While a new year has begun, many challenges that were experienced during 2021 remain. The COVID-19 pandemic continues to impact the world as new variants of the virus develop.
Following the November identification of the COVID-19 omicron variant, this form of the virus recently developed a sub-variant named BA.2. With the development of additional COVID-19 viral variants and sub-variants, professionals across industries have been tasked with continuing to work under different methods of conducting business and helping customers live within a world where the pandemic has become part of life.
With the approach of the two-year anniversary of COVID-19 lockdowns in the United States, many lessons have been learned within the fashion industry regarding conducting business according to pandemic guidelines. Looking back on the lessons learned from the last two years of an apparel industry under COVID-19, California Apparel News asked financial-industry experts: As the world navigates through the pandemic’s new variants—and considers the potential spread of additional strains—what advice would you offer to apparel professionals?
Western Regional Manager
CIT Commercial Services
The apparel and retail sectors have shown great resiliency beginning with temporary business closures in 2020, the slow reopening of the economy, the delta-variant wave and now omicron. While all of this was happening, supply-chain challenges developed in addition to labor shortages and cost increases.
In terms of preparation, it seems the best course of action is to be ready for anything. It appears the number of omicron cases is beginning to decline in several states, but the reality is other variants could emerge.
Some of our clients are working through fall inventory that was delivered late. Fortunately, in most cases the retailers are taking in the product, but there have been some cancellations.
Ultimately, properly managing inventory levels is important. Many companies will decide to purchase goods early this year to counter some of the logistic and port challenges. Maintaining adequate capital and financial liquidity is imperative to be able to react to future market disruptions. Finally, retailers and wholesalers should continue to watch news developments closely and be prepared to make further mid-course adjustments as circumstances dictate.
Express Trade Capital
Apparel professionals understand that they usually experience more difficult times than good times. This is a positive trait as they become nimbler in working through these unprecedented times of the ongoing COVID spread. One of the key areas of concern relates to the inventory levels and timely receipt of merchandise. Navigating the timing is critical as many apparel companies are extremely seasonal in nature and any delay throughout the supply chain can cause ripple effects. We suggest that our clients be extremely proactive bringing in inventory as early as possible for the upcoming season while continually monitoring the external COVID developments in planning their future inventory purchases.
Executive Vice President
Western Region Manager
Rosenthal & Rosenthal
If there is anything that the last two years has taught us it’s that businesses need to be flexible and to pivot based on the latest information. It doesn’t work to say, “We’ve been successful in the past so we don’t need to change” or “That’s how we have always done it.”
Unfortunately, the supply-chain issues persist and are expected to for the foreseeable future. So, just-in-time inventory that worked seamlessly for many years doesn’t anymore. But you can’t have too much inventory either as the buying whims of the consumer change. It’s a delicate balance, for sure!
It also seems likely that there will be more COVID variants ongoing. The supply chain needs to be more diverse so that should one particular factory or area of the world be affected—or worse, shut down again—it won’t wreak havoc on the flow of goods and timely shipping. Instead of having just one source or importing from just one country, it would be wise to expand the vendor base to minimize this risk.
Of course, it’s easier said than done. Having a trusted financial partner in your corner is key. As PPP money winds down and the costs of doing business continue to increase, having access to working capital will be invaluable to sustain continued growth and get through what looks like another challenging year.
Flexibility, staying on top of the issues, pivoting when necessary and communication with your financial partner should provide the best chance for survival in these crazy times.
Chief Executive Officer
B. Riley Retail Solutions
The retail world got turned on its ear in 2020 and 2021—and I don’t expect things will change soon. In 2020 we became flooded with liquidation projects due to the COVID-19 pandemic. During the early days of the pandemic, every retailer felt the stress of temporary closures. Retailers who were already under financial distress had difficulty holding on. Consumers and store staffs became wary of shopping and contracting the virus. Sales declined and many left the workforce creating a shortage of workers. But not all retailers felt the same pain: Grocery stores, sporting goods and home goods experienced record sales as people stayed home.
There’s more trouble ahead, so what to do? First, if you don’t have a strong e-commerce channel, you better get one—online buying has exploded over the last two years and is here to stay. Next, aggressively address your supply-chain issues. Retailers need multiple sources of goods. If you are still relying on goods manufactured from one source then you remain at the whim of continued plant closures due to virus spikes and raw-material shortages. Thirdly, address the worker shortage. Having goods to sell does little good if you can’t pack and ship the orders or get your goods on retail shelves. You will likely have to pay higher rates or offer better benefits or become more flexible with schedules. Unfortunately, there are no “quick fixes,” but those who have persevered share common traits.
Executive Vice President and Managing Director
Los Angeles Region Manager
White Oak Commercial Finance, LLC
If there is one thing the pandemic has proven over the past two years it is its ability to throw a curveball. It is critical for industry professionals to remain diligent to keep employees and partners healthy and safe. There are many things that companies cannot control in this current environment, from supply-chain disruptions to staffing shortages, but no one can afford to let their guards down on proactive safety measures that help keep operations moving as smoothly as possible.
Given market uncertainties, apparel companies should continue to focus on what they do best. Now is not the time to venture into uncharted territory or make speculative purchases. No one knows what awaits the industry in the months ahead so it is best to concentrate your efforts on the things your business already does well, perhaps fine-tuning certain systems and processes to find efficiencies, and make sure any investments or expenditures are consistent with your business model. In this dynamic economy, companies need to be nimble and prepared to adapt quickly to changing conditions. With COVID-19, change is inevitable.
To get ready for whatever lies ahead, you should take the necessary steps now to manage your assets, keep a strong balance sheet and confirm your financial reporting is up to date. You should also make sure you have excess availability on your credit line to help bridge temporary setbacks and take advantage of growth opportunities necessary to stay competitive.
Having a credit facility that is flexible and can expand or contract depending upon business needs is important.
Senior Vice President, National Sector Head,
Retail and Apparel
HSBC Bank USA N.A.
The apparel industry entered 2022 with positive momentum. Demand has exceeded expectations throughout the pandemic, and that remained the case during the 2021 holiday season.
Additionally, product scarcity has led to more full-priced sales and fewer discounts, markdowns and closeouts. For the first time in decades we have also seen material price increases due to higher production and shipping costs. In my year-end discussions with wholesalers and retailers, they looked to 2022 with optimism, expecting these favorable trends to continue at least through the end of the year.
Omicron has certainly impacted some of that optimism, with fewer in-person shoppers to begin the year and less tourism in major urban areas. With that said, I believe the fundamental strength we saw in the sector in 2021 will carry through the current year. Many of the positive underlying factors remain the same. The economy continues to steadily improve, with consistent employment gains. Consumers have shifted spend from leisure and entertainment to product purchases. Supply remains scarce due to production and shipping delays throughout the world, which means consumers will be less discerning when they find what they are looking for. All of this points to another strong year ahead albeit with some headwinds at the start due to the current surge in infections.
While I think this argument bolsters the case for apparel companies to move ahead with plans for growth, I would be remiss if I didn’t note the risks inherent in the current environment. The industry still faces many of the same challenges as pre-pandemic. The shift from bricks and mortar to e-commerce continues, with more retail closures expected. The industry and the consumer are slowly coming to realize the scale of its environmental impact, and meaningful resolutions are still in their infancy. The price increases I mentioned earlier are expected to continue in 2022 and will at some point give the consumer pause. Ultimately, all of these challenges are easy to manage when product is scarce and demand is high. If that consumer demand dips at some point in the near future, we will risk significant damage to the performance of retailers and wholesalers who have geared up production for a strong year. My advice would be to continue to produce for growth while having a plan in place if inventory levels suddenly start growing.
Executive Vice President and National Sales Manager
Merchant Financial Group
The COVID-19 environment changed everything not only for the apparel business but also for businesses around the world. Merchant advised clients and our extended network to develop backup plans, continue to adapt, communicate and pursue strategic partnerships. It is essential to be nimble and flexible to the ever-changing retail environment as unpredictable events are inevitable and not all goes according to plan.
Before COVID-19, the retail and wholesale business already had its challenges. Adding in the lack of in-person gatherings, the pandemic only heightened industry problems—the lack of store foot traffic, supply-chain issues, shipping delays, empty shelves, lack of workers and several other contributors. This pandemic and its latest variants caused supply-chain issues we’ve never seen in our lifetime. What we are experiencing today will not be something that goes away overnight. We live in an uncertain world, and it’s difficult to predict the short-term and long-term effects on the apparel industry.
Apparel professionals must prepare for all scenarios—best and worst. The apparel companies that will continue to grow and thrive will be omni-channel businesses that are open-minded and initiate creative solutions to new industry caveats. The omni-channel model is essential to compete in today’s environment. Buyers enjoy the in-person shopping experience, but they also appreciate the convenience of mobile-phone shopping and Amazon Prime. Manufacturers must expand and develop their sourcing networks and strengthen relationships with retail partners. The workforce is native to being in-person, specifically the apparel industry workforce. How could we imagine merchandising products virtually? This industry is navigating working remotely and will continue to improve its practices with time. Some improvements will include implementing new tech systems and creating strategic partnerships with companies that can improve operations. Merchant urges apparel businesses to keep overhead at a minimum and consider mergers, acquisitions and partnership opportunities.
Lastly, we believe now more than ever that it is essential to have a close-knit team of advisers in place to help businesses navigate the waters. A strong group of like-minded professionals with different skill sets like working-capital lenders, accountants and attorneys will help any apparel business through these times and help them reach their operational and financial goals.
President and Chief Executive
Greenspan Consult, Inc.
At this point in time it feels like the “same ol’, same ol’.” We are now approaching two years and still counting of the pandemic. And, yes, in many instances things have improved, but we are still fighting variants of this virus, which means people are still resistant to traditional bricks-and-mortar shopping. The impact on apparel manufacturers and importers is still being felt throughout the industry.
As always, personnel are critical for the success of the business. Companies must retain their key employees. This includes continuing to find ways for employees to periodically work from home as well as to come into their offices. Companies must also find ways to keep their employees compensated. This might include increased benefits, vacation time or remote-work schedules.
Developing, investing and growing the e-commerce side of the business is vital to long-term success. This can be accomplished by having your own e-commerce site if applicable or selling to e-commerce retailers.
Maintaining realistic gross-profit margins is critical for continued success. With all the supply-chain issues that companies are dealing with including drastically increased shipping costs, companies must find ways to maintain their gross-profit margins. Collaborating with suppliers for cost reductions, finding alternative sources of production or trying to increase prices are all areas that apparel companies must work through to maintain adequate profit margins.
Liquidity is of critical importance. Maintaining proper inventory levels—closing out old or obsolete inventory—is vital for having adequate liquidity. Do not be too dependent on your lender for financing. That is a risk not worth taking.
We all have seen some crazy times over the past two years with the COVID pandemic and then the subsequent variants and who knows what comes next. That said, apparel companies have been able to pivot really well during this time. The e-commerce distribution channel has seen significant growth and become the largest distribution channel for most of our apparel clients. This trend will continue into 2022 and beyond as the consumer has become very comfortable shopping online.
The focus should be on building a digital platform that provides a great selection of product, is user friendly and engages the customer at the first click. While the bricks-and-mortar channels are resurging and growing, they may never get back to pre-pandemic levels. Inventory management is always key, especially in today’s dominant DTC world.
Supply-chain management should also be a focus, especially given all the supply-chain issues we have seen over the past year. Looking for alternative factories overseas to supplement production needs or to spread out production over various factories is recommended. Being concentrated in one or a few factories can cause product delivery issues if we see more delays at the ports or future variants causing workforce issues at the factories. Lastly, we have all seen significant workforce issues and needs over the past two years, and today it is very much an employee’s market. The employer of choice will need to provide significant flexibility with respect to work hours, a hybrid work model with respect to working from home and at the office, and compensation and benefits will continue to be extremely competitive.
Executive Vice President
Finance One, Inc.
The spread of omicron and additional COVID-19 strains will further delay the recovery of the global supply-chain crisis, which contributed to the United States’ inflation rate rising to a 40-year high of 7 percent at the end of 2021. Domestically, congestion at the ports of Los Angeles and Long Beach, the two largest ports in the U.S., hasn’t improved despite the best efforts of top authorities. The number of ships anchored outside the ports waiting for a berthing spot during January was 100 compared to 55 in 2021 and 23 in 2020. Around 1,700 dockworkers at the West Coast ports tested positive for COVID-19 in January alone, exceeding total infections for all of 2021, which led to many absences at a time when every dockworker is needed to reduce congestion. Internationally, a short supply of shipping services and containers is expected to trail well into 2022, continuously exposing apparel importers to overinflated container shipping costs.
By now, apparel companies would have experienced unprecedented frequency and magnitude of supply-chain and logistics issues brought on by the pandemic. Relentlessly reviewing and improving supply-chain networks, identifying vulnerabilities and updating logistics contingency plans for alternate modes/ports/providers, forecasting appropriate inventory levels, clearly conveying expectations in real time to buyers and suppliers alike when challenges arise are some of the ways for apparel companies to minimize disruptions and build operational resilience.
Republic Business Credit, LLC
It continues to have a déjà-vu feeling on the challenge front as we head into the spring and summer season instead of the new year that many apparel manufacturers sought across the country. Those challenges include supply chain, rising material costs, labor costs, container costs, port delays, delayed shipping and fluctuating consumer confidence as the pandemic continues to have an impact around the world.
Apparel companies must remain adaptable and flexible while focusing on what they are able to control. If you haven’t already, it would be a good time to revisit your credit and factoring agreements to make sure they are structured for your evolving customer and business needs. I would take advice from other entrepreneurs, lawyers and accountants along with your factoring company to ensure you are getting well-rounded information. My strongest advice is to not attempt to tackle this year alone but form a counsel of close advisers that you stay in regular contact with to confront the many challenges on the horizon. Regardless of what COVID-19 has in store for 2022, it is always best to have plans for success to go along with the many backup plans we have all resorted to in the past two years. Supply-chain issues are going to linger, but I know the apparel community will thrive together.
David M. Reza
Senior Vice President Western Region
Milberg Factors, Inc.
Fortunately, all business managers and leaders in all industries, not just apparel, can access a wealth of information from government, public-health, medical and media resources on how best to operate during this pandemic.
If asked, we would remind owners and managers to comply with all federal, state and local regulations. Businesses should also make staff physical and mental health a priority and require vaccinations and boosters for in-person work. Additionally, employers should offer a hybrid work schedule, balancing in-person and virtual or remote attendance. Be flexible as the COVID/public-health environment continues to be fluid.
There should be efforts to proactively communicate with staff, customers, vendors and logistics providers. Focus should be placed on creating the most robust and resilient supply chain and inventory-management system as is possible within your means. Companies that deliver product as per their commitments are delivering certainty to their customers.
Product and track records are important selling points, but they are not enough. Investing in technology will help suppliers to develop a better understanding of their customers, resulting in stronger and more collaborative relationships.
Executive Vice President
Western Region Manager
Wells Fargo Commercial Capital
Most of our clients have continued to navigate through COVID-19 in as positive a manner as possible. The biggest obstacle right now remains the continued impact on logistics. It’s imperative that apparel companies do whatever is necessary to negotiate costs down to the extent possible as the increases have led to some pretty clear margin erosion throughout the industry. It’s also important that apparel companies value their suppliers and work closely with them in navigating through any COVID-related issues.
The next piece relates to continually building strong relationships with customers. Most retailers have generally been understanding of shipping delays, but many in the industry remain somewhat wary of the potential for chargebacks, particularly as they relate to highly seasonal goods. It helps having strong long-term relationships with customers.
Finally, the various COVID-related issues that have hit the industry can sometimes lead to cash crunches. If an apparel company knows that supply-chain disruptions will impact cash flow, it’s best to sit down with your lender as soon as possible to discuss it. We’ve helped many of our clients who’ve run into cash-flow issues with support above and beyond what they would typically need. Most lenders have a pretty broad view of the industry, so there’s an understanding that these remain exceptional times. The odds are pretty good that the challenges that an apparel company is facing today due to COVID-related issues may not be unique to that business. Lenders understand this and are willing to help. The key lies in early communication and the ability to put together a cash-flow projection that clearly illustrates the issue, which allows a lender to help formulate a solution.
Kenneth L. Wengrod
Stealth Management Group LLC
It’s time to recognize that COVID and its mutated variants are going to be permanently part of our daily lives. We need to adjust to this phenomenon and deal with it.
The pandemic’s impact has conditioned us to maximize the importance of productivity and understanding of the importance of minutiae. Owners and managers of apparel firms need to pay attention to details, something people tend to shy away from. Retailers cancel orders even though they may be ready for shipment. This places a severe burden on the apparel company and the workers in its supply chain. Apparel professionals need to remain vigilant and proactive to avoid problems. I recommend carefully reviewing the purchase order to determine if the language outlines protective measures, such as a force majeure, cancellations and disputes.
In today’s environment, survival and growth rely on the swift assessment of the dynamics of the entire landscape, that is, from the supply chain to its ultimate customer.
These days, prioritize the ability to improve productivity. Reduce the cycle time of manufacturing and shipping. Finally, companies should focus less on manufacturing labor costs. There is no question that the transportation costs of imports have risen sharply with container costs rising from $7,500 per container to over $25,000 per container. During pre-COVID life, shipping companies’ owners of vessels and terminals were losing money. On the flip side, the same shipping companies are making billions, presently, from these port delays. Charging importers extra fees for these delays has had a huge impact.
Now may be the time to closely reexamine apparel imports from Asia. Think more along the lines of manufacturing in our hemisphere. Benefits from USMCA may be cost justified in labor and shipping, with shorter lead times to boot.
Today is not about economies of scale and producing for large runs. It’s about timely reaction to market demands and creating demand with lower inventory levels. Consumers want what they can’t get.