Is ‘Nearshoring’ The New Offshoring?
Moncler, the Italian maker of down jackets and après-ski wear, makes around half of its products by value in Italy, where local craftsmen produce items like leather handbags, scarves and gloves. Its “façon” manufacturing operation (cut, make and trim), however, is mostly based in Eastern Europe, where Moncler provides the raw materials and its supplier is entrusted to assemble the product under attentive monitoring and weekly inspections. This includes Moncler’s core down jackets. Last year, the brand even established a new manufacturing hub in Romania and hired 600 workers, having bought a local supplier the year prior. The technical abilities and quality level found in Romanian manufacturing is what sparked the move.
It is not the only luxury brand sourcing closer to home (known as “nearshoring”), a practice once deemed uncompetitive when compared to budget suppliers in China, India and Southeast Asia. Affordable luxury brands in particular are moving production to markets closer to home, as they seek higher-quality suppliers and the fall in the value of the euro versus the dollar makes the cost advantage in sourcing further afield less pronounced. What’s more, working with suppliers positioned closer to large consumer markets in Europe allows brands to be more responsive to demand, boosting overall productivity. The same dynamic can be seen across the Atlantic. Close to the US — still the world’s largest consumer market — Honduras, El Salvador and Guatemala increasingly offer a compelling mix of low wages, technical ability and proximity, allowing them to compete for business with Asian hubs.
“There are some categories where it becomes very interesting [for European brands] to source in Europe because the difference in prices [with Asia] is a very low percentage and it’s so much more convenient, you don’t have long to travel, you don’t have custom taxes and you can be much more reactive,” David Benichou, a managing director at the global business advisory firm Alixpartners, said in Paris. Twenty to 30 percent of volumes are likely to move back from Asia to near-shore countries like Romania and Bulgaria when the dollar-to-euro exchange rate is $1.15 to $1.05, Benichou estimates.
Romania is currently the fastest growing economy in the EU, with 5.6 per cent growth, while Bulgaria’s GDP rose 3.4 percent, according to Eurostat data. Exports explain some of that growth. Romania exported €15.4 billion of goods in the first quarter of the year, an 11.4 percent increase, according to Romania’s National Institute of Statistics, with clothes, accessories and footwear the second-largest group, accounting for over a third. In Bulgaria, exports rose 15 percent to €6.2 billion in the first quarter, Eurostat data shows.
The annual production value of apparel in Bulgaria increased 40 percent from 2009 to 2014 reaching €1.3 billion. In Romania, it has climbed 23 percent over the same period to €2.18 billion, the latest Statista data shows.
Where Time is Money
Producing items in Eastern Europe provides brands from European fashion capitals with flexibility to produce “very late in the process and to process additional volumes if necessary,” explained AlixPartner’s Benichou. Fashion quality in Eastern Europe is generally better than in Morocco and Tunisia, he adds. Romania and Bulgaria are able to produce complex, more sophisticated items thanks to years of technical production, while Morocco is known for its denim and other parts of North Africa tend to produce more basic apparel.
Bulgarian and Romanian manufacturers also tend to allow buyers to order lower minimum quantities per item compared to bigger producers like China and Bangladesh, which is helpful for smaller production runs and mid-sized companies. Sending your buyers to check on quality issues is also only an hour-long flight and fewer agents, Benichou said.
By contrast, consider a Paris or Milan-based brand sourcing from Asia. The shipment may take eight to nine weeks to arrive plus extra for customs clearance. Given at least a month in production time and product development at the start, a brand will have to make a commitment on volumes sometimes six months in advance, often well before they have knowledge of what will sell. A supplier in Eastern Europe, meanwhile, can deliver from their factories to a distribution centre in a few days, allowing a company to react to market demands much faster.
“Agile sourcing gives us the flexibility and advantages to design late in-season and replenish best-sellers.”
Take SMCP, which sells Parisian chic at affordable luxury price points through its Sandro, Maje and Claudie Pierlot brands. Twenty-five new products arrive on average in stores every week. Being on trend and high quality is core to the brand. To achieve this, it sources over half its products in the EMEA region, mainly in Eastern Europe and Mediterranean countries. The rest is done in Asia. Products take on average 100 to 120 days from design to store, but that drops by five weeks with markets closer to home. Those “proximity markets” allow SMCP to replenish sold-out items within the season, maximising sales, a spokesperson said.
“Sourcing close to home is very important to reduce delivery timing,” a spokesperson said. “Our agile sourcing gives us the flexibility and advantages to design late in-season and replenish best-sellers during the season. In that way, we respond best to market demand.”
To take advantage of nearshoring strategies, it is essential for smaller brands to have the internal processes to handle that flexibility, Mr Benichou added. The most advanced companies have two collections running in parallel; the main one with larger orders and requiring longer lead times, and the fast-track one that is more reactive to the market, he said.
The Right Mix of Reliability and Flexibility
MIK-BG, a Bulgarian manufacturer that claims it supplies Chanel, Sonia Rykiel, Sandro, Cacharel and Vanessa Bruno directly and through agencies, can produce clothes from as little as four to five weeks depending on the model and how many items are needed. The company, which specialises in dresses made from sketches, will cut the fabric as per the pattern supplied by the designer or agent, make the garment, and finish and package it.
“Yes, I see greater market demand. The brands are reorienting their production entirely in Europe. They are no longer searching to produce [as much] in countries like Turkey and China, because of the rise in wages in China, and because of Turkey’s political situation,” spokeswoman Trayana Racheva said.
“There is a growth in searching for a manufacturer which can provide high quality for the luxury lines. Still, there is a tendency for luxury lines of the brands to be produced in France and Italy, and the second lines are entrusted to companies from Eastern Europe. The main supply is medium and low-end clothing, of course, because of the large quantities.”
“If you’ve got a reliable source you’re not going to abandon it. You might experiment elsewhere but the savings that can be made are trivial.”
Clothesource, a U.K.-based agent who buys womenswear from Romanian factories for British chains like Phase Eight and department store John Lewis says it has increased its supplier base by up to 30 per cent in the last 18 months as value of the euro makes cost savings from other markets like Asia less.
“We’ve seen price rises in China that makes Romania more attractive. It’s just an easy place to work, its easy transport across the border and there’s quite a range of factories,” Liz Leffman, a director, says. She typically sells dresses, blouses, skirts and light, non-tailored items to British brands. “If you’ve got a reliable source you’re not going to abandon it. You might experiment elsewhere, but the savings that can be made are trivial.” The outcome of Brexit could hurt the future of Romanian factories if there are more border controls or tariffs, she warned.
A similar response in the United States has also seen the growth in suppliers in Central American nations like Honduras and El Salvador, ranked seventh and tenth biggest suppliers of US clothing in 2015, according to Textiles Intelligence. President Trump’s overtures to impose an additional tariff on Mexican and Chinese apparel imports may also add to demand for suppliers in Central America.
Sourcing from low-cost countries has its own set of problems, highlighted by disasters like the 2013 Rana Plaza factory collapse in Bangladesh, which killed more than 1,100 people and prompted condemnation of brands including Wal-Mart, Gap and H&M for profiteering from its low-paid workforce. While Turkey’s democracy teeters and terrorist attacks in Tunisia put off some buyers, Eastern Europe alternatively has more stable governments and EU standards, albeit with some of the lowest wages in the European Union.
“The response for mid-size apparel and mid-market is to be very agile and flexible, to always keep alive a network of suppliers in Romania, Bulgaria and North Africa for what they want to produce,” Alixpartner’s Benichou advised. “If the dollar is strong, they should in one season shift back volume into Europe and when the dollar is weak again, you can in the next season go back to Asia.”
This article by Sarah Shannon first appeared in The Business of Fashion Daily Digest.
Sarah Shannon is a freelance journalist based in London, covering the business of retail, luxury and fashion for various publications including the Financial Times and Business of Fashion.