain on the spending sidelines.
Therefore, it would behoove manufacturers to maintain lean inventories, keep overhead low, and ensure that their customers are both proven and good credit risks. Although it has been widely reported that traditional lending sources have been tougher to navigate than in prior times, there is evidence that the situation is easing up. Adhering to the aforementioned guidelines will aid those businesses in obtaining financing.
Manufacturers and importers alike will face both the classic micro challenges unique to all producers in the industry, as well as macro problems faced by all businesses selling a consumer product.
As has been the case for the last two decades, having product that satisfies the value/price proposition of retailers and consumers is a must.
Then it’s critical to excel at the basics: managing product and labor costs to maximize margins, “right-sizing inventory levels,” and controlling expenses.
On a broader economic front, all businesses will have to deal with the impact of the recent elimination of payroll tax cuts, higher Social Security taxes, and volatility in energy and raw materials. Importers will deal with increasing pricing and wage inflation in China. These dynamics could require both retailers and their vendors to adjust their business models.
Just as retailers are evaluating vendor bases, many manufacturers are actively assessing the risk inherent in having a major retailer represent a significant percentage of overall sales volume (particularly if the customer isn’t performing well from a financial perspective) and choosing to diversify into other new customers.
From a financing perspective, the above issues are certainly points that any lender needs to assess, but there remains plenty of lending capacity in a very competitive marketplace. Most are reasonably upbeat about economic prospects in 2013, although Q1 is proving to be somewhat soft.
Approving financing for manufacturers is still a “transaction”-driven process. The typical underwriting process still leans heavily on the cornerstones of prudent credit granting: the shareholders’/managers’ character and competency, coupled with financial capacity and collateral.
Of course, macroeconomic events affecting consumer behavior and/or key customer business model shifts à la JCPenney cannot be ignored by manufacturers, importers and lenders.
While there is no crystal ball to predict the challenges manufacturers will face in 2013, there are some issues that are unresolved from 2012 and are having a lingering impact in the new year.
In Q1 of 2013, manufacturers will continue to have to deal with the effects of Superstorm Sandy. Many retail customers could not, or did not, because of the storm accept all orders that were supposed to be shipped prior to the year’s end. As such, manufacturers are carrying more inventory on their books and in their warehouses than previously planned. At Capital Business Credit this is causing more requests for overadvances.
Additionally, in Q1 the Chinese New Year can be an “economic speed bump” for manufacturers as there could be up to a four-week shutdown at Chinese factories. This also causes the need for overadvances and/or trade finance programs to ensure that suppliers get paid earlier to ensure that goods are actually shipped before the holiday begins.
There are several macroeconomic trends that may impact consumer spending this year. The most prominent is the payroll-tax increase. While we are still waiting to see the effect of this, it is realistic to assume that larger tax withholdings will lead to fewer disposable dollars to spend at retail. At the same time, gasoline prices are rising. Cutbacks in consumer spending may not be realized until the second quarter, as consumers typically react to changes with a lag.
Despite both the known speed bumps, and a handful of other unknown factors that will arise in 2013, financing will still be available as long as the manufacturer has a sound business strategy. While financiers continue to remain cautious, the cost of financing may become more expensive—as manufacturers may need to borrow more.
The biggest challenges faced by manufacturers and importers today remains the constant re-evaluation that major retailers are undertaking as it relates to their respective vendor bases, coupled with the need to continue to identify cost-effective and efficient new sources of production.
I think consumers are going to be cutting down on their debt and saving more. So they will be reducing their spending.
And yes, we avoided a huge federal policy blunder by avoiding the fiscal cliff, but as time goes by there will be some governmental fiscal tightening that will affect some things.
Economic growth will not accelerate too quickly. I think the economy is going to remain flat at around 2 percent. With the consumer cutting back on spending and fiscal tightening and less government spending, that will have some sort of impact on the apparel industry.
The thing I am more concerned about is bricks-and-mortar stores. We are seeing online-sales projections for clothing and shoes was about $35 billion in 2012. It is projected to be $40 billion in 2013 and $45 billion for 2014. It is 10 percent of all apparel and footwear sales now. I would venture to say that online sales of apparel and shoes are growing at 10 percent to 15 percent annually.
Apparel lines have to have newness and freshness and can’t go stale. There has to be a reason for the consumers to go into a store and purchase.
And customers are always looking for value. They are looking to have European tailoring to fit the American male or woman but not pay high prices.
On a positive note, with the robust energy sector and our housing market improving, people have a higher confidence level in the stock market.
While that is happening, bricks-and-mortar stores at the malls are in total upheaval. You are going to see a lot of mall closings and consolidation.
Malls will try to do a mixture of other types of services like spas to keep people coming in.
Money is available for lending to apparel manufacturers, and the cost will stay where it is today. I don’t see it dropping unless the banks come back into the picture. But there is a lot of money, and people are starting to put it back in the market.
The bumps in the road could be Egypt and the Middle East. A lot of textiles are coming out of Egypt for big players such as Macy’s and Nike. There has been a tremendous drop in production, and people are looking for other sources.
The stock market is off to a good start in 2013, but that does not reflect the underlying weakness in the U.S. and global economies.
Consumers are still very cautious with their spending and will remain that way until the there is more visibility on the economy and upcoming budget talks in Washington.
Europe has stabilized, but many of the economies there are shrinking, which hurts domestic manufacturers doing business there or those who view Europe as a growth opportunity.
Manufacturers that succeed or obtain financing in 2013 will most likely have strong brands or offer value to the consumer.
Companies stuck in the middle will remain under pressure and find obtaining financing more difficult. Manufacturers should also have a thoughtful e-commerce strategy, given the growth of this channel and importance of not having concentration with large retailers who are increasingly becoming more expensive to do business with.