Around the globe, trusted economic forecasters are predicting a slowdown over the next year, yet there is disparity regarding whether they feel a recession will occur. As previous spans of negative economic growth have shown, the most effective method of navigating through recessionary periods is to prepare in advance, expecting the worst while hoping for the best.
In the apparel industry, there have been drastic shifts in the retail segment, consumer shopping habits and ongoing international-trade challenges. Adding an extended period of economic downturn could prove disastrous for companies in the apparel industry if they don’t take the necessary steps to safeguard their businesses. While economic decline into a recessionary period isn’t imminent at this point, as 2019 enters the fourth quarter and 2020 is on the horizon, we asked financial experts: How would you advise your apparel-industry clients to prepare for a potential recession?
Apparel manufacturers have experienced several challenges the past couple years including a changing and volatile retail environment, a threat of increasing tariffs and, now, a potential slowdown in the U.S. economy. Despite these challenges, consumer spending has held up well and unemployment is close to historical lows.
Apparel manufacturers need to focus on keeping expenses down while remaining disciplined in managing inventory levels. It also remains prudent to diversify the supplier base in the event the trade wars escalate.
On the financial side, apparel companies should maintain adequate capital levels and the financial flexibility to withstand potential downturns in retail. Preserving cash flow and focusing on core competencies is good business practice and all the more important if economic conditions soften. In addition, working closely with an experienced financing source in good times and bad can be very helpful. That’s especially true for younger companies that have never experienced an economic downturn. For all these reasons, apparel companies should develop plans now for how they can best respond to a softer retail climate.
First off, those clients that have seen the light regarding tariff implications will be the ones that have a path to success. Having your production concentrated in any one country is a recipe for disaster for multiple reasons. Additionally, the online model is a key component of a blended revenue stream that will be required in order to offset the continued contraction of stores at the bricks-and-mortar level. Finally, crossover product diversification will be critical. Many traditional retailers are slowly taking away apparel floor space for products in the growing home-furnishing and nonperishable-food and organic-product categories. This can be a challenging transition but far from impossible. Those clients that are looking at the real big picture will be the ones standing at the end of the day.
Our apparel-industry clients have had a lot of noise in the marketplace to deal with such as the soft retail environment, the direct-to-consumer business and tariffs. Adding a potential recession to the mix would be another challenge to the industry. In order to survive (and hopefully thrive), they need to continue to watch their inventory levels and speculate less than they currently are. Too much inventory—and inventory that the consumer won’t buy—has and will continue to wreak havoc on the cash flow of the business. More diversification in selling, whether expanding to include new customers, both foreign and domestic, and having an online presence will help to ensure that softness in one part of the business can be offset by increases in others. This would need to be done by maximizing existing resources and staff so as to not increase overhead—and maybe even tighten up on the expenses—to try to stay one step ahead of the economy and any potential recession.
We are certainly hearing a cautionary tone in the marketplace from our clients. While economic indicators remain largely positive, the trade tensions between the U.S. and China have created a sense of uncertainty in the market. A recent client conversation highlighted the importance of focusing upon the strengths of the organization. In other words, know what you are capable of and make sure you do it well. He emphasized that “now is not the time to take every order.” This type of conservative approach combined with an attention to detail allows companies to prosper in good times as well as prepare for any potential uncertainties in the future.
The best advice I could provide to a company to manage through any disruption, be it macroeconomic or industry specific, is to maintain flexibility. Growth and success should be supported with investment and ambitious objectives. However, regardless of whether it is a retailer, wholesaler or digital-native company, maintaining a healthy amount of skepticism supplements a strategy to manage a downside scenario. Too often we see businesses investing in long-term assets, leases or systems that can support exponential growth and then end up stuck with expensive overhead when that growth is slower than expected.
Another key element of flexibility is more short term—a company’s inventory. Inventory is key to success and growth but is difficult to monetize profitably if sales slow down. The companies we see as most successful in this area make strategic bets on inventory to drive revenue but then liquidate it quickly if it isn’t needed. This is a healthy practice to have in place to allow a company to take advantage of higher than expected demand but quickly improve liquidity if needed.
Recession concerns are very real in the apparel industry going into the fourth quarter of 2019 and 2020. The entire credit market continues to see retailer after retailer struggle financially in 2019, with more bankruptcies on the horizon. There have been several contributing factors to today’s retail environment including the increase in e-commerce, the trade war with China, and customer demand for immediacy and newness. The drastic shift to a more-online shopping model has hurt the traditional bricks-and-mortar retail market. In addition, the trade wars with China and other foreign countries have also been at the forefront of apparel manufacturers’ minds, adding to the recession concerns.
Merchant has advised clients and prospects to manage their overheads and to mitigate any unnecessary risks during these uncertain economic times. We urge importers to seek other alternative production paths outside of China in order to minimize the potential tariff risks. Merchant also recommends clients and prospects tighten up their customer list based on each customer’s creditworthiness. Wholesalers should not ship goods to any customers that are not covered by a factor credit approval or credit insurance. These are not the times to be taking added credit risks. An alternative to ramping up growth to combat the tough economy, we encourage clients to develop or continue to expand their online presence.
Our belief is that during times when there is an economic decline, there are also plenty of opportunities that can strengthen businesses in the long run. Taking advantage of potential strategic mergers and acquisitions is one way for an apparel manufacturer to endure a recession. We encourage owners to think out of the box but also not lose sight of their core business and build on those existing successful retail partnerships.
Rob Greenspan, President and Chief Executive, Greenspan Consult, Inc.
While I don’t have a crystal ball—nor do I know anybody who has one—it is always difficult to predict the future, especially in the apparel industry. For the past few years the economy, for the most part, has been good, but recent events have given rise to economic uncertainties.
It is during these times that apparel companies should be developing their Plan B in order to react quickly and efficiently to any economic changes.
Some immediate issues of concern for apparel companies either selling fabric or finished goods into the wholesale market or to the retail trade should be the creditworthiness of their customers. There are many companies where factor credit approvals or accounts-receivable insurance is not available due to their current financial position. If the economy goes in the wrong direction, the financially weaker companies are usually the first ones to go out of business. Apparel companies should stay on top of their customers’ ability to pay. Be mindful of the problems of selling to companies with poor credit—you might not get paid. Also, understand what could happen to your top line sales revenues if one of your significant customers is no longer in business and how this impacts your ability to continue to stay in business.
Still of concern are the effects of increasing tariffs. Your Plan B should include alternative sources of production if possible. Make sure your flow of goods won’t be disrupted. Conversations with your suppliers and customers about increasing costs should be had.
Your Plan B should include plans for new inventory purchases or a liquidation of excess or older inventory. During an economic downturn, you do not want to carry any old, obsolete or excess inventory. You should try to not speculate on inventory, or, if you have to buy before you have orders, you should consider bringing in lesser amounts to be safe. If you do have to speculate on inventory, your plan should include having a second home for any excess inventory, and it should be sold as quickly as possible. Cover your costs, if you can, and get out from under it.
As always, you should be looking at your current overhead costs to see what could now be eliminated and, then, what should be eliminated if the economic situation gets worse. Do not wait to make these decisions when you are under pressure. Have a plan that encompasses decisions such as cutting back on your product line, eliminating nonprofitable divisions, or finding or developing new lines of business to replace what might be lost.
During an economic downtown, cash is always king. Stay liquid, be nimble, and don’t hold on to nonperforming assets. Your Plan B should focus on all of these and more, but the focus should be on liquidity and of course continued profitability.
Gary Herwitz, Managing Partner, CoMetrics Partners, LLC
It’s all about inventory management. Retail bankruptcies and credit risks coupled with retailers delaying or canceling purchase orders has resulted in an abundance of goods available for the off-price channels. It’s become a buyers’ market, whereby getting anything close to cost is extremely challenging. This will be exasperated if the economy cools off. Apparel companies must emphasize inventory management and the flow of product and not speculate on inventory purchases.
Despite a decadelong economic prosperity, the apparel sector remained an anomaly and did not enjoy the growth of other businesses in the last few years. An economic recession will add another crushing blow to the apparel industry, which already suffered from rising costs of goods, increased overhead and additional tariffs. The record-breaking number of retail-store closures has also reduced the number of bricks-and-mortar retailers.
Since the industry is already in a slump, only the fittest and most resilient companies will survive through an economic downturn. One way to prepare for a recession is to diversify the customer and vendor bases to mitigate concentration risk. In addition, verifying the financial strength of suppliers will ensure uninterrupted production and the flow of new merchandise. Another way is to raise efficiency by outsourcing non-core parts of operations. It will be prudent to secure a bank line of credit or financing in advance and diligently monitor both personal and business credit ratings. Timely assessment of buyers’ financial strength will be important to avoid credit risk. Factors will be an invaluable business partner to all apparel manufacturers during an economic recession.
A recession damages consumer confidence, affecting retailers and ultimately manufacturers. However, there may be hidden opportunities. Retailers and manufacturers that survive a recession may emerge with a more-engaged and loyal set of customers, fewer competitors, and additional assets and prospects. Companies need to prepare for a period of rapid change, and they must be ready to invest and innovate even in the midst of the economic upheaval. In the last two recessions, in 1999 and 2007, retailers suffered falling sales and shrinking margins coupled with rising store closures and bankruptcies.
Digital sales, instead of slowing, actually accelerated; a number of new competitors to legacy brands emerged; and discount outlets grew. These changes have continued to shape retail, while e-commerce continues to drive change in the industry; direct-to-consumer brands and private labels are chipping away at established names; and low-cost retailers are flourishing while mid-market brands are shrinking.
Companies should consider redefining the customer-value proposition and narrowing focus; also, in this information age, it makes sense to narrow your focus with data and computational statistics to help navigate through these times of uncertainty. Businesses might sell underperforming assets and build reserves. In addition to computational statistics, automation and partnerships with others, even temporarily, may help offset costs in their supply chains as only a handful of successful vertical manufacturers exists in this country today.
We advise our clients to diversify, diversify and diversify. Diversification is the varying of its range of products or fields of operations. We strongly suggest that apparel companies reduce their reliance on any single customer or any single go-to market strategy. We would generally suggest less than 10 percent or 20 percent of sales with any one customer. At the same time, we advise apparel manufacturers to look at products or services that even out seasonality wherever possible. That might include the addition of a Winter/Summer/Spring line, accessories or a direct-to-consumer strategy. We strongly advise against a wholesale-only strategy at this stage as the additional stress on a long cash-to-cash cycle can be very difficult to navigate during a recession.
I suspect that all of our apparel-industry clients follow the news with special attention paid to the reports on the economy, trade, tariffs, retail spending, etc. With some economists citing indicators that are similar to those that were present in 2007 and 2008, there is speculation that the economy is headed for a recession. If we are headed toward a downturn, then I believe that the apparel industry as a whole is better positioned to sustain itself than it was a dozen years ago.
Let’s face it, apparel manufacturers and importers have been dealing with a challenging macrobusiness environment for years. The hits just keep on coming: retail bankruptcies, liquidations, massive reductions in doors, shifts in consumer buying channels, eroding prices and tariffs, to name a few of the obstacles facing companies on a daily basis. That’s in addition to the day-to-day grind of late production, meeting cancellation dates, dealing with never-ending retail markdowns and more challenges. So, while the possibility of a recession cannot be ignored, our apparel clients are already battling a litany of challenges, so many operators are reasonably well prepared to navigate a soft economy. Of course, if we have a recession, further belt tightening will be required.
If a recession occurs, unemployment will rise and consumer spending will contract. But as we saw in the last recession, some sectors of the apparel industry are counter-cyclical and can actually perform well, for example discounters, while other areas, for example fashion brands, lose ground. That underscores the need for companies to better understand how a downturn will impact both their retail customers and the consumers who have typically bought their products. The good news here is that social media has made gathering intelligence on consumer purchasing so much easier. Further, we would urge clients to assess which if any of their suppliers might feel the pinch due to a sharp drop in production orders.
We would certainly remind our clients that a recession will present both opportunities and threats. It may be time for some to play more offense, that is, creating moderate or downstairs lines for existing customers and/or discounters. Of course, the defense can’t be ignored. We will certainly reinforce to our clients that lower inventories should be maintained, they should increase their buy against orders and proactively manage expenses.
There is always turmoil and change in our industry: a potential recession, rising interest rates, retail closures and world events, to name a few. However, manufacturers, importers and exporters should not react to events they cannot change. Companies need to focus their attention on the following principles to avoid losing their existing customer base. In order to stay connected to the customer, remaining razor focused while understanding what their socio-demographic analytics indicate their uber-consumers are looking for, is key. Consumers are looking for authenticity, value and the ease of purchasing and returning merchandise. Discriminating consumers have both more time, based on internet access, as well as money. It’s critical that companies understand how consumers think and what they want. Inspiring consumers will pull dollars from their wallets. Companies should be mindful that they need to explore avenues of exporting their merchandise since 95 percent of potential customers are outside of our United States borders. On the global front, Asia, Europe and parts of Africa continue to have a strong demand for U.S.-designed apparel. Africa’s consumer spending is growing significantly.
Manufacturers, importers and exporters who seem to be in tune with the flux of the current market conditions are able to maximize their opportunities in such conditions. These business owners do not need to chase sales to support their overhead and will do exceptionally well under any market condition. Their operations are lean and mean so when the market opportunity arises, they maximize their position. Today, a smart business owner must properly level all aspects of the business side and create merchandise that customers have to have once seeing the designs. Creating the proper financial foundation at the right point will afford them a better cash flow later. Searching inside themselves for a solution while focusing on areas they can change will help clients prepare for a potential recession.