Australia’s Textile, Clothing and Footwear manufacturing industry is dangling by a thread with niche fashion label growth preventing it from completely unravelling. The industry is suffering from the same trends currently plaguing the rest of Australia’s manufacturing sector as intense competition from foreign imports, rising labour costs and changes in consumer spending have cut revenue growth and shredded profit margins for many operators.
For clothing and footwear manufacturers in particular, these problems have been compounded by the devastating impact of the strong Australian dollar which as fuelled import growth.
Added to this have been recent changes to national labour regulations governing the rights of independent contractors who were one of the few and final sources of competitive labour used to ease the degree to which Australian producers were being undercut by foreign clothing and footwear manufacturers. As a result of these factors, industry revenue for Australian textile, clothing and footwear manufacturers is forecast to decline by 4.5 per cent over 2012-13 to reach $5.3 billion.
This reflects the long-term decline within the industry over the past five years during which revenue has fallen at 6.7 per cent per annum on average since 2007-08.
The industry’s most significant challenge over the next year will be coping with the ongoing rise in competition from textile, clothing and footwear manufactured abroad especially in countries with access to cheap labour and lower overhead costs.
Local manufacturers already compete intensely with foreign manufacturers given that imports account for 80 per cent to 90 per cent of domestic demand on average for Sleepwear, Underwear and Infant Clothing Manufacturing, Men’s and Boy’s Manufacturing, Women’s and Girls’ Manufacturing and Knitting Mills in Australia.
However, imports for these segments are expected to increase 5.3 per cent over the next year to reach $1.0 billion. Further to this, textile, clothing and footwear imports have increased at an annualised 9.2 per cent since 2007-08.
Chinese clothing imports are the industry’s largest source of competition given they make up 79 per cent of Women’s and Girls’ Clothing imports, 76 per cent of Men’s and Boys’ Clothing imports, 84 per cent of Sleepwear, Underwear and Infant Clothing imports and 66 per cent of imports for Tailoring and Clothing Accessories.
Other countries such as Indonesia are also ramping up clothing, footwear and textile exports to Australia however their market share is miniscule compared to the overwhelming dominance of Chinese manufactured clothing across all industry segments.
Nonetheless, the increasing market share of imports from these countries within Australia is still significant because it indicates that import competition will undoubtedly remain tough for Australian manufacturers over the medium to long-term as Chinese imports become less competitive as a result of higher wages and therefore greater production costs.
Other factors that are causing local manufacturers to lose market share to foreign imports include the strong Australian dollar and rising wage costs all of which have fuelled price competition and eroded profitability for the industry.
Since it spiked during 2009-10, the Australian dollar peaked at a 30-year high in 2011-13 and is expected to remain above parity with the US Dollar over 2012-13. This has made imports even cheaper and therefore a logical choice of supply for downstream retailers.
Added to this has been the negative impact new workplace laws introduced by the federal government to boost the conditions and rights for outworkers who are hired as independent contractors by industry operators. In the past, outworkers were generally paid below the minimum wage on a per item basis which helped manufacturers keep production costs low and to compete against foreign manufacturers who have access to cheap labour.
The new labour laws now require that outworkers be given the same entitlements as in-house employees, including sick leave, annual leave and the minimum wage. This is expected to reduce the employment level in the industry further for 2012-13, as manufacturers lose the incentive to use outworkers in place of in-house workers.
Changes in consumer spending behaviour since the onset of the global financial crisis have also stifled growth for Australian Textile, Clothing and Footwear industry and this is expected to continue during 2012-13.
The industry depends on downstream demand from wholesalers and retailers who are in turn beholden to broad macro-economic factors affecting consumer sentiment and spending. For example, clothing and footwear retailers, including department stores, have struggled to adjust to the seismic shift in consumer spending behaviour since the onset of the global financial crisis.
Since 2007-08, consumers have cut spending and increased savings in order to deleverage depressed demand along the entire textile, clothing and footwear supply chain. This has also been demonstrated by Australia’s national savings rate remaining at record levels over the past five years and credit card advances slumping over the same period. In addition to this, consumers have also become accustomed to price reductions due to aggressive discounting as retailers fight to secure sales and entice people through their doors. This increases the level of price competition for clothing, textile and footwear manufacturers and also the appeal of cheaper foreign imports especially given the strong dollar. This helps retailers and department stores justify lower prices but maintain a minimum level of profitability.
Further to this, demand for the industry and for other participants along the supply chain has also fallen as a result of Australia’s online shopping boom. This has occurred in response to consumers becoming increasingly comfortable with using price comparison websites and purchasing items online from domestic and international retailers. The dramatic growth of the internet as a channel for commerce has also been supported by increasing internet speeds and the rapid uptake of these high-speed internet services. The larger range of products and services at competitive prices available online coupled with improvements to the online security have further helped make the internet a safe and credible medium for shopping.
As a result, Online Shopping in Australia has grown 8.3 per cent per annum on average in the five years through 2012-13 however purchases to overseas retailers is likely to have risen at a much faster rate. The strong Australian dollar has also fuelled online spending over this time especially to overseas textile, clothing and footwear sites offering a greater range of products at competitive prices sometimes with free delivery.
Despite the gloomy trading conditions, some pockets within Australia’s Textile, Clothing and Footwear Manufacturing industry have shown signs of growth due to their niche product offering and favourable downstream consumer trends.
For example, fashion retailing is one niche segment that is actually tipped to flourish over the next year which could boost demand for some domestic manufacturers. Australia’s high-end goods retailing industry has actually defied the depressed retail environment over the past few years thanks to consistent demand from high-income earners and the increasing numbers of international tourists who now view Australia as a good international shopping destination. Most importantly however, growth has also been buoyed by middle-class fashionistas who place a high value on the quality and durability of luxury high-end goods such as international fashion labels.
The other main driver for growth in Australia’s fashion retailing industry includes the rise of online sales and the growing popularity of omni-channel retailing whereby retailers use a variety of selling platforms to maximise the customer experience.
Omni-channel retailing actually caters to value conscious consumerism whereby people are more willing to spend time and effort comparing prices online or perusing shopping isles in order to get the best bang for their buck. For fashion retailing, this has been demonstrated by the rapid growth in sales for new online fashion retailers such as The Iconic and also by the opening of an Australia based website for international fashion online retailer ASOS.
The success of Australia’s online fashion retail industry will also be boosted by MYER’s $30 million investment to revamp and increase its online presence over 2013. MYER is also expanding its high-end good range for which it has reported sales growth despite the flat retail environment. Other major department stores such as David Jones are also improving their online sales platform and overall customer service.
This has been demonstrated by the success of one of Australia’s niche mid-priced women’s fashion retailers, Cue Clothing Company which is a family-owned company that actively promotes Australian made clothing because it delivers greater quality and allows to company to keep abreast of seasonal fashion trends within Australia.
According to its website, Cue branded clothes are almost exclusively made in Australia and this is actually a major selling point for the company. The company has also tapped into the trend of ethical consumerism whereby Australians and consumers around the world are becoming more aware of how their consumption habits are impacting on the environment and different communities. This has fuelled the organic food movement, the concept of Fair Trade and underpins Cue Clothing’s efforts to ensure and promote ethical working conditions for its suppliers through its accreditation with Ethical Clothing Australian and in its work with the Textile, Clothing and Footwear Union in Australia. This example demonstrates the possibility of growth for niche fashion brands and manufacturers in Australia which is likely to offset the decline in the broader industry over 2012-13.
What can we take from all of this? Australia’s Textile, Clothing and Footwear Manufacturing industry is expected to continue declining over the medium-term but at a slower rate compared to the previous five years. Over the next five years, the Australian dollar is expected to decline which could slow the level of import growth over the same period. However, this is unlikely to offset the comparative advantage foreign manufacturers especially in Asia hold in terms of labour costs which will be amplified as tariffs continue to be reduced on imported products. As such, imports are still forecast to rise at 2.2 per cent per annum on average over the five years through 2017-18 to reach $11.3 billion.
Chinese manufacturers will remain the industry’s largest source of competition over this period however they are expected to lose market share to other low-cost producers as inflation and wages rise. This means that there will be no significant fall in import competition for Australian clothing, textile and footwear manufacturers but that they will be competing against a broader range of manufacturers from around the world.
Looking further downstream, Australia’s general retail environment is also expected to remain constrained over the next five years with revenue for Australia’s Fabric, Clothing and Footwear Retailing industries expected to grow at just 1.4 per cent per annum on average to total $19.3 billion by 2017-18.
In addition to this, revenue for Department Stores in Australia is expected to be just 0.8 per cent per annum on average over the same period to reach $19.6 billion in 2017-18. The slow growth over this period is expected to come from the prevailing cautious and savvy spending behaviour among consumers and their willingness to spend time perusing shopping isles or clicking around online shopping sites to find the very best bang for their buck. As a result, revenue for Australia’s Online Shopping industry is expected to grow at 6.7 per cent per annum to reach $15.6 billion in 2017-18. On a brighter note, consumer sentiment is expected to remain positive and incomes are also expected to rise over the same five year period. These are good indicators of demand for Australian textile, clothing and footwear fashion manufacturers which provides a glimmer of hope for the entire industry for this period.