Consolidation Shifts The Balance Of Power To Retailers
August 22, 2013 In recent years, the textile industry has had to endure endless deflation, bear the brunt of the great recession and survive the cotton price spike of 2011. Few in the textile supply chain have been immune to the adverse effects of the calamities listed above, yet few are aware of the greatest challenge facing the industry: retail consolidation.
Retail is a tough game and the Darwinian notion of “survival of the fittest” has come into play. While many chained retail stores downsized during the recession, many smaller ones simply folded. In the United States, there are now 4,000 fewer apparel specialist stores than there were in 2007, when the recession began. But why does any of this matter?
It matters because the balance of power between the textile supplier and retailer has shifted dramatically, and manufacturers are faced with a dwindling number of customers to sell their products through. Those retailers that have managed to survive in the current climate have emerged with greater market share and, as a result, have imposed tougher conditions on their suppliers. These new conditions can range from credit extensions to environmental certification for products, but all are relatively non-negotiable.
The level of retail consolidation varies across geographies and across channels but is noticeable almost everywhere. In the United Kingdom, for example, the five largest department stores now account for 76% of all channel revenues, up from 72% in 2007. In South Africa, the top 10 apparel specialists have increased their combined share of the market from 34% in 2007 to 42% in 2012. Even the realm of e-commerce is not immune from this trend, with Amazon, eBay, and Otto consolidating their positions at the top of the market.
Pressure on Unit Prices
The increased demands arising from retail consolidation can vary substantially, from setting minimum standards for workers in the supply chain to forbidding the use of certain chemicals in the dyeing process. These retailer demands come at a cost to the supply chain, whether financial or otherwise. However, the real bargaining power that dominant retailers have – and the one that suppliers fear more than anything else – is the ability to lower unit prices.
Retailers that are positioned as volume sellers are under constant pressure to lower their prices and offer discounts to maintain their competitive advantage. The gradual disappearance of independent textile retailers has left a vacuum for others to fill, and it is the larger, volume-oriented retail chains that have now occupied this void. This has not only reduced choices for the consumer and supplier, but dragged down average selling prices in the apparel and household textile industry. The greater the level of retail consolidation in the market, the greater the pressure on suppliers to reduce unit prices.
There are, of course, numerous advantages to supplying textiles to higher-volume retailers, such as the increased volume demand and the potential to sell in new geographic markets. However, this should not come at the cost of choice for textile suppliers. The ones most affected by retail consolidation are the producers of higher-quality textiles, whose products are priced out of the reach of most large retail chains.
Fighting Fire with Fire
As the old saying goes, “the best defense is a good offense,”’ so the obvious solution for textile suppliers is to seek greater market share, resulting in supplier consolidation. Just as suppliers are faced with limited choices regarding which retailers they supply to, retailers can similarly feel the pressure from a limited choice of suppliers they are able to buy from. The volume focus of chain retailers also means the number of producers that can supply a consistent product in sufficient quantity to fill shelves nationwide (and even globally) are a minority.
Greater supplier consolidation certainly aids the producer’s bargaining power, but there are wider economies of scale to be realized that will help individual businesses thrive in today’s tough market.
So far, many of the issues of retail consolidation that have been addressed relate to the wider textiles supply chain. As much as the cotton industry shares in these challenges, there is an additional risk to cotton that arises from greater retail consolidation.
Do Retailers ‘Need’ Cotton?
Cotton may no longer be at the 2011 price point, but it is nevertheless a more expensive option for retailers compared to many synthetic fibers. In addition to the pressure applied on unit prices as a consequence of retail consolidation, the remaining retailers are likely to think creatively about how they can lower the cost of merchandise.
Private label products, which have become particularly prominent within household textiles, have seen increased penetration in several major markets at the expense of more costly, branded products. These retailer-branded goods are typically aimed at the lower end of the market and therefore tend to rely heavily on cheaper, synthetic fibers.
Replacing cotton with cheaper materials could shave cents off unit prices, resulting in sizeable cost savings for the retailers that sell those items by the tens of thousands. As much as apparel and household textiles brands would like, private label penetration is unlikely to see a reversal. Many consumers are already accustomed to purchasing store-brand clothing, and the more private-label products invade retailers’ shelves, the less likely cotton is to be used as the primary material in many textile products.
The only thing stopping retailers from a wholesale switch to synthetic fibers is consumers’ preference for the material, particularly in products such as socks, underwear and shirts. In absence of this penchant for light, breathable, natural fibers, many in the cotton industry would be at the mercy of cost-focused retail chains that do not possess the same sentimental attachment to cotton that the rest of the supply chain does.
Playing the Sustainability Card
Whether organic or not, cotton fiber is perceived by the average consumer to be natural, and our own research shows that the majority of people define organic as natural. The cotton industry needs to encourage and strengthen that association as much as possible because cotton’s share of the textiles market has been on the decline for some time – and retail consolidation is only going to exacerbate the issue.
On the plus side, consumers’ collective “green consciousness” is growing, and that could bring a reversal in cotton’s falling market share in textiles if the fiber can be correctly positioned.
The sustainability card is not the only option for cotton, but it certainly is a powerful one, in light of consumers’ misinterpretation of the organic label. Much of what has been discussed in this article will make for somewhat depressing reading, but with the correct strategy, textiles suppliers can reassert themselves against retailers, and cotton can defend its place in the market against synthetic fibers.
Are We Really All In It Together?
While the balance of power is certainly shifting in regard to the relationship between buyers and suppliers, viewing the supply chain dynamic in an oversimplified, retailer/supplier context is perhaps misleading and unhelpful.
Over the last few decades, the most successful textiles retailers have developed mutually beneficial partnerships with suppliers and taken a longer-term view of the textile supply chain. As much as retailers hate to admit it, they need textiles as much as textiles need them.
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