Many UK retailers have moved sourcing overseas in recent years considering it the best way to save money, but with companies’ margins increasingly under pressure Head of UK Retail at Alvarez & Marsal Mark McMenemy argues that businesses may want to switch their attention to UK manufacturing once again.
Over the last 20 years, UK retailers have relentlessly moved sourcing to the Far East and in particular to China. This has been motivated by the need to get a lower cost of supply to secure improved gross margins to offset increased rents, rates, store staffing and a number of other overheads. And of course retailers have to compete head on with all their competitors making the same transition.
This has devastated UK manufacturing; traditional mills in Lancashire are closed and industries have been destroyed in places like Northampton, which was a centre of excellence for shoe making.
But this may now be changing. Margins are now under pressure in a way not seen for a generation.
The primary attraction of China was the low cost of labour compared to the cost of investing in machinery here in the UK. However, with this year’s labour inflation at around 15 per cent, and in some affluent regions nearer 25 per cent following years of pay rises, the argument is wearing a little thin. China is now a high cost labour pool compared to Bangladesh, Vietnam and other countries. If you combine this with the rapid increase in cost of raw materials (cotton inflation at 35 per cent, wool at 25 per cent, linen at 25 per cent), then it is clear that retailers face a significant threat in supply costs. This comes at a time when the average UK consumer has less disposable income and little confidence that the recession is over. Retailers are feeling the pressure. Some are passing cost inflation on to customers while others are trying to absorb it themselves - time will tell which approach is right!
On both sides of the coin, retailers are looking closely at how they can regain control of their own destinies.
Other factors are also at play. Chinese GDP is anticipated to grow at ten per cent this year, with 70 per cent of that figure coming from domestic demand. As the pay levels of ordinary workers grow, so too does their appetite for more and better quality products. Many manufacturers find satisfying that domestic demand easier than working with foreign companies. There is no foreign exchange risk, less bureaucracy on CSR checks, and no language challenges.
This is leading to a lack of readily available production for UK retailers, particularly medium-sized ones. In order to secure their target delivery dates, they are being forced to put down orders much earlier so that manufacturers can fit these into their production schedules. Of course, the further ahead commitments have to be made, the less flexibility retailers have, and the less responsive they can be to new fashion trends.
The obvious move must be to lower cost countries such as Bangladesh, or to lower cost parts of China, but this will not be easily achieved. So, while some retailers are considering moving, others are weighing up more radical alternatives, and are looking at three important factors. Firstly, a downside of Far East sourcing is the four-week shipping time. This forces slow timetables for fashion retailers to hit product launch dates, potentially missing the latest cat-walk trend. Secondly, as oil prices increase and the supply of cargo vessels declines, long-distance freight shipping costs have risen sharply. Thirdly, in the absence of sufficient available lower cost migrant northern Chinese worker arriving in the south of the country each year, manufacturing facilities have had to face up to levels of automation. Many of the most sophisticated and automated footwear factories, for example, now reside in China.
If the cheap labour no longer exists and if the existing workforce is being reduced and replaced with machines, then these machines can be placed anywhere at the same cost. So if the primary reason for heading east is no longer valid - why stay there? That is a question increasingly being asked in retail buying departments and boardrooms.
There is no doubt that over the years that expertise, not only in manufacturing but also crucially in elements of design, has been transferred from UK shores to the Far East and will not be easy to re-create here. But it is not an impossible task. Clearly being closer to home would reduce shipping times and logistical costs. It would avoid earlier and earlier commitments forced by production capacity constraints. It would almost certainly lead to lower inventory levels. Perhaps most crucially, it would increase flexibility for the more fashion-related retailers and remove the current unwanted compromises.
At a recent conference Arcadia Group boss Sir Philip Green began to explore some of these issues and trends. If leading retailers were to put their full weight behind such a push, the effect would be immediate and possibly decisive. The politicians, of course, could make sure the positive development ‘on their watch’ became headline news. Reversing the decline of traditional UK manufacturing would be a political coup and could well get government support in the form of tax breaks or enterprise incentives.
‘Made in the UK’ is no longer a pipe dream - watch this space!
McMenemy is former Finance Director of Mothercare, Clarks Shoes and Monsoon.
Note: The views expressed here are those of Mark McMenemy and do not necessarily represent the views of Retail Gazette.