So You Want to Conduct Your Business as Usual? Think Again.

Thursday, July 30, 2009

Say you're a farmer and you grow cotton. What’s most important to you? Sure, you want to make money and, sure, you want to provide for your family – you understand that. But what are you doing to understand your customers? You may say it doesn’t matter, I can always ship into the loan, my coop will handle it, my local pool worries about customers.

Do you care about the market? What makes up your market? Your merchant or coop help to make up your market, certainly. But what about their customers, the textile mills? What affects their market and how does that market matter to you? You may say, I’m a farmer, not a textile mill. But a textile mill will say, he is your customer: You will pay attention or he’ll buy from someone else. There’s a lot of cotton out there. Why? Because the mills have to pay attention to their customers,

In the long run, those who best understand the needs of their customers will be the most successful. The loan program won’t be around forever. If you think it will, you’re kidding yourself. Also, if you think there’ll always be plenty of merchants around vying for your business you’re kidding yourself. You can never take your business for granted. Complacency breeds contempt. Put more succinctly, ignore your customer and your business will go elsewhere.

The textile industry has undergone enormous change in the past ten years. Global trade in textiles was once regulated by high tariffs and a complex system of import quotes. Not anymore. Textiles used to be produced predominantly in the U.S., Europe and Japan. Not anymore. Textile mills used to dictate fashion, everything from fabric construction to fiber content. Not anymore.

Choice is a key word in textiles today. So is variety. The ultimate customer, today’s consumer, demands choice and variety. Whereas in the old days textile mills could tell the consumer what to wear that power has gradually transferred to the consumer. It’s what the consumer wants to buy that matters most – not what the mills want to produce.

The same holds true for cotton. Today’s consumer is looking for something new, something different. Growing any old cotton to meet the loan is not what today’s consumer is looking for. Variety, a choice of fibers, that’s what today’s consumer is looking for. Quality is critical, but so is uniqueness.

The organic movement is an example of uniqueness. Retailers like to show they’re “green”, that they use organic cotton in their clothing in order to distinguish their products from someone else’s. Consumers love it, whether they live in the U.S. or Europe.

Today’s mill is looking for something new, something to distinguish its products from someone else’s. Commodity production is a dead end, the beginning of a self-fulfilling spiral of cost cutting and lowering of quality standards. There will always be a market for junk, but increasingly today’s consumer wants something more.

Mills, in turn, are impelled to respond -- they adapt. They either go down market and try to survive at the bottom of the supply chain or they move up market stressing quality and value. Increasingly mills are opting for the latter option by focusing on a wider variety of products, improving quality and providing better value.

Yet these changes are not without problems. In fact, these problems may be summed up in ten factors impacting textile mills today. These factors – the direct result of broader industry and macro-economic forces – are driving mills to demand better quality cotton in order to compete.

1. Textile industry consolidation. It’s hard to find textiles made in the U.S. or Europe anymore. Production has shifted to other countries such as China and India. At the same time, the textile industries in Japan, Korea, Taiwan and Hong Kong have been forced to reorient their production in more of a supporting role to the industries in China and India.

2. Continuing overcapacity. The rush to build new investment in China and India has resulted in nagging overcapacity in some sub-sectors of the textile industry.

3. Export competition. Until overcapacity problems are rationalized throughout Asia, buyers of goods produced there will have a significant upper hand in sourcing product for discounted prices, as it’s too easy for sourcing companies to play suppliers against each other.

4. Consolidation in raw materials. There are a limited number of growing regions in the world for cotton, while synthetic fiber production tends to move near the centers of textile production. This provides synthetic producers with a competitive advantage opposite cotton.

5. Shifting investment flows. The sheer force of the movement of capital around the globe has resulted in a huge influx of resources into Asia, but has also contributed to overexpansion in some parts of the textile industry resulting in depressed prices.

6. Slowing global market growth. Whereas global consumption of textiles spiked during the 20th Century, the rate of growth in global consumption of textiles appears to have moderated at the beginning of the 21st Century. As the societies in the developed world age, their rate of growth in the consumption of textiles has declined to more closely match population growth, while at the same time textile consumption has soared in the developing world. The question for mills everywhere is “will the gains posted in the developing world offset the declines recorded in the developed world?”

7. Consolidation of the retail sector. Today, just 20 retail firms make up 55 percent of the global market for apparel. “Big box” stores have driven small retailers and many traditional department stores out of business. The result: both the top and bottom of the retail business has heavily consolidated into the hands of a relatively few powerful buying organizations.

8. Government policy. The WTO, free trade agreements and farm legislation all affect the global textile industry by increasing (or decreasing) competition at all levels of the textile supply chain. Government actions often result in unforeseen and unintended consequences.

9. The impact of China. Industry in China has quickly grown to dominate the global textile business, not only as the largest exporter of finished textile products (such as apparel) in the world but also as the world’s largest importer of basic yarns and fabrics.

10. The impact of China’s competitors. The textile industry is likely an evolutionary industry for China. In time, China’s economy will expand into other more profitable, value-added industries, hence providing an opportunity for other suppliers to fill a possible void. Increasingly, suppliers such as Vietnam and Cambodia will play a growing role in the global market for textiles and apparel.

All of these factors add up to one conclusion: textiles mills are forced to rethink their businesses today in order to better compete in the future. They insist on the same reassessment from suppliers, too. Today’s mills demand more from its suppliers and in the future mills will demand even more of cotton growers both in terms of providing value and innovation.

So you want to conduct your business as usual? Think again.

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