As the pandemic and the war in Ukraine have placed intense stress on global supply chains, purely efficiency-based models have shown their limits in the fashion industry. Since then, luxury and fashion players have pivoted their business models from using AI to investing in bioengineered fibres or nearshoring some of their operations to build their resilience for tomorrow, while they also need to anticipate regulatory shifts in terms of sustainability to plan for the future.

Weak links revealed in the cost-based global supply chain

The pre-Covid-19 supply chain model of the textile and fashion industry clearly shows a strong geographic dependence on China, which still contributed almost 50 percent of global manufacturing output in 2022, over seven times higher than the second largest manufacturing output country, India. The major manufacturing countries export a substantial proportion of their output, meaning that global supply chains are overly reliant on a handful of key producing markets – a model which has shown its limits as luxury and fashion players move away from cost considerations solely, and increasingly take into account the need to secure timely deliveries.

Chart 1: Distribution of Global Production. Credits: Euromonitor International.

Increased inflation places extra pressure on fashion businesses

Since the emergence of the pandemic, all-time high inflation has worsened the situation for fashion supply chains, as on the one hand, brands and retailers have felt the pressure of the increasing cost of goods (COGS); while on the other hand, they do not want to risk eroding their volume sales by passing all these costs to consumers whose budgets are being squeezed.

Nearly 25 percent of global respondents stated their plans to decrease their spending on apparel and footwear in the next 12 months, according to the Euromonitor International Voice of the Consumer: Lifestyles Survey 2023

The high inflationary environment has therefore turned pricing strategy into a balancing act. The Euromonitor International Apparel and Footwear Inflation Tool shows that in the case of apparel, costs were generally passed on to the consumer during the first 18 months of the pandemic (March 2020 to September 2021), but since then, brands have been absorbing these costs and sacrificing margins, with a 12-percentage point gap on average between March 2022 and March 2023.

If the decreasing trend for COGS continues, June 2023 will be the inflexion point and industry players will have to decide if it is time to recover some of the lost margin or if they should lower prices to gain volume sales instead.

Cost of Goods (COGS) vs Consumer Price Index (CPI). Apparel, World (*), Jan 2019-Nov 2023

Chart 2: Cost of Goods vs Consumer Price Index. Credits: Euromonitor International.

Geopolitical considerations are further driving a realignment of global investments

Political instability is further accelerating the need for international companies to reduce their reliance on China for production, due to the country’s answer to the war in Ukraine diverging from that of the US, and the uncertainty around its intentions towards Taiwan, not to mention the diplomatic damage caused by the Xinjiang cotton scandal in 2021.

In that context, the map for global investments is being redesigned while government initiatives also weigh in, starting with the US Government’s “Call to Action for Northern Central America” launched in 2021. That Call for Action encourages regional sourcing and production of the textile industry, and now counts commitments of over 3.2 billion dollars from US-based private businesses.

More generally, since 2020, fashion players have been relying less on China and expanding their pool of suppliers to other manufacturing hubs in Asia – in particular India, Vietnam, Thailand, the Philippines, and Indonesia – but they are also seeking to develop proximity tracks closer to their end markets. For instance, US footwear brand Steve Madden has shifted 50 percent of its production to Brazil and Mexico to serve its core market, the US, away from Asia.

Chart 3: Textile and Leather Global Production. Credits: Euromonitor International.

Another great example of the emergence of more regional supply chains is that of Spanish retailer Mango, which has developed alternatives to China through a “twin-track” supply chain. Asia is now the “long distance” track, producing basic pieces such as t-shirts, which usually take 6-8 weeks to be shipped to Europe. The “proximity” track consists of factories in Turkey, Romania and Morocco, where the retailer produces more trend-driven items aimed at the European market. The company is also looking to expand its sourcing from Mexico and Central America to build a “proximity track” in the US, as it plans to quadruple the number of stores in this market to 40 by 2024.

New sustainability imperative fuels material innovations and hopes of reverse sourcing

Companies also need to anticipate new employment and environmental laws to plan for their future, since regulation in this regard is set to tighten, starting with the EU Strategy for Sustainable Textiles. This changing regulation combined with the growing scarcity of raw materials and their rising costs are leading fashion businesses to explore the potential of new materials.

Lately, there has been a flurry of new man-made biomaterial innovations that allow cruelty-free but also chemical-free and plastic-free claims. For example, Inditex has acquired 30 percent of Infinited Fiber Company’s annual future production volume of Infinna, a cellulosic fibre made from 100 percent textile waste, which can be recycled again, together with other textile waste and is biodegradable.

Simultaneously, the Spanish company has introduced the “Zara Clothes Collection Programme”, encouraging customers to return unwanted clothing in-store. Returned clothes are for now, mostly sold as second-hand clothes on Zara Pre-Owned or given to charities, but could ultimately be used as raw materials, thereby allowing more regional and local production if the production of recycled fibres such as Infinna scales up in the future.

Tomorrow’s supply chains look less global and more regional

Given the current market environment, we anticipate that supply chains will continue to operate in offshore production environments where cost is important but will also increasingly build quasi-independent regional supply chains in various parts of the world, to provide a hedge against future shocks.

We also predict that biotech and fashion players will continue to invest in the recycling and upcycling of textiles to gain a competitive advantage, as circular business models might become a legal requirement in the next few years.

About the author

This article was written by Marguerite Le Rolland, the apparel and footwear industry manager at Euromonitor International, a leading independent provider of strategic market research based in London, UK. In her role, Marguerite oversees the industry research and is responsible for strategic analysis on corporate strategies, market and consumer trends, competitive intelligence, retail performance and opportunity analysis in the fashion industry. Her comments and analysis are regularly quoted in the press from Business of Fashion to Le Monde, AFP, Vogue Business, The Guardian, Telegraph and WWD. For more information about Euromonitor's or to get in touch, click here.