Grim outlook for clothing wholesale and manufacturing

An IBISWorld report has painted a grim picture for clothing wholesale and manufacturing, which is in decline as retailers cut wholesale intermediaries and source more products overseas.

The report, titled Clothing Wholesaling in Australia, reveals profit margins in the industry have declined over the past five years, a trend which is expected to continue over the next five years.

IBISWorld estimates the industry value added will increase at an average rate of 0.9% over the 10 years through 2015-16.

“Australia’s GDP is expected to grow at a stronger rate over this period. As such, the industry will account for a smaller share of the economy,” the report says.

“Apparel prices declined over much of the five years through 2010-11 as the majority of apparel is sourced from countries with low production costs.”

“The increasing value of the Australia dollar also lowered the relative cost of imports. However, cost savings were passed on in the form of lower prices to retailers.”

Karen Dobie, IBISWorld Australia general manager, says consumers have become accustomed to price reduction, and now expect to buy items at sale prices regardless of the time of year.

“They are now also becoming increasingly savvy in the use of price comparison websites, as well as buying items directly online from both domestic and international retailers,” Dobie says.

In an effort to compete in the retail environment, clothing retailers are cutting costs in order to provide savings to customers.

For Australian wholesalers and manufacturers, this has resulted in steady declines in revenue as retailers cut wholesale intermediaries and source products directly from overseas.

“International manufacturers face significantly cheaper operational costs than are possible in Australia, making it cheaper for retailers to source items offshore,” Dobie says.

According to IBISWorld, strained industry profit margins are expected to fall from 7.9% of revenue in 2006-07 to 7.2% by mid next year.

IBISWorld is anticipating a bumpy road for the industry, as global economic turmoil continues to contribute to low consumer sentiment and spending cutbacks.

“While the high Australian dollar will provide some protection to retailers’ profit margins, it will also encourage retailers to source more clothing from overseas,” Dobie says.

“[This trend will force] more clothing manufacturers to close or to move offshore to competitive low-cost countries such as Vietnam, Pakistan and India.”

IBISWorld says manufacturers should try to combat the threat by responding to consumer trends.

“Product innovation and the introduction of new styles is necessary to drive sales… In terms of products sold by this industry, casual wear is popular in Australia,” the report says.