Low-cost RMG production the secret weapon in 2023

Soaring inflation, geopolitical instability and supply chain disruptions will deepen the crises of global fashion businesses in 2023, but Bangladesh’s apparel sector would remain a positive territory as many key players will continue to seek the country’s low-labour cost manufacturing.

The findings of “Business of Fashion-McKinsey State of Fashion 2023 Survey” released last week, firmly assure that renowned global buyers and retailers are thinking to continue sourcing products from Bangladesh because of a major advantage – reasonable prices.

“Many fashion players are expected to continue to produce garments in historically low-labour cost manufacturing countries such as Bangladesh and Pakistan, but nearshoring will remain on executive radars,” the report notes.

One of the respondents, MAS Holdings Group’s Chief Executive Suren Fernando said, “A few years ago, MAS was predominantly supplying everything out of Sri Lanka. Today, we have a much broader manufacturing and sourcing footprint.

“Our largest manufacturing base is still in Sri Lanka, but we have a significant presence in Bangladesh.”

MAS Holdings is South Asia’s largest manufacturer of lingerie. “Our geographic expansion generally starts by working with one or two ‘anchor’ customers, to understand what they want strategically, what they might see in a particular region,” he added.

According to the survey, 65 per cent of fashion executives said they were considering nearshoring to address supply chain challenges.

As the second largest apparel exporter and an Asian country, it will give Bangladesh an opportunity to grow while Sri Lanka, Myanmar and Pakistan deal with their political crises.

Projected state of business in 2023

The Business of Fashion-McKinsey State of Fashion 2023 Survey show that 56 per cent of fashion executives expect conditions in the fashion industry to worsen in the year ahead.

Meanwhile, 28 per cent opined that it will remain the same, and 16 per cent expected the industry to do better in 2023.

According to the report, non-luxury fashion retail sales are expected to grow by 1 per cent to 6 per cent in the US market, and 2 per cent to 7 per cent in the Chinese market. However, sales in the Europe market will dip by 1 per cent to 4 per cent in 2023, when compared year-on-year.

Meanwhile, luxury fashion sales are expected to grow across the board in 2023. Retail sales of this segment will grow by 3 per cent to 8 per cent in the European market, 5 per cent to 10 per cent in the US and 9 per cent to 14 per cent in the Chinese market.

Outlooks for 2023 vary by region and continent. In the US, which is more insulated from the effects of the war in Ukraine and Covid-19, 61 per cent of executives expected the same or better conditions in 2023 than 2022.

European and Asian fashion leaders were the most pessimistic in the survey, with 64 per cent and 53 per cent anticipating worsening conditions, respectively.

What do industry leaders, experts say?

Projected growth in the US market – the single largest export destination – is a positive indicator for Bangladesh, while slower negative growth in the European market will not be big problem for the industry.

Speaking to The Business Post, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) President Faruque Hassan said, “Positive growth outlook in the US market is a good opportunity for Bangladesh as the export growth is better there.

“As Bangladesh has strength in mid-range and basic goods, we will be able to grab more market share in 2023 amid the global crises.”

Bangladesh exports to the US increased by 53.54 per cent to $6.64 billion during January-August period of 2022. In FY22, Bangladesh’s exports to the US reached $10 billion, the highest ever recorded.

Faruque argued China is losing market share, which has created an opportunity for Bangladesh. In the last decade Bangladesh made a stride to improve capacity, and it helped the country gain more global market, he added.

Commenting on the issue, Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Vice President Fazlee Shamim Ehsan said, “We expected about a 20 per cent dip in the European market, but 4 per cent to 5 per cent negative growth would not be a big problem.

“As they promise to continue buying from here, we just need fair prices from retailers and branding to survive and overcome this critical period. In addition to this, the Bangladesh government should continue its policy support to remain competitive in the export market.”

Bangladesh apparel exports to the European Union (EU) rose by 10.26 per cent to $6.79 billion during July-October of FY23, which is 59 per cent of total apparel exports. In FY22, Bangladesh had fetched $21.40 billion from the EU.

What are the challenges ahead?

Inflation, geopolitical instability and supply chain disruptions persist as top risks, and these factors could make global fashion businesses worse in 2023.

As per the survey’s findings, 78 per cent respondents reported that inflation will be the top risk for fashion businesses in 2023, while 66 per cent said it will be geopolitical instability, and 52 per cent pointed at supply chain disruptions.

Meanwhile, 31 per cent said increased economic volatility, 28 per cent volatile energy price, 17 per cent rising interest rate, 15 per cent financial market volatility, 7 per cent trade policy changes and 5 per cent Covid-19 pandemic.

While executives are divided on how long the economic slowdown might last, they agree the conditions ahead will be difficult for the industry to navigate, the report said.

In addition to concerns about inflation, economic slowdowns and margin pressures, respondents cited changing consumer demand and declining confidence as key challenges in 2023, it added.

What are the brands planning?

To help mitigate the impacts of inflation on costs, over 60 per cent of the respondent executives said they plan to optimise or re-negotiate sourcing agreements, according to the survey.

In addition, approximately two-thirds of the executives said they are considering nearshoring to adapt to unpredictable consumer demand.

More than 60 per cent of fashion leaders also said they are considering strategic partnerships with suppliers to increase their speed in the market, and create more efficient supply chains that will carry benefits for the long term.

To reduce their own costs of inventory management and simplify sourcing agreements, nearly 75 per cent of respondents aim to simplify inventory by reducing the number of products and styles, while 65 per cent plan to adjust the balance between seasonal and basic items in assortments.

As such, nearly 60 per cent of respondents plan to increase the share of lower-priced items in their assortments, while 80 per cent expect more than 10 per cent of their sales in 2023 to be driven by promotions and discounts.

Growth priorities

In 2023, fashion leaders anticipate a continuation of the casualisation trend that took hold during the pandemic, as more shoppers shifted to working from home.

Casualwear, followed by sportswear and sneakers, are the highest-ranking categories in terms of where executives see the greatest growth potential.

However, while executives believe consumers will continue dressing casually day-to-day, nearly 40 per cent expect occasion wear to be one of their top three growth categories in 2023, as special events like weddings increase after having been postponed during the pandemic.

Bangladesh’s RMG export status

During July-November of FY23, apparel exports rose by 15.61 per cent to $18.33 billion against $15.85 billion a year ago. In FY22, export earnings from RMG products rose sharply by 35.47 per cent to $42.61 billion, which was $31.45 billion in the previous year.

Of the $42.61 billion, knitwear products fetched $23.21 billion, up by 36.88 per cent from last FY’s $19.91 billion, while woven items earned $19.39 billion, registering a 33.82 per cent growth.