The Impending Crisis pt.2

Last October, I wrote an entry called Two questions wondering about the state of the economy, the rate of exchange and how these trends may affect us. I wish I’d called the entry “Three questions” and included the topic of energy prices. The comments were interesting. Nearly everyone reported an up tick in international sales (I have too). Generally, everyone felt the luxury goods market was steady but since then, experts agree it has been wavering. I think luxury has been a holy grail of sorts. We tell ourselves all is well with the world based on its market performance, perhaps in a misaligned perception that we can aspire to producing it eventually.

I can’t tell where Birnbaum’s world of mass retailers, outsourced transnational production and push manufacturing of commodities ends and ours begins (today’s first entry). Most certainly in ours, the tragedy of the madras jackets wouldn’t have happened because you’re not producing in advance of orders. Right? Of course not. You’ve learned how to manage production to order from my book so those things won’t happen to you. Still, when the biggest operators sneeze, it’s the rest of us who catch pneumonia. To whit, once everyone moved offshore, we couldn’t buy fabric domestically so whatever affects them, affects us. The question is, how will it manifest this time?

The latest issue of Birnbaum’s newsletter set the tone for his upcoming book and what these things may be. Perhaps I should reiterate that the product markets he’s describing are restricted to commodities. Namely underwear, men’s trousers, men’s shirts etc. Here’s some excerpts (some are not germane but interesting) from his newsletter, my comments follow.

…woven shirts appear to be the exception among the four strategic category items. I believe this is the result of fashion changes. Men are beginning to move away from casual attire back to more formal clothing. (pg 17)

I wonder -how do people dress in a recession? More classics, more tradition? I figure fashion historians in our midst will enlighten us. I took fashion history but don’t remember much. Does it go without saying that I think a move back toward more formal attire is a plus? Classics are less disposable than trendy apparel. While lean manufacturing is sustainable, is fast fashion?

(pg 18, re: underwear)…November data clearly shows that both importers and retailers were expecting lousy Christmas sales. December data for retail sales clearly showed that however lousy their expectations were, they were still unduly optimistic.

Birnbaum’s opinion on the state of the economy, based on his figures:

…economists are still debating about whether the U.S. is in a state of recession. Based on these figures, the only true topic for debate is how deep is the recession and how long it will last. From where I sit, the answer is very deep and possibly very long. (pg.25)

Birnbaum’s newsletter elaborates on the state of the industry by nation and sector. He’s very gloomy about Mexico, I haven’t included his comments on it. But still, I wonder if the losses in Mexico and Caribbean Basin represent opportunities to those who want to outsource but not far afield? On Sri Lanka he says:

Sri Lanka has an excellent industry -reliable, high quality and with some of the best management in the world. Of the many factories, ten count. Of these ten, three are world class. All three will one day rank in the world’s top 50. However, all three are going the way of Korea and Taiwan -moving offshore, in this case, to India. I cannot blame them. India is ideal for offshoring. All the customers want to work in India. But all things considered, these customers would prefer working with their Sri Lankan suppliers. (pg 68)

More on the South Asia region which conversely, provides a hint toward solutions:

South Asia as a whole is falling down. There are no more successful South Asian countries. To some degree, each country is failing for its own reasons. But there is one common cause of failure. All four (Pakistan Sri Lanka, Bangladesh, India) South Asian governments take the position that they need do nothing to support their industries. They need not provide infrastructure. They need not provide education. They need not provide logistics. I’m sorry to say that they are wrong. (pg 71)

His picks:

The non-bloc comprised of Vietnam, Cambodia and Indonesia looks like it is doing very well. In these difficult times, they are some of the very few real winners…Vietnam leads the world as the U.S. supplier with the highest growth rate, beating out Greater China.

This is good news for Cambodia. Of all nations, Cambodia has the best paid and protected needle trades workforce. If you wanted to outsource and have greater assurances of fair trade standards, Cambodia is your best bet.

Birnbaum’s conclusions (pg 107)

We are moving into a very difficult period. The industry is about to be hit with a double whammy:

  1. Retailers are finally beginning to realize that over-ordering goods just to mark them down later is not a profitable strategy. The smart ones will be cutting order size regardless of the state of the economy.
  2. The U.S. is moving into what might well be a serious and long-lasting recession. Consumer demand for garments will fall and with it customer demand for imports.

As we can see from the October report, customers reduced orders in the fourth quarter, but those reductions proved to be inadequate. 2008 motto will be “Order Less – Profit More”.

Eric and I talked about this last night. In some respects, we think DEs will continue to be immune to trends affecting Birnbaum’s intended average book reader, newsletter subscriber or consulting client. Few of you are producing commodities; the exceptions are tee producers who don’t cut and sew. Few of you are selling to department stores. Most are cutting to order or at least some semblance to it. Few of you -while not luxury producers- are competing on price. These are all strengths.

Then there’s the matter of organics. In the coming push and shove of recession and increased energy costs, how significant will organic fibers be to consumers? Will operations that are sustainable but not organic (these aren’t the same thing) have more staying power? Which is more responsible? Will consumers get the message? Will they care enough to pay for it?

Another factor that will become increasingly significant to our industry is obesity. There’s no way around it. With 30% of the population overweight and another 30% obese, I think styling choices will become even more of an issue of haves and have nots. I can’t see that beyond the few dedicated DEs serving the plus size market, that the industry will move beyond commodities in serving over 60% of the total adult apparel market. Just the infrastructure demands of meeting the needs of this population are staggering. With apparel prices continuing to decline and the direct correlation with income and obesity, there will be a continuing shortfall. Offerings across the board in plus size apparel will only worsen.

I did tell Eric one thing. Assuming I had the interest and the capital (including intellectual capital), I’d open a mill to produce fabric for the domestic market. With increasing energy prices, being domestically integrated would be an unparalleled advantage. I also joked that I’d buy up a lot of treadle sewing machines that don’t rely on electricity. Maybe it won’t be a joke twenty years from now.

Birnbaum’s newsletter is pricey at $400 a year but if you can afford to outsource and you’re producing commodities, it’s probably a must have subscription.

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  1. Bethany says:

    Every time we are in a presidential election year the media begins to squack about how the economy is going to sh*t and we are going to be in a recession and blah blah blah. Look, I have no idea if we are going into recession or not. But I do know this: the reason there has been a down turn in retail is the clothing right now is UGLY! You heard me: the whole 80’s throwback with skinny jeans and tops that make super models look fat- or at least pregnant. Seriously, who wears that crap? I am a 33 year old size 6 with a pear shape, and I have no idea what I am supposed to wear. Skinny jeans? No way. Short skirts? Not in this lifetime. Empire waisted tops? I was pregnant for the last 5 years and I have no desire to look preggers when I am not. So I have pretty much just stuck to Juicy sweatpants (I live in LA) and tshirts. If I want to look cute I might break out a pair of wide-legged pants and a cute little blouse, but let me tell you- this look is to impress women only- men think it does NOT look sexy. Oh, a ditto for those new high waisted jeans- HORRIBLE. Oh, and then I go check out J.Crew- one of my faves for a classic look and they are showing the ugliest colors: orange and green. I mean hello!!! Has this ever been cute? My prediction is sale rack for most of J.Crew’s cruise collection. So maybe the way to make money in this business is to design clothing that people will actually buy- not what the haute couture designers and anorexic stylists (I’m looking at you Rachel Zoe) are telling us to design.

  2. Kathleen says:

    but let me tell you- this look is to impress women only- men think it does NOT look sexy.

    Here’s a man’s perspective on current fashion, including the increasingly popular preggar tops. Be advised this is to a site you may consider highly offensive. He uses a lot of naughty words too. It might not be safe for work. You have been warned. Note: I can see the difference btwn the two reds.

    But back to what Bethany says, yeah, I think most of what I see in the stores is ugly. Eric asked me last night why I didn’t buy a pair of jeans (having a pre-Magic clothing crisis) and I said that btwn what’s available (mostly coochie baring) and the spurious rampant criticisms of “mom jeans”, I don’t know what to wear. Either way, I don’t want to be an object of derision.

  3. Kathleen says:

    This just in, WWD says profits from last quarter are up at luxury lines Polo and Arnault’s stable (LVMH Moët Hennessy Louis Vuitton). WWD says Bernard Arnault says that ‘the impact of a U.S. recession is likely to be “limited, weak or even non-existent” for the world’s biggest luxury player. At Polo, sales rose 11 percent.

  4. Jennifer E. says:

    Read the link – hmm agree about the crocs but not about the reds .
    1) 1 Delta E is what the normal human eye can see a color difference in.
    2) He used the old formula instead of the more accepted 1984 Delta E cmc formula which accounts for greater color difference in darker hues so I would not say that the color difference is not 4 Delta E
    3) I can see the difference

    Did mention ever that I did over 2000 measurements calculating Delta E cmc on red fabric for my thesis – I guess I might be bit basis on the subject

  5. Mike C says:

    Our sales continue to accelerate. If the economic slowdown has hit us, its been in terms of lost growth – and that’s not something we have any way of measuring.

    Still, we’re being more cautious than our normal cautious selves. We’re stockpiling as much cash as we can, delaying large purchases that we should probably be making, maintaining headcount even at the cost of some growth, etc.

    (I don’t know that we’d be doing anything differently if the economy were going gangbusters though. We’re just… cautious people.)

  6. Karen C says:

    OK, that link was funny (and, yes, somewhat offensive). But I have that type of humor. I agree about the hat, red lipstick and the maternity tops. However, I’m sticking with a cowl neck top!

    And I actually think this downturn or economic correction is going to be a good thing, especially for DEs with quality products made domestically.

  7. J C Sprowls says:

    To Bethany’s point – it does appear to be the election rhetoric, doesn’t it? I’d call it cultivating of false hope. But, I digress.

    It a toss-up. I mean, how much of “recession” is actually the public reacting to fears stoked by the media and theorists? Granted, some theorists have been right [occasionally]. But, we only know they’re right after the crisis has passed. I’m just not convinced one can predict – only speculate and ruminate on past history.

    On a business note, speculation is a good habit to get into. It’s how one articulates a plan to deal with conditions or symptoms. I like Mike’s points, especially where he says they’re holding headcount despite growth because the future is in flux (i.e. too volatile). That’s prudent. They’re looking at the risk factor and have decided to remain conservative in their approach. Besides… there are other short-term patches at their disposal (e.g. offering limited overtime).

    I also like Kathleen’s point that one’s style of dress does not change during a recession (e.g. classics v. fashion-forward). Spot on! It’s the frequency with which one buys that changes, not the what. If a recession is imminent, consumers will simply buy less of what they already buy (i.e. conservation).

    I can dream that consumers will be inspired to re-evaluate their purchasing power. Maybe they’ll demand more value for their money? Maybe the disposable knock-offs for 20% less MSRP and 80% less lifetime will lose their appeal? I can only speculate.

    Regardless the tier being produced, if I’m cutting to order – right there on the bleeding edge – then I’m exposed to significantly less risk than large corporations and better capable of adapting to fluctuations or permanent changes in the market. IOW: I don’t need to wait 3-6 months for a team of managers to influence the elephant with clever devices and tricks to move another direction. I get off the animal, gently take it by the trunk and lead it in another direction.

  8. Tiffany says:

    I disagree with a lot of what he wrote. Technically, we are not in a recession. GDP is still growing. We are in a downturn. I think if we enter a recession it will be mild. Foriegn investors will pump money into our economy to prevent a major recession. When the US market goes down so does the global market.

  9. Kathleen says:

    I also like Kathleen’s point that one’s style of dress does not change during a recession (e.g. classics v. fashion-forward). Spot on! It’s the frequency with which one buys that changes, not the what. If a recession is imminent, consumers will simply buy less of what they already buy (i.e. conservation).

    I didn’t say this, maybe it wasn’t clear. I *do* think styles change in a recession and according to political clime (we can blame 80’s fashion on Reagan). I suspect people buy more conservatively in styling *and* quantity. If they know they can’t buy as much stuff as before, they know something needs to last longer. As such, their buys can’t be stylistically risky or as fashion forward because their disposable income is in fact, less disposable -like their clothes.

    Foriegn investors will pump money into our economy to prevent a major recession. When the US market goes down so does the global market.

    Tiffany, I admire your thinking and you don’t post nearly enough for everyone to see it but I don’t agree. Not anymore. Statistics don’t continue to bear this out. The global market is in trouble too (the point of much of Birnbaum and it’s not just him). Besides, (and I know you’re not saying this) relying on foreign investors to bail us out is still relinquishing our base, they own us. With as much debt the average consumer is accumulating, what will happen when we’re not such a good credit risk anymore? I think it’s a problem for policy makers to continue to rely on this strategy as a solution to these problems. We need to assume responsibility and be proactive rather than waiting for someone else to bail us out -which is only in the short term, the piper must be paid.

  10. Harmony says:

    Let me know when you open that US mill… count me in! My goal for 2008 is to launch a line of 100% made in the USA organic printed fabrics.

    I really do think we are at the very beginning stages of a major consumer shift. The better living through more stuff mantra of the last 20 years hasn’t delivered and as money (and waistbands) get tight and more information about the external costs we are all bearing for cheap goods comes out I think we will see a significant shift away from quantity towards quality both in terms of timeless (well, more classic) styles and sustainable production practices. I think fast fashion will mark an era whose time is slowly coming to an end.

    I can imagine people no longer bragging about the “deal” they got and instead bragging about how sustainable/local/organic/the story behind their clothes. Perhaps I am delusional… but that’s where I think we are heading…. slowly.

  11. sfriedberg says:

    I think the US economy has some rather horrifying issues. The sub-prime mortgage mess is a symptom, not a cause. US domestic savings rates have gone negative (again). We are literally drawing down on savings for household spending. In contrast, other 1st world countries typically have savings rates of 8-12% (this is what gets put in the bank or in bonds after all taxes, expenditures, tithes, etc.)

    Both the federal government and the typical household are living desperately beyond their means. Corporations and states, in marked contrast, have more effective financial controls on them.

    Over the last 20 to 30 years, foreign commercial investors have effectively propped up the US federal government by buying US treasury bonds heavily. As national and household US finances have deteriorated (in particular, as our debt levels become so high that annual tax revenues and personal incomes can not service even the interest on our debts), US treasury bonds have become less attractive. I find it very significant that it was NOT commercial investors but sovereign wealth funds that rushed in to shore things up most recently. Frankly, I don’t expect that to happen again without some serious geopolitical repercussions.

    I expect the US dollar to lose its unique status as the global reserve currency in my lifetime. It will probably remain a significant currency, but it will no longer have the preeminent place it has enjoyed for decades.

    This is not the forum for a full-blown economics rant, but aspects of our economy are perilously close to meltdown, and with today’s financial wizardry a collapse in one area is likely to spread. Not a new problem, we have been digging ourselves a deeper and deeper hole for decades.

  12. Eric H says:

    Nobody will know we are in an “official” recession until we are at least a few months into one. The NBER is the go-to arbitrator of when recessions start and stop; their definition is something like “several months of decline” (negative growth), but in practice I think this has turned out to be 2 or more consecutive quarters. We could very well be in the middle of one right now, but won’t know it until the summer. At present, it seems very likely. Manufacturing output, home sales, employment, retail sales, stocks, and consumer sentiment are all pointing down.

    I try to keep up with James Hamilton’s excellent econbrowser blog; predicting recessions is one of his research areas. He seems to be saying that a recession is probable in 2008.

    But we have to keep in mind what Paul Samuelson said: “Economists have correctly predicted nine of the last five recessions.” In Paul Krugman’s case, this has been upped to nine of the last zero recessions.

  13. Lisa Bloodgood in Portland says:

    I heard or read somewhere that some countries who don’t like the US have millions, perhaps billions, of dollars of our currency stockpiled and could just release it to totally screw up our economy. Which would suck, since its value isn’t as high anymore.

    I agree, skinny jeans and those tops–t. curtains–only look good on, oh, wait, nobody! I’m a size 8 and will be 36 next week. The way I shop is I buy all my pants and most of my blouses in the misses section and my long- and short-sleeved t shirts and all my sweaters in the juniors section. This is because I’m too curvy below the waist to fit into juniors pants and I’m small enough above the waist to fit into junior t shirts and sweaters. Besides, all the sweaters in the misses section are either too square, too old for me, or to short in the torso, thanks to my long torso. So I buy junior sweaters a size bigger. I have found classic ones as well as the trendy ones. I tend to buy classic and basic more than trendy but I only buy trendy if I actually like it. And I go to the thrift stores a lot.

  14. Tiffany says:

    Posted by: Kathleen at February 6, 2008 5:14 PM
    I think the money from foreign investors is definitely a short term solution. I think most American’s would be sickened if they knew how much of our country is already owned by foreign investors. We are in bed with so many different countries that it’s to their disadvantage to see us do poorly. I just don’t think we are headed into a huge recession in the near future. Some major catastrophic event would have to occur for this to happen. Truly, the American economy is dependent on us changing our core beliefs. We are consumers, and we like to consume by any means necessary. I agree that the average American carries way too much debt with very little savings. We really need redefine what a necessity is. In a third world country, being poor means you might not eat or have a home. In America it usually means you can’t afford cable TV. As a country we definitely need tighter lending policies. Poor lending policies are what got the housing market into the mess it’s in. When I bought my house I was being offered mortgages that were 4 times the amount that I could afford. It was up to me to tell the lenders what I could reasonably afford. I feel sorry for the people who took those loans.

    For the first time in my life this election means so much to me. I am disturbed by the reasons some people are voting for their chosen candidate. I think people really need to analyze some of the policies these candidates want to enact. They are promising us the world with tax cutes. That’s just not possible.

    And by the way I like skinny jeans. They tuck into my boots easier.

  15. Jasmin says:

    When retailers in manhattan are now taking Euros … well, you know the value of the dollar and its place in the world have changed.
    The sub-prime market issues will, I believe, come out further over the next 12-18 months, and losses so far are probably about half of what will eventually be lost. In New Zealand and Australia the losses will (I think) keep our housing markets flat or falling somewhat for the next few years (already underway), and credit criteria will tighten, interest rates will increase… but we probably won’t feel the same level of effects as the USA, although ‘mortgage stress’ is starting to set in.
    I guess it depends to some extent how Asia and especially China feel, and how they manage the enormous amount of US Treasury bonds they hold. I hope you can work it out. The infrastructure fixes required in the US (highways, power grid etc) are going to become more critical too over the next decade. I think the APAC region and Europe will potentially become the new global leaders through this period, particularly Asian regions. When China and India progress further towards becoming significant consumer market(s), will they be buying US goods and services? Maybe, if the providers in the US can understand different cultural norms and modes of interaction, respect them, and offer value from that perspective. It is sure going to be interesting ….
    And yes – fashion at the moment is ugly! So was a lot of the seventies and eighties, lets be honest, and we had recessions then … any alignment there?

  16. Jasmin says:

    And I forgot to say … if the primary customers for the outsourced mills and manufacturers are the companies catering to the new middle classes in Asia … and say they prefer to be paid in Euros … how will this impact American DEs? Local capacity may become a necessity :-). New Zealand has lost a lot of value add manufacturing capacity due to offshoring as well, and in the long run (and with travel miles/carbon footprint questions) this may not be sustainable. If you can’t cook yourself, you are dependent on a restaurant being open, and willing to serve you, it isn’t very pleasant for you if they decide you aren’t a valued customer anymore and have to come at off peak hours, or take the leftovers if you want anything ….. and I think this is the risk in losing inshore capacity, there is no longer any competitive lever, and people/industries are vulnerable.
    Clothing can be ugly and badly made now, because of the same thing at an individual level – most people ‘outsource’ their clothing to retailers, and don’t have ‘at-home’ design and manufacturing capacity, hence, they don’t have a choice if they need an item of clothing, they have to take what retailers provide in their price bracket. If all retailers provide a similar supply … well, that’s the way it is :-)

  17. Kathleen says:

    Apologies for the cross posting of my comment but I wanted this reference here where it also belongs (and in part, to make it easier for me to find later).

    There’s a very interesting post called China’s First Steps Away From Low-Cost Manufacturing and What it Means For Your Company. Kindred with Birnbaum, he outlines internal reasons why China is going to become more expensive. This is a good blog to keep on your radar if you’re interested in outsourcing.

  18. Paul Villforth says:

    I find it interesting to read the posts from 2008 before the shit hit the fan. I was working in Houston when you all were having this discussion and the company I was working for wanted to hire me outright (I started as a contract engineer) but they were going to wait until the contract expired in November. Well November came and the banking crisis hit Texas hard. All the projects were put on hold and my new job evaporated. With what they were paying me I could have retired next year.
    The other part of your post that is interesting is the part about obesity. All of you may or may not be aware that the American population has been experimented upon for the past 50+ years with the low-fat high-carbohydrate diet. The rate of heart disease has increased sharply since 1960 and new clinical research supports the claim that the low-fat high-carbohydrate diet causes heart disease, diabetes, obesity. Saturated fat comprising 60 to 80% of the daily calorie intake supports a healthy heart and circulatory system. It was the increasing roll of sugar in the western diet beginning in the post WW1 era that led to increasing rates of heart disease. Fat had nothing to do with it and the theory that was promulgated was based upon cooked evidence.

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