Industry Focus: Finance: Entering 2020: A New Year for New Plans in the Apparel Industry
Following a great deal of uncertainty as the apparel industry approached the fourth quarter of 2019, businesses entered 2020 with cautious optimism. While the warnings of a recession had turned around, with forecasters revising their predictions for the new year and progress with trade deals including the finalization of the United States–Mexico–Canada Agreement, in addition to advancement toward an agreement with China, additional concerns remained.
Regardless of the outcome, an important presidential election in the United States during November 2020 will have an impact on where we go from here. Protests in India and Hong Kong have continued to influence the market, while the United Kingdom’s Brexit deal continues to leave unanswered questions. Devastating natural disasters also continue to impact business hubs around the globe, leaving uncertainty and necessitating not only an initial approach to sourcing and supply chain but also alternate plans to quickly pivot if sudden changes threaten the market.
Upon entering 2020, the apparel industry now faces a year filled with opportunities and major decision-making. We asked financial-industry experts with a deep understanding of the apparel market, “When thinking about the end of 2019 and examining the current climate in 2020, what financial forecast would you offer to your clients to help them succeed throughout this year?”
Darrin Beer, Western Regional Manager, Commercial Services, CIT
This year could be challenging as a slowing economy could impact the growth prospects for apparel manufacturers. Instead of focusing on topline growth, apparel companies should seek to operate more efficiently by improving productivity in the supply chain and operations while ensuring financial flexibility. The right financing can help manufacturers invest more in product development.
Continued investment in product development should be complemented with a social-media strategy focusing on consumer preferences that promote their beliefs, including social consciousness and sustainability. For today’s consumers, apparel goes beyond being just a fashion statement—it’s also a statement about values.
Apparel manufacturers should also pay close attention to evolving news developments. That’s not to say they should overreact to every headline, but the twists and turns in business conditions that evolve over the course of a year deserve constant monitoring. Staying informed about business and regulatory trends can help apparel manufacturers better anticipate and respond to market shifts.
Mark Bienstock, Managing Director, Express Trade Capital
The unfortunate picture that we see is that retail continues to contract. With fewer stores to sell to, it makes it that much harder for a manufacturer to grow or even sustain its volume. It truly boils down to price, newness and brand awareness in winning the business of the retailer. Inventory management will be critical for the future of apparel. Speculation will put companies out of business. Rotation is what we preach to all of our clients. Apparel inventory is not like fine wine. It does not go up in value. The best course of action for many of the well-established brands is to consider licensing their name to generate an ongoing revenue stream from a wide spectrum of categories.
Sydnee Breuer, Executive Vice President, Western Region Manager, Rosenthal & Rosenthal of California
2019 was a challenging year overall for the apparel industry, and I would expect more of the same for 2020. The retail environment continues to struggle, with retailers reducing their footprints or going out of business altogether and online retailers still trying to figure out how to be profitable despite increasing market share and popularity.
Now that the election season is in full swing, the political environment is in a constant state of flux. Regulations will continue to impact how our clients conduct business, most notably the contract worker versus employee changes in California. Tariffs were a major headline in 2019, and our clients needed to manage their supply chains to be more efficient and cost-effective, including seeking out more-economical resources in other countries.
It is imperative that our clients continue to manage their expenses and inventory levels in order to be profitable and successful in 2020. Product needs to be placed strategically to match consumer demand, be it in physical stores or online. With our expertise and knowledge of the creditworthiness of retail customers, we are able to assist our clients in navigating the minefield.
Gino Clark, Executive Vice President, Managing Director, Originations, White Oak Commercial Finance, LLC
Preliminary reports for the 2019 retail industry show that last year encompassed a challenging marketplace complete with many opportunities for ready businesses. In this environment, we noticed that the majority of our successful clients embodied these common traits: expense controls, well-managed inventories, the discipline to pass on long-margin orders or margin accounts, the ability to adapt to consumer demands, and active engagement with industry specialists such as accountants, lawyers and lenders or factors as a valuable sounding board.
As we begin 2020, we are encouraging clients to build on their recent successes by reinvesting profits back into their businesses and addressing changes in supply-chain and distribution channels by closely managing their business model. For example, we have a private-label manufacturer that understands the importance of global diversification and has developed the capability to source from multiple global regions to offer a balance between price points and production times to meet specific customer demands.
We believe smart and adaptive decision-making will be essential for our clients’ success and that we are the right lender and factor to help them manage through the challenges and capitalize on the opportunities in 2020.
Joshua Goodhart, Executive Vice President, National Sales Manager, Merchant Financial Group
2019 was certainly an interesting year for the apparel industry. Although the stock market’s performance was well above what most analysts expected, the apparel market continued to fight through turbulent times and new challenges. I would say the most prominent obstacles included the tariffs put on foreign-made product as well as the constant struggles of many large chain retailers and bricks-and-mortar outlets. In 2019, we saw the trend of more retailers filing bankruptcy and their financial condition continuing to deteriorate. We saw wholesalers seek other options outside China to produce goods and try to manage expenses. Overall, many wholesalers saw a drop in sales volume due to not wanting to accept a thinner-margin business or a once-solid retailer no longer being creditworthy.
In 2020, I believe we will still see much of the same trends for the traditional wholesale apparel businesses that we saw in 2019. Those wholesalers who have adapted, kept overhead tight and maintained solid relationships with their core retail accounts will continue to financially weather the storm. We will see more and more private-equity money going into growing direct-to-consumer businesses with fun, new products that will create excitement in the market. Companies will look to use more financial resources on more joint collaborations with other brands, celebrities and influencers to try and develop an extra buzz in the market. Manufacturers will continue to search for other resources for production at competitive prices outside of China. We would also urge our clients and other apparel manufacturers to not take any unnecessary financial risks to maximize profits.
I do believe there will be challenges in 2020, but I also believe there will be opportunities. There is a tremendous amount of private-equity money out there as well as M&A opportunities in the apparel sector. If the price is right, these opportunities can be very lucrative in this environment.
Rob Greenspan, President, Chief Executive, Greenspan Consult, Inc.
2019 was not the easiest year to navigate due to the continued retail issues of store closures, bankruptcies, continuing retail credit issues and of course the effects of Internet sales continuing to pound the retail environment. 2020 will probably be more of the same. Companies need to continue to find ways to grow their topline sales revenues. That will include e-commerce growth as the wholesale side of the business is becoming more difficult to find, develop and grow new customers.
Managing production through the tariff issues was a real problem during 2019. Many companies have been successful in finding new sources of production in non-tariff countries. Continuing to find new avenues for quality production should be a focus for apparel companies during 2020 as we still don’t know how and when the trade deals will be concluded.
As always, companies need to keep a high level of liquidity in their businesses. You need to make sure you can survive on your cash flow without having to go to your lender for continuous over-advances. Work on improving profitability by managing gross profit margins and overhead and of course keeping inventory at the proper levels and turnover rates.
Kee Hyun Kim, Chief Executive Officer, Finance One, Inc.
The U.S. economy expanded at a healthy rate in 2019 despite fears of a looming recession. A steady growth is expected to continue in 2020 with a low unemployment rate and relatively high consumer confidence. But there are numerous uncertainties that can have significant impact on our economy.
Domestically, the outcome of the 2020 presidential election and the ongoing negotiation of the trade agreement with China add layers of unpredictability. Brexit, the continued protests in Hong Kong and the spread of coronavirus are some of the global factors that can impact the U.S. economy. On top of those economic uncertainties, troubles within the apparel industry are expected to continue. The increasing cost of doing business and declining numbers of retail stores are expected to persist throughout the year.
Opportunities exist even amid an industrywide slump and economic uncertainties. Sustainable fashion continues to be one of the main interests among young consumers. Companies first to adapt and act on changes in consumer behavior will have a better chance to succeed. The proliferation of e-commerce has caused retailers to opt for drop-ship orders. Vendors who can effectively manage the inventory and provide service to the consumer should be able to increase business volume in 2020.
Sunnie S. Kim, President, CEO, Hana Financial, Inc.
Although our firm does not provide specific economic advice, we feel 2020 will be another year filled with uncertainty for retail apparel. Consumer behavior is still shifting, the possibility of a recession looms on the horizon, and international-trade conflicts are not yet fully resolved.
In such a climate, firms should prioritize investing in automation and technology and more carefully managing expenses to build reserves for future growth.
Robert Meyers, President, Republic Business Credit, LLC
Republic’s advice remains pretty consistent every year. The only certain thing in business these days seems to be its consistent uncertainty. 2020 seems to have it all for apparel manufacture to worry about, elections, travel restrictions, tariffs, trade wars, new supply chains and elongated Chinese New Year to kick it all off. Republic’s advice remains rather simple, you need to have flexibility in your business wherever possible. Businesses should strive for a diverse customer base, robust ecommerce platform, higher margins, retain profits, less inventory on hand and reduce their overheads wherever possible. While all of that isn’t easy, it provides a pathway for your business to absorb the uncertainty. The biggest struggles we see involve apparel companies that are cash tight and keep more inventory on hand than necessary. Cash remains king during these types of cycles and uncertain times. Make sure that you have discussed your business projections with your accountant and factor so they are prepared to support your success in the upcoming years.
Kevin Sullivan, Senior Vice President, Regional Credit Manager, Commercial Services Group, Wells Fargo Capital Finance
It’s important to remember that, despite some of the issues that continue to plague the retail bricks-and-mortar segment, the economy remains pretty strong. Unemployment continues to run at around 3.5 percent, which is about as low as the unemployment rate gets. We’re seeing around a 2.0 percent GDP growth rate, which also remains pretty solid. While business spending slowed a little toward the end of last year due to the uncertainty surrounding the tariff situation, spending should improve as that uncertainty begins to lift. Interest rates should remain reasonably low as the Fed is basically in a holding pattern on rates.
While consumer spending should remain strong in 2020, the key for apparel companies continues to lie in their ability to capture consumer dollars relative to purchases of other goods and services. The companies that continue to thrive have been able to diversify their customer bases, whether through acquisitions, adding new product categories or licenses, or venturing out into new distribution channels. Direct-to-consumer models will continue to impact apparel, and the ability to either develop company-owned DTC models or find new customers in the space will remain an important part of maintaining or growing topline revenues in 2020.
Ken Wengrod, Co-founder, President, FTC Commercial Corp.
2020 will be an excellent year for apparel manufacturers who understand how to deal with volatility and mitigating market risks. I believe the U.S. economy will remain robust, with strong consumer confidence, and, with the trade barriers behind us, today’s apparel manufacturers will need to heavily compete to attract consumer dollars for their merchandise.
First and foremost, apparel manufacturers need to have the right merchandise for their specific consumers. They need to define their DNA and stay true to their core beliefs. Old business models and strategies need to be discarded and replaced with strategies that stress new technologies, including a strong emphasis on digital, sustainability and diversity. Pressure to employ new technology will be evident. Small to medium enterprises, on the surface, will be at a disadvantage to larger players who have the funds for R&D and acquire the “right platforms.” SMEs need to run lean operations with low overhead so they can employ the necessary technology to effectively compete in this new environment. Building financial flexibility should remain their focus by maximizing gross margins, low overhead and not chasing sales.
Manufacturers need to develop a platform and marketplace that consists of a multi-channel distribution network, bricks-and-mortar, social media and on-line sales. These are key opportunities to maximize the exposure of their merchandise.
In 2020, today’s consumers, Millennials and Gen Zers are expecting manufacturers to walk the talk on sustainability. Manufacturers will need to develop a strategic plan to define their life’s purpose and how they are addressing sustainability, diversity and their supply chain. Once the consumers feel confident knowing the manufacturers are transparent in these areas and have a positive experience visiting the manufacturer’s marketplace, the consumers will be inclined to spend.
Also, building export sales should be a primary focus in this coming year. Ninety-five percent of the potential market is outside of our boundaries. Europeans and Asians are still craving U.S.-designed merchandise, especially the SoCal lifestyle. The essence in 2020 will be for apparel makers to be able to be agile so they can move quickly and maintain their resolve for all challenges.